sign in sign up
<<
Home , Money market, Occupy the SEC

Vol. 79 Thursday, No. 157 August 14, 2014

Part II

Securities and Exchange Commission

17 CFR Parts 230, 239, et al. Money Fund Reform; Amendments to Form PF; Final Rule

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47736 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

SECURITIES AND EXCHANGE requiring money market funds to report C. Effects on Other Money Market Funds, COMMISSION additional information to the SEC and to , and the -Term Financing investors. Finally, the amendments Markets 17 CFR Parts 230, 239, 270, 274 and require investment advisers to certain D. The 279 E. Examination of large unregistered liquidity funds, Regulation Since the Financial Crisis [Release No. 33–9616, IA–3879; IC–31166; which can have many of the same 1. The 2010 Amendments FR–84; File No. S7–03–13] economic features as money market 2. The Eurozone Crisis and U.S. Debt funds, to provide additional information Ceiling Impasses of 2011 and 2013 RIN 3235–AK61 about those funds to the SEC. 3. Continuing Consideration of the Need DATES: Effective Date: October 14, 2014. for Additional Reforms Money Market Fund Reform; Compliance Dates: The applicable III. Discussion Amendments to Form PF A. Liquidity Fees and Redemption Gates compliance dates are discussed in 1. Analysis of Certain Effects of Fees and AGENCY: Securities and Exchange section III.N. of the Release titled Gates Commission. ‘‘Compliance Dates.’’ 2. Terms of Fees and Gates ACTION: Final rule. FOR FURTHER INFORMATION CONTACT: 3. Exemptions to Permit Fees and Gates Adam Bolter, Senior Counsel; Amanda 4. Amendments to Rule 22e–3 SUMMARY: The Securities and Exchange Hollander Wagner, Senior Counsel; 5. Operational Considerations Relating to Commission (‘‘Commission’’ or ‘‘SEC’’) Fees and Gates Andrea Ottomanelli Magovern, Senior 6. Implications of Liquidity Fees is adopting amendments to the rules Counsel; Erin C. Loomis, Senior 7. Implications that govern money market mutual funds Counsel; Kay-Mario Vobis, Senior B. Floating Net Asset Value (or ‘‘money market funds’’) under the Counsel; Thoreau A. Bartmann, Branch 1. Introduction Investment Company Act of 1940 Chief; Sara Cortes, Senior Special 2. Summary of the Floating NAV Reform (‘‘Investment Company Act’’ or ‘‘Act’’). Counsel; or Sarah G. ten Siethoff, 3. Certain Considerations Relating to the The amendments are designed to Assistant Director, Investment Company Floating NAV Reform address money market funds’ Rulemaking Office, at (202) 551–6792, 4. Money Market Fund Pricing susceptibility to heavy redemptions in Division of Investment Management, 5. Amortized Cost and Penny Rounding for times of stress, improve their ability to Stable NAV Funds Securities and Exchange Commission, 6. Tax and Accounting Implications of manage and mitigate potential contagion 100 F Street NE., Washington, DC Floating NAV Money Market Funds from such redemptions, and increase 20549–8549. 7. Rule 10b–10 Confirmations the transparency of their risks, while SUPPLEMENTARY INFORMATION: The 8. Operational Implications of Floating preserving, as much as possible, their Commission is adopting amendments to NAV Money Market Funds benefits. The SEC is removing the rules 419 [17 CFR 230.419] and 482 [17 9. Transition valuation exemption that permitted CFR 230.482] under the Securities Act C. Effect on Certain Types of Money institutional non-government money of 1933 [15 U.S.C. 77a–z–3] (‘‘Securities Market Funds and Other Entities 1. Government Money Market Funds market funds (whose investors Act’’), rules 2a–7 [17 CFR 270.2a–7], historically have made the heaviest 2. Money Market Funds 12d3–1 [17 CFR 270.12d3–1], 18f–3 [17 3. Municipal Money Market Funds redemptions in times of stress) to CFR 270.18f–3], 22e–3 [17 CFR 270.22e– 4. Implications for Local Government maintain a stable net asset value per 3], 30b1–7 [17 CFR 270.30b1–7], 31a–1 Investment Pools share (‘‘NAV’’), and is requiring those [17 CFR 270.31a–1], and new rule 30b1– 5. Unregistered Money Market Funds funds to sell and redeem shares based 8 [17 CFR 270.30b1–8] under the Operating Under Rule 12d1–1 on the current market-based value of the Investment Company Act of 1940 [15 6. Master/Feeder Funds—Fees and Gates securities in their underlying portfolios U.S.C. 80a], Form N–1A under the Requirements rounded to the fourth decimal place Investment Company Act and the 7. Application of Fees and Gates to Other Types of Funds and Certain (e.g., $1.0000), i.e., transact at a Securities Act, Form N–MFP under the ‘‘floating’’ NAV. The SEC also is Redemptions Investment Company Act, and section 3 D. Guidance on the Amortized Cost adopting amendments that will give the of Form PF under the Investment Method of Valuation and Other boards of directors of money market Advisers Act [15 U.S.C. 80b], and new Valuation Concerns funds new tools to stem heavy Form N–CR under the Investment 1. Use of Amortized Cost Valuation redemptions by giving them discretion Company Act.1 2. Other Valuation Matters to impose a liquidity fee if a fund’s E. Amendments to Disclosure weekly liquidity level falls below the Table of Contents Requirements required regulatory threshold, and I. Introduction 1. Required Disclosure Statement giving them discretion to suspend II. Background 2. Disclosure of Tax Consequences and redemptions temporarily, i.e., to ‘‘gate’’ A. Role of Money Market Funds Effect on Fund Operations—Floating B. Certain Economic Features of Money NAV funds, under the same circumstances. 3. Disclosure of Transition to Floating NAV These amendments will require all non- Market Funds 1. Money Market Fund Investors’ Desire To 4. Disclosure of the Effects of Fees and government money market funds to Gates on Redemptions impose a liquidity fee if the fund’s Avoid Loss 2. Liquidity Risks 5. Historical Disclosure of Liquidity Fees weekly liquidity level falls below a 3. Valuation and Pricing Methods and Gates designated threshold, unless the fund’s 4. Investors’ Misunderstanding About the 6. Prospectus Fee Table board determines that imposing such a Actual Risk of Investing in Money Market 7. Historical Disclosure of Affiliate fee is not in the best of the Funds Financial Support fund. In addition, the SEC is adopting 8. Economic Analysis 9. Web site Disclosure 1 amendments designed to make money Unless otherwise noted, all references to F. Form N–CR market funds more resilient by statutory sections are to the Investment Company Act, and all references to rules under the 1. Introduction increasing the diversification of their Investment Company Act, including rule 2a–7, will 2. Part B: Defaults and Events of portfolios, enhancing their stress testing, be to Title 17, Part 270 of the Code of Federal 3. Part C: Financial Support and improving transparency by Regulations, 17 CFR Part 270. 4. Part D: Declines in Shadow Price

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47737

5. Parts E, F, and G: Imposition and Lifting 4. Notice to the Commission good faith by the fund’s board of of Liquidity Fees and Gates 5. Stress Testing directors (i.e., use a floating NAV).5 In 6. Part H: Optional Disclosure 6. Web Site Disclosure 1983, the Commission codified an 7. Timing of Form N–CR 7. Total Burden for Rule 2a–7 exemption to this requirement allowing 8. Economic Analysis B. Rule 22e–3 money market funds to value their G. Amendments to Form N–MFP Reporting C. Rule 30b1–7 and Form N–MFP Requirements 1. Discussion of Final Amendments portfolio securities using the ‘‘amortized 1. Amendments Related to Rule 2a–7 2. Current Burden cost’’ method of valuation and to use the Reforms 3. Change in Burden ‘‘penny-rounding’’ method of pricing.6 2. New Reporting Requirements D. Rule 30b1–8 and Form N–CR Under the amortized cost method, a 3. Clarifying Amendments 1. Discussion of New Reporting money market fund’s portfolio securities 4. Public Availability of Information Requirements generally are valued at cost plus any 5. Operational Implications of the N–MFP 2. Estimated Burden amortization of premium or Amendments E. Rule 34b–1(a) accumulation of discount, rather than at H. Amendments to Form PF Reporting F. Rule 482 Requirements their value based on current market G. Form N–1A factors.7 The penny rounding method of 1. Overview of Proposed Amendments to H. Advisers Act Rule 204(b)–1 and Form Form PF PF pricing permits a money market fund 2. Utility of New Information, Including 1. Discussion of Amendments when pricing its shares to round the Benefits, Costs, and Economic 2. Current Burden fund’s NAV to the nearest one percent Implications 3. Change in Burden (i.e., the nearest penny).8 Together, I. Diversification V. Regulatory Flexibility Act Certification these valuation and pricing techniques 1. Treatment of Certain Affiliates for VI. Update to Codification of Financial create a ‘‘rounding convention’’ that Purposes of Rule 2a–7’s Five Percent Reporting Policies permits a money market fund to sell and Issuer Diversification Requirement VII. Statutory Authority redeem shares at a stable share price 2. ABS—Sponsors Treated as Guarantors Text of Rules and Forms 3. The Twenty-Five Percent Basket without regard to small variations in the 9 J. Amendments to Stress Testing I. Introduction value of the securities in its portfolio. Other types of mutual funds not Requirements Money market funds are a type of 1. Overview of Current Stress Testing regulated by rule 2a–7 generally must Requirements and Proposed registered under the calculate their daily NAVs using Amendments Investment Company Act and regulated 2 market-based factors and cannot use 2. Stress Testing Metrics pursuant to rule 2a–7 under the Act. penny rounding. 3. Hypothetical Events Used in Stress Money market funds generally pay When the Commission initially Testing dividends that reflect prevailing short- established the regulatory framework 4. Board Reporting Requirements term rates, are redeemable on allowing money market funds to 5. Dodd-Frank Mandated Stress Testing demand, and, unlike other investment 6. Economic Analysis companies, seek to maintain a stable 5 K. Certain Macroeconomic Consequences See section 2(a)(41)(B) of the Act and rules 2a– NAV, typically $1.00.3 This 4 and 22c–1. The Commission, however, has stated of the New Amendments that it would not object if a mutual fund board of 1. Effect on Current Investors in Money combination of principal stability, liquidity, and payment of short-term directors determines, in good faith, that the value Market Funds of debt securities with remaining maturities of 60 2. Efficiency, Competition and Capital yields has made money market funds days or less is their amortized cost, unless the Formation Effects on the Money Market popular management vehicles for particular circumstances warrant otherwise. See Fund Industry both retail and institutional investors. Accounting Series Release No. 219, Valuation of 3. Effect of Reforms on Investment Debt Instruments by Money Market Funds and As of February 28, 2014, there were Certain Other Open-End Investment Companies, Alternatives, and the Short-Term approximately 559 money market funds Financial Reporting Codification (CCH) section Financing Markets registered with the Commission, and 404.05.a and .b (May 31, 1977) (‘‘ASR 219’’). We L. Certain Alternatives Considered these funds collectively held over $3.0 further discuss the use of amortized cost valuation 1. Liquidity Fees, Gates, and Floating NAV trillion of assets.4 by mutual funds in section III.B.5 below. Alternatives 6 See 1983 Adopting Release, supra note 3. 2. Alternatives in the FSOC Proposed Absent an exemption, as required by Section 6(c) of the Investment Company Act Recommendations the Investment Company Act, all provides the Commission with broad authority to 3. Alternatives in the PWG Report registered mutual funds must price and exempt persons, securities or transactions from any provision of the Investment Company Act, or the M. Clarifying Amendments transact in their shares at the current regulations thereunder, if, and to the extent that 1. Definitions of Daily Liquid Assets and NAV, calculated by valuing portfolio such exemption is in the public interest and Weekly Liquid Assets instruments at market value or, if consistent with the protection of investors and the 2. Definition of Demand Feature market quotations are not readily purposes fairly intended by the policy and 3. Short-Term Floating Rate Securities available, at fair value as determined in provisions of the Investment Company Act. See 4. Second Tier Securities Commission Policy and Guidelines for Filing of N. Compliance Dates Applications for Exemption, SEC Release No. IC– 2 1. Compliance Date for Amendments Money market funds are also sometimes called 14492 (Apr. 30, 1985). ‘‘money market mutual funds’’ or ‘‘money funds.’’ 7 Related to Liquidity Fees and Gates See current rule 2a–7(a)(2). See also supra note 3 See generally Valuation of Debt Instruments and 5. Throughout this Release when we refer to a rule 2. Compliance Date for Amendments Computation of Current Price Per Share by Certain as it exists prior to any amendments we are making Related to Floating NAV Open-End Investment Companies (Money Market today it is described as a ‘‘current rule’’ while 3. Compliance Date for Rule 30b1–8 and Funds), Investment Company Act Release No. references to a rule as amended (or one that is not Form N–CR 13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)] being amended today) are to ‘‘rule.’’ 4. Compliance Date for Diversification, (‘‘1983 Adopting Release’’). Most money market 8 See current rule 2a–7(a)(20). Stress Testing, Disclosure, Form PF, funds seek to maintain a stable NAV of $1.00, but 9 Today, money market funds use a combination Form N–MFP, and Clarifying a few seek to maintain a stable NAV of a different of the two methods so that, under normal Amendments amount, e.g., $10.00. For convenience, throughout circumstances, they can use the penny rounding this Release, the discussion will simply refer to the IV. Paperwork Reduction Act method to maintain a price of $1.00 per share stable NAV of $1.00 per share. without pricing to the third decimal place like other A. Rule 2a–7 4 Based on Form N–MFP data. SEC regulations mutual funds, and use the amortized cost method 1. Asset-Backed Securities require that money market funds report certain so that they need not strike a daily market-based 2. Retail and Government Funds portfolio information on a monthly basis to the SEC NAV to facilitate intra-day transactions. See infra 3. Board Determinations—Fees and Gates on Form N–MFP. See rule 30b1–7. section III.A.1.a.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47738 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

maintain a stable share price through funds maintain a significant amount of colloquially known as ‘‘breaking the use of the amortized cost method of liquid assets and invest in securities buck’’).20 valuation and/or the penny rounding that meet the rule’s quality, Different types of money market funds method of pricing (so as they maturity, and diversification have been introduced to meet the abided by certain risk-limiting requirements.14 For example, a money different needs of money market fund conditions), it did so understanding the market fund’s portfolio securities must investors. Historically, most investors benefits that stable value money market meet certain credit quality standards, have invested in ‘‘prime money market funds provided as a cash management such as posing minimal credit risks.15 funds,’’ which generally hold a variety vehicle, particularly for smaller The rule also places restrictions on the of taxable short-term obligations issued investors, and focused on minimizing remaining maturity of securities in the by corporations and , as well as dilution of assets and returns for repurchase agreements and asset-backed 10 fund’s portfolio to limit the 21 shareholders. At that time, the and risk to which a money . ‘‘Government Commission was persuaded that money market funds’’ principally hold market fund may be exposed. A money deviations of a magnitude that would obligations of the U.S. government, market fund generally may not acquire cause material dilution generally would including obligations of the U.S. any with a remaining maturity not occur given the risk-limiting Treasury and federal agencies and conditions of the exemptive rule.11 As greater than 397 days, the dollar- instrumentalities, as well as repurchase discussed throughout this Release, our weighted average maturity of the agreements collateralized by historical experience with these funds, securities owned by the fund may not government securities. Some and the events of the 2007–2009 exceed 60 days, and the fund’s dollar- government money market funds limit financial crisis,12 has led us to re- weighted average life to maturity may their holdings to only U.S. Treasury evaluate the exemptive relief provided not exceed 120 days.16 Money market obligations or repurchase agreements under rule 2a–7, including the funds also must maintain sufficient collateralized by U.S. Treasury exemption from the statutory floating liquidity to meet reasonably foreseeable securities and are called ‘‘Treasury NAV for some money market funds. redemptions, generally must invest at money market funds.’’ Compared to Under rule 2a–7, money market funds least 10% of their portfolios in assets prime funds, government and Treasury seek to maintain a stable share price by that can provide daily liquidity, and money market funds generally offer limiting their investments to short-term, invest at least 30% of their portfolios in greater safety of principal but high-quality debt securities that assets that can provide weekly liquidity, historically have paid lower yields. fluctuate very little in value under as defined under the rule.17 Finally, rule ‘‘Tax-exempt money market funds’’ normal market conditions. In exchange 2a–7 also requires money market funds primarily hold obligations of state and for the ability to rely on the exemptions to diversify their portfolios by generally local governments and their provided by rule 2a–7, money market limiting the funds to investing no more instrumentalities, and pay interest that funds are subject to conditions designed than 5% of their portfolios in any one is generally exempt from federal income to limit deviations between the fund’s issuer and no more than 10% of their tax.22 $1.00 stable share price and the market- portfolios in securities issued by, or We first begin by reviewing the role 13 based NAV of the fund’s portfolio. subject to guarantees or demand features of money market funds and the benefits Rule 2a–7 requires that money market (i.e., puts) from, any one institution.18 they provide investors. We then review the economics of money market funds. 10 Rule 2a–7 also includes certain See Proceedings before the Securities and This includes a discussion of several Exchange Commission in the Matter of InterCapital procedural standards overseen by the features of money market funds that, Liquid Asset Fund, Inc. et al., 3–5431, Dec. 28, fund’s board of directors. These include 1978, at 1533 (Statement of Martin Lybecker, when combined, can create incentives Division of Investment Management at the the requirement that the fund for fund shareholders to redeem shares Securities and Exchange Commission) (stating that periodically calculate the market-based Commission staff had learned over the course of the during periods of stress, as well as the value of the portfolio (‘‘shadow potential impact that such redemptions hearings the strong preference of money market 19 fund investors to have a stable share price and that price’’) and compare it to the fund’s can have on the fund and the markets with the right risk-limiting conditions, the stable share price; if the deviation that provide short-term financing.23 We Commission could limit the likelihood of a between these two values exceeds 1⁄2 of deviation from that stable value, addressing 1 percent (50 basis points), the fund’s 20 Commission concerns about dilution); 1983 See current rule 2a–7(c)(8)(ii)(A) and (B). Adopting Release, supra note 3, at nn.42–43 and board of directors must consider what Regardless of the extent of the deviation, rule 2a– accompanying text (‘‘[T]he provisions of the rule action, if any, should be taken by the 7 imposes on the board of a money market fund a impose obligations on the board of directors to board, including whether to re-price the duty to take appropriate action whenever the board assess the fairness of the valuation or pricing believes the extent of any deviation may result in method and take appropriate steps to ensure that fund’s securities above or below the material dilution or other unfair results to investors shareholders always receive their proportionate fund’s $1.00 share price (an event or current shareholders. Current rule 2a– interest in the money market fund.’’). 7(c)(8)(ii)(C). In addition, the money market fund 11 See id., at nn.41–42 and accompanying text can use the amortized cost or penny-rounding 14 See current rule 2a–7(c)(2), (3), (4), and (5). methods only as long as the board of directors (noting that witnesses from the original money 15 market fund exemptive order hearings testified that See current rule 2a–7(a)(12), (c)(3)(i). believes that they fairly reflect the market-based 16 the risk-limiting conditions, short of extraordinarily Current rule 2a–7(c)(2). NAV. See rule 2a–7(c)(1). adverse conditions in the market, should ensure 17 See current rule 2a–7(c)(5). As we discussed 21 See Investment Company Institute, 2014 that a properly managed money market fund should when we amended rule 2a–7 in 2010, the 10% daily Investment Company Fact Book, at 196, Table 37 be able to maintain a stable price per share and that liquid asset requirement does not apply to tax- (2014), available at http://www.ici.org/pdf/2014_ rule 2a–7 is based on that representation). exempt funds. See Money Market Fund Reform, factbook.pdf. 12 Throughout this Release, unless indicated Investment Company Act Release No. 29132 (Feb. 22 Unless the context indicates otherwise, otherwise, when we use the term ‘‘financial crisis’’ 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (‘‘2010 references to ‘‘prime funds’’ throughout this Release we are referring to the financial crisis that took Adopting Release’’). See infra section III.E.3. include funds that are often referred to as ‘‘tax- place between 2007 and 2009. 18 See current rule 2a–7(c)(4). Because of limited exempt’’ or ‘‘municipal’’ funds. We discuss the 13 Throughout this Release, we generally use the availability of the securities in which they invest, particular features of such tax-exempt funds and term ‘‘stable share price’’ to refer to the stable share tax-exempt funds have different diversification why they are included in our reforms in detail in price that money market funds seek to maintain and requirements under rule 2a–7 than other money section III.C.3. compute for purposes of distribution, redemption, market funds. 23 Throughout this Release, we generally refer to and repurchases of fund shares. 19 See current rule 2a–7(c)(8)(ii)(A). ‘‘short-term financing markets’’ to describe the

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47739

then discuss money market funds’ requiring a floating NAV for certain make money market funds more experience during the financial crisis money market funds, suggesting, among resilient by increasing the against this backdrop. We next analyze other reasons, that it was a significant diversification of their portfolios, our 2010 reforms and their impact on reform that would remove one of the enhancing their stress testing, and the heightened redemption activity most desirable features of these funds, increasing transparency by requiring during the 2011 Eurozone sovereign and would impose numerous costs and them to report additional information to and 2011 and 2013 U.S. debt operational burdens. However, others us and to investors. Finally, the ceiling impasses. expressed support, noting that it was a amendments require investment We used the analyses available to us, targeted solution aimed at curbing the advisers to certain large unregistered including the critically important risks associated with the money funds, which can have similar analyses contained in the report funds most susceptible to destabilizing economic features as money market responding to certain questions posed runs. Most commenters supported funds, to provide additional information by Commissioners Aguilar, Paredes, and requiring the imposition of liquidity about those funds to us.29 24 Gallagher (‘‘DERA Study’’), in fees and redemption gates in certain II. Background designing the reform proposals that we circumstances, suggesting that they issued in 2013 for additional regulation would prevent runs at a minimal cost. A. Role of Money Market Funds of money market funds.25 The 2013 However, commenters also noted that As we discussed in the Proposing proposal sought to address certain fees and gates alone would not resolve Release, the combination of principal features in money market funds that can certain of the features of money market stability, liquidity, and short-term yields make them susceptible to heavy funds that can incentivize heavy offered by money market funds, which redemptions, by providing money redemptions. Many commenters is unlike that offered by other types of market funds with better tools to opposed combining the two alternatives mutual funds, has made money market manage and mitigate potential contagion into a single package, arguing that funds popular cash management from high levels of redemptions, requiring money market funds to vehicles for both retail and institutional increasing the transparency of their implement both reforms could decrease investors.30 Money market funds’ ability risks, and improving risk sharing among the utility of money market funds to to maintain a stable share price investors, and also to preserve the investors. Commenters generally contributes to their popularity. The ability of money market funds to supported many of the other reforms we funds’ stable share price facilitates their function as an effective and efficient proposed, such as enhanced disclosure, role as a cash management vehicle, cash management tool for investors.26 new portfolio reporting requirements for provides tax and administrative We received over 1,400 comments 27 large unregistered liquidity funds, and convenience to both money market on the proposal from a variety of amendments to fund diversification funds and their shareholders, and interested parties including money requirements. enhances money market funds’ market funds, investors, banks, Today, after consideration of the attractiveness as an investment investment advisers, government comments received, we are removing .31 Due to their popularity with representatives, academics, and the valuation exemption that permits investors, money market fund assets others.28 As discussed in greater detail institutional non-government money have grown over time, providing them in each section of this Release below, market funds (whose investors have with substantial amounts of cash to these commenters expressed a diversity historically made the heaviest invest. As a result, money market funds of views. Many commenters expressed redemptions in times of market stress) have become an important source of concern about the consequences of to maintain a stable NAV, and are financing in certain segments of the requiring those funds to sell and redeem short-term financing markets. As a markets for short-term financing of corporations, their shares based on the current result, rule 2a–7, in addition to banks, and governments. 24 See Response to Questions Posed by market-based value of the securities in their underlying portfolios rounded to 29 We note that we have consulted and Commissioners Aguilar, Paredes, and Gallagher, a coordinated with the Consumer Financial report by staff of the Division of Risk, Strategy, and the fourth decimal place (e.g., $1.0000), Protection Bureau regarding this final rulemaking in Financial Innovation (Nov. 30, 2012), available at i.e., transact at a ‘‘floating’’ NAV. We accordance with section 1027(i)(2) of the Dodd- http://www.sec.gov/news/studies/2012/money- Frank Wall Street Reform and Consumer Protection market-funds-memo-2012.pdf. The Division of Risk, also are adopting amendments that will give the boards of directors of money Act. Strategy, and Financial Innovation (‘‘RSFI’’) is now 30 See Proposing Release supra note 25, at section known as the Division of Economic and Risk market funds new tools to stem heavy II.A. Retail investors use money market funds for Analysis (‘‘DERA’’), and accordingly we are no redemptions by giving them discretion a variety of reasons, including, for example, to hold longer referring to this study as the ‘‘RSFI Study’’ cash for short or long periods of time or to take a as we did in the Proposing Release, but instead as to impose a liquidity fee of no more than 2% if a fund’s weekly liquidity temporary ‘‘defensive ’’ in anticipation of the ‘‘DERA Study.’’ declining equity markets. Institutional investors 25 See Money Market Fund Reform; Amendments level falls below the required regulatory commonly use money market funds for cash to Form PF, Release Nos. 33–9408; IA–3616; IC– amount, and are giving them discretion management in part because, as discussed later in 30551 (June 5, 2013) [78 FR 36834, (June 19, 2013)] to suspend redemptions temporarily, this Release, money market funds provide efficient (‘‘Proposing Release’’). i.e., to ‘‘gate’’ funds, under the same diversified cash management due both to the scale 26 The 2013 proposal also included amendments of their operations and money market fund that would apply under each alternative, with circumstances. These amendments will managers’ expertise. See infra notes 63–64 and additional changes to money market fund require all non-government money accompanying text. disclosure, diversification limits, and stress testing, market funds to impose a liquidity fee 31 See, e.g., Comment Letter of UBS Global Asset among other reforms. See Proposing Release, supra of 1% if the fund’s weekly liquidity Management (Sept. 16, 2013) (‘‘UBS Comment note 25. We discuss these amendments below. Letter’’) (‘‘Historically, money funds have offered 27 Of these, more than 230 were individualized level falls below 10% of total assets, both retail and institutional investors a means of letters, and the rest were one of several types of unless the fund’s board determines that achieving a market rate of return on short-term form letters. imposing such a fee is not in the best investment without having to sacrifice stability of 28 Unless otherwise stated, all references to interests of the fund (or that a higher fee principal. The stable NAV per share also allows comment letters in this Release are to letters investors the convenience of not having to track submitted on the Proposing Release in File No. S7– up to 2% or a lower fee is in the best immaterial gains and losses, and helps facilitate 03–13 and are available at http://www.sec.gov/ interests of the fund). In addition, we investment processes, such as sweep account comments/s7-03-13/s70313.shtml. are adopting amendments designed to arrangements . . .’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47740 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

facilitating money market funds’ 1. Money Market Fund Investors’ Desire money market fund has three sources of maintenance of stable share prices, also To Avoid Loss internal liquidity to meet redemption benefits investors by making available Investors in money market funds have requests: cash on hand, cash from an investment option that provides an varying investment goals and tolerances investors purchasing shares, and cash efficient and diversified means for for risk. Many investors use money from maturing securities. If these investors to participate in the short-term market funds for principal preservation internal sources of liquidity are financing markets through a portfolio of and as a cash management tool, and, insufficient to satisfy redemption short-term, high-quality debt consequently, these funds can attract requests on any particular day, money securities.32 investors who are less tolerant of market funds may be forced to sell portfolio securities to raise additional incurring even small losses, even at the In order for money market funds to cash.36 And because the secondary cost of forgoing higher expected use techniques to value and price their market for many portfolio securities is returns.34 Such investors may be loss shares generally not permitted to other not deeply liquid, funds may have to averse for many reasons, including mutual funds, rule 2a–7 imposes sell securities at a discount from their general risk tolerance, legal or additional protective conditions on amortized cost value, or even at fire-sale investment restrictions, or short-term money market funds.33 As discussed in prices,37 thereby incurring additional cash needs. These overarching the Proposing Release, these additional losses that may have been avoided if the considerations may create incentives for funds had sufficient internal liquidity.38 conditions are designed to make money money market fund investors to redeem This alone can cause a fund’s portfolio market funds’ use of the valuation and and would be expected to persist, even to lose value. In addition, redemptions pricing techniques permitted by rule if the other incentives discussed below, 2a–7 consistent with the protection of that deplete a fund’s most liquid assets such as those created by money market can have incremental adverse effects investors, and more generally, to make fund valuation and pricing, are available an investment option for because the fund is left with fewer addressed. liquid assets, necessitating the sale of investors that seek an efficient way to The desire to avoid loss may cause less liquid assets, potentially at a obtain short-term yields. investors to redeem from money market discount, to meet further redemption We understand, and considered when funds in times of stress in a ‘‘flight to requests.39 Knowing that such liquidity developing the final amendments we are quality.’’ For example, as discussed in costs may occur, money market fund adopting today, that money market the DERA Study, one explanation for funds are a popular investment product the heavy redemptions from prime 36 See, e.g., Comment Letter of Goldman Sachs and that they provide many benefits to money market funds and purchases in Asset Management L.P. (Sept. 17, 2013) (‘‘Goldman investors and to the short-term government money market fund shares Sachs Comment Letter’’) (‘‘A money fund faced during the financial crisis may be a with heavy redemptions could suffer a loss of financing markets. Indeed, it is for these flight to quality, given that most of the liquidity that would force the untimely sale of reasons that we designed these portfolio securities at losses.’’). We note that, assets held by government money amendments to make the funds more although the Investment Company Act permits a market funds have a lower risk money market fund to borrow money from a , resilient, as discussed throughout this than the assets of prime money market see section 18(f) of the Investment Company Act, Release, while preserving, to the extent 35 such , assuming the proceeds of which are funds. paid out to meet redemptions, create liabilities that possible, the benefits of money market must be reflected in the fund’s shadow price, and funds. But as discussed in section III.K.1 2. Liquidity Risks thus will contribute to the stresses that may force below, we recognize that these reforms When investors begin to redeem a the fund to ‘‘break the buck.’’ may make certain money market funds substantial amount of shares, a fund can 37 Money market funds normally meet redemptions by disposing of their more liquid less attractive to some investors. experience a loss of liquidity. Money assets, rather than selling a pro rata slice of all their market funds, which offer investors the holdings. See, e.g., Jonathan Witmer, Does the Buck B. Certain Economic Features of Money ability to redeem shares upon demand, Stop Here? A Comparison of Withdrawals from Market Funds often will first use internal liquidity to Money Market Mutual Funds with Floating and Constant Share Prices, Bank of Canada Working As discussed in detail in the satisfy substantial redemptions. A Paper 2012–25 (Aug. 2012) (‘‘Witmer’’), available at Proposing Release, the combination of http://www.bankofcanada.ca/wp-content/uploads/ 34 See, e.g., PWG Comment Letter of Investment 2012/08/wp2012-25.pdf. ‘‘Fire sales’’ refer to several features of money market funds Company Institute (Apr. 19, 2012) (available in File situations when securities deviate from their can create an incentive for their No. 4–619) (‘‘ICI Apr. 2012 PWG Comment Letter’’) information-efficient values typically as a result of shareholders to redeem shares heavily (enclosing a survey commissioned by the sale price pressure. For an overview of the in periods of market stress. We discuss Investment Company Institute and conducted by theoretical and empirical research on asset ‘‘fire Treasury Strategies, Inc. finding, among other sales,’’ see Andrei Shleifer & Robert Vishny, Fire these factors below, as well as the harm things, that 94% of respondents rated safety of Sales in Finance and Macroeconomics, 25 Journal that can result from such heavy principal as an ‘‘extremely important’’ factor in of Economic Perspectives, Winter 2011, at 29–48 redemptions in money market funds. their money market fund investment decisions and (‘‘Fire Sales’’). 64% ranked safety of principal as the ‘‘primary 38 The DERA Study examined whether money driver’’ of their money market fund investment). market funds are more resilient to redemptions 32 See, e.g., Comment Letter of the Investment 35 One study documented that investors following the 2010 reforms and notes that, ‘‘As Company Institute (Sept. 17, 2013) (‘‘ICI Comment redirected assets from prime money market funds expected, the results show that funds with a 30 Letter’’) (‘‘Today over 61 million retail investors, as into government money market funds during percent [weekly liquid asset requirement] are more well as corporations, municipalities, and September 2008. See Russ Wermers, et al., Runs on resilient to both portfolio losses and institutional investors rely on the $2.6 trillion Money Market Funds (Jan. 2, 2013), available at redemptions’’ than those funds without a 30 money market fund industry as a low cost, efficient http://www.rhsmith.umd.edu/files/Documents/ percent weekly liquid asset requirement. DERA cash management tool that provides a high degree Centers/CFP/WermersMoneyFundRuns.pdf Study, supra note 24, at 37. of liquidity, stability of principal value, and a (‘‘Wermers Study’’). Another study found that 39 See, e.g., Comment Letter of MSCI Inc. (Sept. market based .’’). redemption activity in money market funds during 17, 2013) (‘‘MSCI Comment Letter’’) (‘‘The need to 33 See, e.g., ICI Comment Letter (‘‘Money market the financial crisis was higher for riskier money provide liquidity provides another set of incentives, funds owe their success, in large part to the market funds. See Patrick E. McCabe, The Cross as early redeemers may exhaust the fund’s internal stringent regulatory requirements to which they are Section of Money Market Fund Risks and Financial sources of liquidity (cash on hand, cash from subject under federal securities laws, including Crises, Board Finance and maturing securities, etc.), leaving possibly most notably Rule 2a–7 under the Investment Economic Discussion Series Paper No. 2010–51 distressed security sales as the only source of Company Act.’’). (2010) (‘‘Cross Section’’). liquidity for late redeemers.’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47741

investors may have an incentive to fund realizes a capital gain elsewhere in significant numbers of such larger redeem quickly in times of stress to the portfolio, which generally is positions.47 avoid realizing these potential liquidity unlikely given the types of securities in 4. Investors’ Misunderstanding About costs, leaving remaining shareholders to which money market funds typically the Actual Risk of Investing in Money bear these costs. invest and the tax requirements for Market Funds these funds.42 3. Valuation and Pricing Methods Lack of investor understanding and Money market funds are unique If a money market fund’s shadow lack of complete transparency among mutual funds in that rule 2a–7 price deviates far enough from its stable concerning the risks posed by particular permits them to use the amortized cost $1.00 share price, investors may have an money market funds can contribute to method of valuation and the penny- economic incentive to redeem their heavy redemptions during periods of rounding method of pricing for their shares. For example, investors may have stress. This lack of investor entire portfolios. As discussed above, an incentive to redeem shares when a understanding and complete these valuation and pricing techniques fund’s shadow price is less than $1.00.43 transparency can come from several allow a money market fund to sell and If investors redeem shares when the different sources. redeem shares at a stable share price shadow price is less than $1.00, the First, if investors do not know a without regard to small variations in the fund’s shadow price will decline even fund’s shadow price and/or its value of the securities in its portfolio, further because portfolio losses are underlying portfolio holdings (or if and thus to maintain a stable $1.00 spread across the remaining, smaller previous disclosures of this information share price under most market asset base. If enough shares are are no longer accurate), investors may conditions. redeemed, a fund can ‘‘break the buck’’ not be able to fully understand the Although the stable $1.00 share price due, in part, to heavy investor degree of risk in the underlying calculated using these methods provides redemptions and the concentration of portfolio.48 In such an environment, a a close approximation to market value losses across a shrinking asset base.44 In default of a large-scale commercial under normal market conditions, times of stress, this alone provides an paper issuer, such as a bank holding differences may exist when market incentive for investors to redeem shares company, could accelerate redemption conditions shift due to changes in ahead of other investors: early activity across many funds because interest rates, credit risk, and redeemers get $1.00 per share, whereas investors may not know which funds (if 40 liquidity. The market value of a later redeemers may get less than $1.00 any) hold defaulted securities. Investors money market fund’s portfolio securities per share even if the fund experiences may respond by initiating redemptions also may experience relatively large no further losses.45 to avoid potential rather than actual changes if a portfolio asset defaults or losses in a ‘‘flight to transparency.49’’ its credit profile deteriorates.41 Today, We note that although defaults in unless the fund ‘‘breaks the buck,’’ assets held by money market funds are 47 The Financial Stability Oversight Council market value differences are reflected low probability events, the resulting (‘‘FSOC’’), in formulating possible money market only in a fund’s shadow price, and not losses can lead to a fund breaking the reform recommendations, solicited and received buck if the default occurs in a position comments from the public (FSOC Comment File, the share price at which the fund File No. FSOC–2012–0003, available at http:// satisfies purchase and redemption that is greater than 0.5% of the fund’s www.regulations.gov/#!docketDetail;D=FSOC-2012- transactions. assets, as was the case in the Reserve 0003), some of which have made similar Deviations that arise from changes in Primary Fund’s investment in Lehman observations about the concentration and size of interest rates and credit risk are Brothers commercial paper in money market fund holdings. See, e.g., Comment 46 Letter of Harvard Business School Professors temporary as long as securities are held September 2008. And as discussed Samuel Hanson, David Scharfstein, & Adi to maturity, because amortized cost further in section III.C.2.a of this Sunderam (Jan. 8, 2013) (‘‘Harvard Business School values and market-based values Release, money market funds hold FSOC Comment Letter’’) (noting that ‘‘prime MMFs converge at maturity. But if a portfolio mainly invest in money-market instruments issued by large, global banks’’ and providing information asset defaults or an asset sale results in 42 In practice, a money market fund cannot use about the size of the holdings of ‘‘the 50 largest non- a realized capital gain or loss, deviations future portfolio earnings to restore its shadow price government issuers of money market instruments between the stable $1.00 share price and because Subchapter M of the Internal Revenue Code held by prime MMFs as of May 2012’’). requires money market funds to distribute virtually 48 See, e.g., DERA Study, supra note 24, at 31 the shadow price become permanent. all of their earnings to investors. These tax For example, if a portfolio experiences (stating that although disclosures on Form N–MFP requirements can cause permanent reductions in have improved fund transparency, ‘‘it must be a 25 basis point loss because an issuer shadow prices to persist over time, even if a fund’s remembered that funds file the form on a monthly defaults, the fund’s shadow price falls other portfolio securities are otherwise unimpaired. basis with no interim updates,’’ and that ‘‘[t]he from $1.0000 to $0.9975. Even though 43 See, e.g., Comment Letter of the Systemic Risk Commission also makes the information public the fund has not broken the buck, this Council (Sept. 16, 2013) (‘‘Systemic Risk Council with a 60-day lag, which may cause it to be stale’’). Comment Letter’’) (‘‘If the fund’s assets are worth As discussed in section III.E.9.c, a number of money reduction is permanent and can only be less than a $1.00—and you can redeem at $1.00— market funds have begun voluntarily disclosing reversed internally in the event that the the remaining shareholders are effectively paying information about their portfolio assets, liquidity, first movers to run. This embeds permanent losses and shadow NAV on a more frequent basis than in the fund for the remaining holders.’’). 40 We note that the vast majority of money market required, in part to address investor concerns 44 fund portfolio securities are not valued based on See, e.g., MSCI Comment Letter (‘‘[W]hen a regarding the staleness of information about fund market prices obtained through fund’s market-based NAV falls significantly below holdings. The final amendments we are adopting trading because most portfolio securities such as its stable NAV, an early redeemer not only benefits today include a number of regulatory requirements commercial paper, repos, and certificates of from this price discrepancy, but also puts designed to enhance transparency of money market are not actively traded in a secondary market. downward pressure on the market-based NAV for risks, including daily disclosure of liquid assets, Accordingly, most money market fund portfolio the remaining investors (as the realized losses on shareholder flows, current NAV and shadow NAV securities are valued largely through ‘‘mark-to- the fund’s assets must be shared across a smaller on fund Web sites, and elimination of the 60 day model’’ or ‘‘matrix pricing’’ estimates, which often investor base).’’). lag on public disclosure of Form N–MFP data. See use market inputs, as well as other factors in their 45 For an example illustrating this incentive, see infra section III.G.1. pricing models. See Proposing Release, supra note Proposing Release, supra note 25, at text following 49 See Nicola Gennaioli, Andrei Shleifer & Robert 25, at n.27. See also infra section III.D.2. n.31. Vishny, Neglected Risks, Financial Innovation, and 41 The credit quality standards in rule 2a–7 are 46 For a detailed discussion of the financial crises, Financial Fragility, 104 J. Fin. Econ. 453 (2012) (‘‘A designed to minimize the likelihood of such a see generally DERA Study, supra note 24, at section small piece of news that brings to investors’ minds default or credit deterioration. 4.A. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47742 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Because many money market funds hold Instances of discretionary sponsor money market funds have an implicit securities from the same issuer, support were relatively common during government guarantee, they may believe investors may respond to a lack of the financial crisis. For example, during that money market funds are safer transparency about specific fund the period from September 16, 2008 to investments than they in fact are and holdings by redeeming assets from October 1, 2008, a number of money may underestimate the potential risk of funds that are believed to be holding the market fund sponsors purchased large loss.57 50 amounts of portfolio securities from same or highly correlated positions. C. Effects on Other Money Market their money market funds or provided Second, money market funds’ Funds, Investors, and the Short-Term capital support to the funds (or received sponsors on a number of occasions have Financing Markets voluntarily chosen to provide financial staff no-action assurances in order to support for their money market funds.51 provide support).53 But the financial In this section, we discuss how stress The reasons that sponsors have done so crisis is not the only instance in which at one money market fund can be include keeping a fund from re-pricing some money market funds have come positively correlated across money below its stable value, protecting the under strain, although it is unique in the market funds in at least two ways. Some sponsors’ reputations or brands, and number of money market funds that market observers have noted that if a increasing a fund’s shadow price if its requested or received sponsor money market fund suffers a loss on one sponsor believes investors avoid funds support.54 As noted in the Proposing of its portfolio securities—whether that have low shadow prices. Prior to Release, since 1989, 11 other financial because of a deterioration in credit the changes that we are adopting today, events have been sufficiently adverse quality, for example, or because the funds were not required to disclose that certain fund sponsors chose to fund sold the security at a discount to instances of sponsor support outside of provide support or to seek staff no- its amortized-cost value—other money financial statements; as a result, sponsor action assurances in order to provide market funds holding the same security support, potentially affecting 158 may have to reflect the resultant support has not been fully transparent 58 to investors and this, in turn, may have different money market funds.55 discounts in their shadow prices. Any lessened some investors’ understanding Finally, the government assistance resulting decline in the shadow prices of the risk in money market funds.52 provided to money market funds during of other funds could, in turn, lead to a the financial crisis may have contagion effect that could spread even the previously unattended risks catches them by contributed to investors’ perceptions further as investors run from money surprise and causes them to drastically revise their that the risk of loss in money market market funds in general. For example, valuations of new securities and to sell them. . . funds is low.56 If investors perceive that some commenters have observed that When investors realize that the new securities are many money market fund holdings tend false substitutes for the traditional ones, they fly to safety, dumping these securities on the market and misprice the risks they are subject to.’’) (emphasis to be highly correlated, making it more buying the truly safe ones.’’). in original). likely that multiple money market funds 53 Our staff estimated that during the period from 50 See Comment Letter of Federal Reserve of will experience contemporaneous August 2007 to December 31, 2008, almost 20% of Boston (Sept. 12, 2013) (‘‘Boston Federal Reserve 59 all money market funds received some support (or decreases in shadow prices. Comment Letter’’) (‘‘Investors in other MMMFs may staff no-action assurances concerning support) from As discussed above, in times of stress, in turn run if they perceive that their funds are their money managers or their affiliates. We note similar (e.g. similar portfolio composition, similar if investors do not wish to be exposed that not all such support required no-action to a distressed issuer (or correlated maturity profile, similar investor concentration) to assurances from Commission staff (for example, the fund that experienced the initial run.’’); see fund affiliates were able to purchase defaulted issuers) but do not know which money infra notes 58–59 and accompanying text. Based on Lehman Brothers securities from fund portfolios market funds own these distressed Form N–MFP data as of February 28, 2014, there under rule 17a–9 under the Investment Company securities at any given time, investors were 27 different issuers whose securities were held Act without the need for any no-action assurances). may redeem from any money market by more than 100 prime money market funds. See, e.g., http://www.sec.gov/divisions/investment/ 51 In the Proposing Release we requested im-noaction.shtml#money. Commission staff fund that could own the security (e.g., comment on amending rule 17a–9 (which allows for provided no-action assurances to 100 money market redeeming from all prime funds).60 A discretionary support of money market funds by funds in 18 different fund groups so that the fund their sponsors and other affiliates) to potentially groups could enter into such arrangements. 57 See, e.g., HSBC Comment Letter. restrict the practice of sponsor support, but did not Although a number of advisers to money market 58 See generally Douglas W. Diamond & Raghuram propose any specific changes. Most commenters funds obtained staff no-action assurances in order G. Rajan, Fear of Fire Sales, Illiquidity Seeking, and who addressed our request for comment on to provide sponsor support, several did not Credit Freezes, 126 Q. J. Econ. 557 (May 2011); Fire amending rule 17a–9 opposed making any changes subsequently provide the support because it was Sales, supra note 37; Markus Brunnermeier, et al., to rule 17a–9, arguing that the transactions not necessary. See, e.g., Comment Letter of the The Fundamental Principles of Financial facilitated by the rule are in the best interests of the Dreyfus Corporation (Aug. 7, 2012) (available in Regulation, in Geneva Reports on the World shareholders. See Comment Letter of the Investment File No. 4 619) (‘‘Dreyfus III Comment Letter’’) Economy 11 (2009). Company Institute (Sept 17, 2013) (‘‘ICI Comment (stating that no-action relief to provide sponsor 59 See, e.g., Boston Federal Reserve Comment Letter’’); Comment Letter of the Dreyfus Corporation support ‘‘was sought by many money funds as a Letter (discussing the relative homogeneity of (Sept. 17, 2013) (‘‘Dreyfus Comment Letter’’); precautionary measure’’). money market funds holdings, and noting that as Comment Letter of American Bar Association 54 See Moody’s Investors Service Special of the end of June 2013, the 20 largest corporate Business Law Section (Sept. 30, 2013) (‘‘ABA Comment, Sponsor Support Key to Money Market issuers accounted for approximately 44 percent of Business Law Comment Letter’’). One commenter Funds (Aug. 9, 2010) (‘‘Moody’s Sponsor Support prime money market funds’ assets); Comment Letter supported amending rule 17a–9, arguing that these Report’’). Interest rate changes, issuer defaults, and of Americans for Financial Reform (Sept. 17, 2013) transactions can result in shareholders having downgrades can lead to significant (‘‘Americans for Fin. Reform Comment Letter’’) unjustified expectations of future support being valuation losses for individual funds. (discussing a study estimating that 97 percent of provided by sponsors. Comment Letter of HSBC 55 See Proposing Release, supra note 25, at section non-governmental assets of prime money market Global Asset Management (Sept. 17, 2013) (‘‘HSBC II.B.3. We note, as discussed more fully in the funds consists of financial sector commercial Comment Letter’’). In light of these comments, we Proposing Release, that although these events paper); Comment Letter of Better Markets, Inc. (Feb. are not amending rule 17a–9 at this time. See also affected money market funds and their sponsors, 15, 2013) (available in File No. FSOC–2012–0003) infra section III.E.7.a. there is no evidence that these events caused (‘‘Better Markets FSOC Comment Letter’’) (agreeing 52 See, e.g., HSBC Comment Letter (‘‘[A] level of systemic problems, most likely because the events with FSOC’s analysis and stating that ‘‘MMFs tend ambiguity about who owns the risk when investing were isolated either to a single entity or class of to have similar exposures due to limits on the in a MMF has developed amongst some investors. security and because sponsor support prevented nature of permitted investments. As a result, losses Some investors have been encouraged to expect any funds from breaking the buck. creating instability and a crisis of confidence in one sponsors to support their MMFs. Such expectations 56 For a further discussion of issues related to MMF are likely to affect other MMFs at the same cannot be enforced, since managers are under no money market fund sponsor support and its effect time.’’). obligation to support their funds, and consequently on investors’ perception, see Proposing Release, 60 See, e.g., Wermers Study, supra note 35 (based leads some investors to misunderstand and supra note 25, at nn.60–61 and accompanying text. on an empirical analysis of data from the 2008 run

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47743

fund that did not own the security and transaction accounts, which expired at discussed further below, redemption was not otherwise under stress could the end of 2012).64 data from the financial crisis show that nonetheless experience heavy Money market funds’ size and some institutional investors are likely to redemptions which, as discussed above, significance in the short-term markets, redeem from distressed money market could themselves ultimately cause the together with their features that can funds far more quickly than other fund to experience losses if it does not create an incentive to redeem as investors and to redeem a greater have adequate liquidity. discussed above, have led to concerns percentage of their prime fund As was experienced by money market that money market funds may holdings.66 This likely is because some funds during the financial crisis, contribute to systemic risk. Heavy institutional investors generally have liquidity-induced contagion may have redemptions from money market funds more capital at stake, along with negative effects on investors and the during periods of financial stress can markets for short-term financing of remove liquidity from the financial sophisticated tools and professional corporations, banks, and governments. system, potentially disrupting other staffs to monitor risk. Because of their This is in large part because of the markets. Issuers may have difficulty proportionally larger investments, just a significance of money market funds’ obtaining capital in the short-term few institutional investors submitting role in the short-term financing markets during these periods because redemption requests may have a markets.61 Indeed, money market funds money market funds are focused on significant effect on a money market had experienced steady growth before meeting redemption requests through fund’s liquidity, while it may take many the financial crisis, driven in part by internal liquidity generated either from more retail investors, with their growth in the size of institutional cash maturing securities or cash from typically smaller investments sizes, to pools, which grew from under $100 subscriptions, and thus may be cause similar negative consequences. billion in 1990 to almost $4 trillion just purchasing fewer short-term debt Slower-to-redeem shareholders may be before the financial crisis.62 Money obligations.65 To the extent that harmed because, as discussed above, market funds’ suitability for cash multiple money market funds redemptions at a money market fund management operations also has made experience heavy redemptions, the can concentrate existing losses in the them popular among corporate negative effects on the short-term fund or create new losses if the fund treasurers, municipalities, and other markets can be magnified. Money must sell assets at a discount to obtain institutional investors, some of which market funds’ experience during the liquidity to satisfy redemption requests. rely on money market funds for their financial crisis illustrates the impact of In both cases, redemptions leave the cash management operations because heavy redemptions, as we discuss in fund’s portfolio more likely to lose the funds provide diversified cash more detail below. Heavy redemptions in money market value, to the detriment of slower-to- management more efficiently due both 67 to the scale of their operations and the funds may disproportionately affect redeem investors. Retail investors— expertise of money market fund slow-moving shareholders because, as who tend to be slower moving—also managers.63 For example, according to could be harmed if market stress begins one survey, approximately 16% of 64 See 2013 Association for Financial at an institutional money market fund organizations’ short-term investments Professionals Liquidity Survey, at 15, available at and spreads to other funds, including http://www.afponline.org/liquidity (subscription funds composed solely or primarily of were allocated to money market funds required) (‘‘2013 AFP Liquidity Survey’’). The size 68 (and, according to this survey, this of this allocation to money market funds is down retail investors. figure is down from almost 40% in 2008 substantially from prior years. For example, prior D. The Financial Crisis due in part to the reallocation of cash AFP Liquidity Surveys show higher allocations of organizations’ short-term investments to money investments to bank deposits following market funds: almost 40% in the 2008 survey, The financial crisis in many respects temporary unlimited Federal Deposit approximately 25% in the 2009 and 2010 surveys, demonstrates the various considerations Corporation deposit almost 30% in the 2011 survey, and 16% in the discussed above in sections B and C, insurance for non-interest bearing bank 2012 survey. This shift has largely reflected a re- allocation of cash investments to bank deposits, including the potential implications and which rose from representing 25% of organizations’ harm associated with heavy redemption on money market funds, finding that, during 2008, short-term investment allocations in the 2008 ‘‘[f]unds that cater to institutional investors, which Association for Financial Professionals Liquidity are the most sophisticated and informed investors, Survey, available at http://www.afponline.org/pub/ 66 See Money Market Fund Reform, Investment were hardest hit,’’ and that ‘‘investor flows from pdf/2008_Liquidity_Survey.pdf (‘‘2008 AFP Company Act Release No. 28807 (June 30, 2009) [74 money market funds seem to have been driven both Liquidity Survey’’), to 50% of organizations’ short- FR 32688 (July 8, 2009)] (‘‘2009 Proposing by strategic externalities . . . and information.’’). term investment allocations in the 2013 survey. The Release’’), at nn.46–48 and 178 and accompanying 61 See infra section III.K.3 for statistics on the 2012 survey noted that some of this shift has been text. types and percentages of outstanding short-term driven by the temporary unlimited FDIC deposit 67 See, e.g., DERA Study, supra note 24, at 10 debt obligations held by money market funds. insurance coverage for non-interest bearing bank (‘‘Investor redemptions during the financial crisis, 62 See Proposing Release supra note 25, at nn.70– transaction accounts (which expired at the end of particularly after Lehman’s failure, were heaviest in 71. 2012) and in which assets have remained despite institutional share classes of prime money market 63 See, e.g., U.S. Securities and Exchange the expiration of the insurance. See 2013 AFP funds, which typically hold securities that are Commission, Roundtable on Money Market Funds Liquidity Survey. As of February 28, 2014, illiquid relative to government funds. It is possible and Systemic Risk, unofficial transcript (May 10, approximately 67% of money market fund assets that sophisticated investors took advantage of the 2011), available at http://www.sec.gov/spotlight/ were held in money market funds or share classes opportunity to redeem shares to avoid losses, mmf-risk/mmf-risk-transcript-051011.htm intended to be sold to institutional investors leaving less sophisticated investors (if co-mingled) (‘‘Roundtable Transcript’’) (Kathryn L. Hewitt, according to iMoneyNet data. All of the AFP to bear the losses.’’). Government Finance Officers Association) (‘‘Most Liquidity Surveys are available at http:// 68 As discussed further below, retail money of us don’t have the time, the energy, or the www.afponline.org. market funds experienced a lower level of resources at our fingertips to analyze the credit 65 See supra text preceding and accompanying redemptions in 2008 than institutional money quality of every security ourselves. So we’re in note 36. Although money market funds also can market funds, although the full predictive power of essence, by going into a pooled fund, hiring that build liquidity internally by retaining (rather than this empirical evidence is tempered by the expertise for us . . . it gives us diversification, it investing) cash from investors purchasing shares, introduction of the Department of Treasury’s gives us immediate cash management needs where this is not likely to be a material source of liquidity (‘‘Treasury Department’’) temporary guarantee we can move money into and out of it, and it for a distressed money market fund experiencing program for money market funds, which may have satisfies much of our operating cash investment heavy redemptions as a stressed fund may be prevented heavier shareholder redemptions among opportunities.’’); see also Proposing Release supra unlikely to be receiving significant investor generally slower-to-redeem retail investors. See note 25, at n.72. purchases during such a time. infra note 80.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47744 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

from money market funds.69 On institutional prime money market funds Figure 1, below, provides context for September 16, 2008, the day after also began to experience heavy the redemptions that occurred during Lehman Brothers Holdings Inc. redemptions.73 During the week of the financial crisis. Specifically, it announced its , The Reserve September 15, 2008 (the week that shows daily total net assets over time, Fund announced that its Primary Lehman Brothers announced it was where the vertical line indicates the Fund—which held a $785 million (or filing for bankruptcy), investors date that Lehman Brothers filed for 1.2% of the fund’s assets) position in withdrew approximately $300 billion bankruptcy, September 15, 2008. Lehman Brothers commercial paper— from prime money market funds or 14% Investor redemptions during the 74 would ‘‘break the buck’’ and price its of the assets in those funds. During financial crisis, particularly after securities at $0.97 per share.70 At the that time, fearing further redemptions, Lehman’s failure, were heaviest in same time, there was turbulence in the money market fund managers began to institutional share classes of prime market for financial sector securities as retain cash rather than invest in a result of other financial company commercial paper, certificates of money market funds, which typically stresses, including, for example, the deposit, or other short-term hold securities that are less liquid and near failure of American International instruments.75 Short-term financing of lower credit quality than those Group (‘‘AIG’’), whose commercial markets froze, impairing access to typically held by government money paper was held by many prime money credit, and those who were still able to market funds. The figure shows that market funds.71 access short-term credit often did so institutional share classes of Heavy redemptions in the Reserve only at overnight maturities.76 government money market funds, which Primary Fund were followed by heavy include Treasury and government redemptions from other Reserve money 73 See DERA Study, supra note 24, at section 3. funds, experienced heavy inflows.77 market funds,72 and soon other 74 See Investment Company Institute, Report of The aggregate level of retail investor the Money Market Working Group, at 62 (Mar. 17, 2009), available athttp://www.ici.org/pdf/ppr_09_ redemption activity, in contrast, was not 69 See generally DERA Study, supra note 24, at mmwg.pdf (‘‘ICI Report’’) (analyzing data from particularly high during September and section 3. See also 2009 Proposing Release supra iMoneyNet). The latter figure describes aggregate 78 note 66, at section I.D. October 2008, as shown in Figure 1. 70 redemptions from all prime money market funds. See also 2009 Proposing Release, supra note 66, Some money market funds had redemptions well in at n.44 and accompanying text. We note that the excess of 14% of their assets. Based on iMoneyNet Reserve Primary Fund’s assets have been returned financing markets that reduced or halted data (and excluding the Reserve Primary Fund), the to shareholders in several distributions made over investment in commercial paper and other riskier maximum weekly redemptions from a money a number of years. We understand that assets short-term debt securities during the fund during the financial crisis was over returned constitute approximately 99% of the crisis. See, e.g., Comment Letter of Investment 64% of the fund’s assets. fund’s assets as of the close of business on Company Institute (Jan. 24, 2013) (available in File 75 September 15, 2008, including the income earned See Philip Swagel, ‘‘The Financial Crisis: An No. FSOC–2012–0003) (‘‘ICI Jan. 24 FSOC Comment during the liquidation period. See, e.g., Inside View,’’ Brookings Papers on Economic Letter’’). Activity, at 31 (Spring 2009) (conference draft), Consolidated Class Action Complaint, In Re The 77 As discussed in section III.C.1 government available at http://www.brookings.edu/∼/media/ Reserve Primary Fund Sec. & Class money market funds historically have faced projects/bpea/spring%202009/ Action Litig., No. 08–CV–8060–PGG (S.D.N.Y. Jan. different redemption pressures in times of stress 5, 2010). A class action suit brought on behalf of 2009a_bpea_swagel.pdf; Christopher Condon & and have different risk characteristics than other the Reserve Fund shareholders was settled in 2013. Bryan Keogh, Funds’ Flight from Commercial Paper money market funds because of their unique See Nate Raymond, Settlement Reached in Reserve Forced Fed Move, Bloomberg, Oct. 7, 2008, Primary Fund Lawsuit, Reuters (Sept. 7, 2013) available at http://www.bloomberg.com/apps/ portfolio composition, which typically have lower available at http://www.reuters.com/article/2013/ news?pid=newsarchive&sid=a5hvnKFCC_pQ. credit default risk and greater liquidity than non- 09/07/us-reserveprimary-lawsuit- 76 See 2009 Proposing Release, supra note 66, at government portfolio securities typically held by idUSBRE98604Q20130907. nn.51–53 & 65–68 and accompanying text (citing to money market funds. 71 In addition to Lehman Brothers and AIG, there minutes of the Federal Committee, 78 We understand that iMoneyNet differentiates were other stresses in the market as well, as news articles, Federal Reserve Board data on retail and institutional money market funds based discussed in greater detail in the DERA Study. See commercial paper spreads over Treasury bills, and on factors such as minimum initial investment generally DERA Study, supra note 24, at section 3. books and academic articles on the financial crisis). amount and how the fund provider self-categorizes 72 See 2009 Proposing Release, supra note 66, at Commenters have stated that money market funds the fund, which does not necessarily correlate with section I.D. were not the only investors in the short-term how we define retail funds in this Release.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47745

On September 19, 2008, the U.S. More specifically, the amendments liquidity buffers provide a source of Department of the Treasury (‘‘Treasury decreased money market funds’ credit internal liquidity and are intended to Department’’) announced a temporary risk exposure by further restricting the help funds withstand high levels of guarantee program (‘‘Temporary amount of lower quality securities that redemptions during times of market Guarantee Program’’), which would use funds can hold.83 The amendments, for illiquidity. The amendments also reduce the $50 billion Exchange Stabilization the first time, also required that money money market funds’ exposure to Fund to support more than $3 trillion in market funds maintain liquidity buffers interest rate risk by decreasing the shares of money market funds, and the in the form of specified levels of daily maximum weighted average maturities Board of Governors of the Federal and weekly liquid assets.84 These of fund portfolios from 90 to 60 days.85 Reserve System authorized the In addition to reducing the risk profile temporary extension of credit to banks market funds. See, e.g., Comment Letter of Invesco of the underlying money market fund to finance their purchase of high-quality Ltd. (Sept. 17, 2013) (‘‘Invesco Comment Letter’’) portfolios, the reforms increased the (‘‘In evaluating the reforms contained in the amount of information that money asset-backed commercial paper from Proposed Rule it is also important to take into money market funds.79 These programs account the significant impact of the reforms market funds are required to report to successfully slowed redemptions in implemented by the Commission in 2010, which the Commission and the public. Money prime money market funds and amounted to a comprehensive overhaul of the market funds are now required to regulatory framework governing MMFs.’’). submit to the Commission monthly provided additional liquidity to money 83 Specifically, the amendments placed tighter market funds. As discussed in the limits on a money market fund’s ability to acquire information on their portfolio holdings Proposing Release, the disruptions to ‘‘second tier’’ securities by (1) restricting a money using Form N–MFP.86 This information the short-term markets detailed above market fund from investing more than 3% of its allows the Commission, investors, and assets in second tier securities (rather than the third parties to monitor compliance could have continued for a longer previous limit of 5%), (2) restricting a money 80 1 with rule 2a–7 and to better understand period of time but for these programs. market fund from investing more than ⁄2 of 1% of its assets in second tier securities issued by any and monitor the underlying risks of E. Examination of Money Market Fund single issuer (rather than the previous limit of the money market fund portfolios. Money Regulation Since the Financial Crisis greater of 1% or $1 million), and (3) restricting a market funds also are now required to money market fund from buying second tier 1. The 2010 Amendments securities that mature in more than 45 days (rather post portfolio information on their Web than the previous limit of 397 days). See rule 2a– sites each month, providing investors After the events of the financial crisis, 7(c)(3)(ii) and (c)(4)(i)(C). Second tier securities are with important information to help in March 2010, we adopted a number of eligible securities that, if rated, have received other them make better-informed investment than the highest short-term term debt rating from amendments to rule 2a–7.81 These 87 the requisite NRSROs or, if unrated, have been decisions. amendments were designed to make determined by the fund’s board of directors to be Finally, the 2010 amendments require money market funds more resilient by of comparable quality. See current rule 2a–7(a)(24) money market funds to undergo stress reducing the interest rate, credit, and (defining ‘‘second tier security’’); current rule 2a– tests under the direction of the board of liquidity risks of fund asset portfolios.82 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 maturities of 60 days or less, or securities that 79 See 2009 Proposing Release, supra note 66, at remove NRSRO rating references from rule 2a–7 convert into cash within one week. See current rule nn.55–59 and accompanying text for a fuller and Form N–MFP. 2a–7(c)(5)(ii) and (iii). description of the various forms of governmental 84 The requirements are that, for all taxable 85 The 2010 amendments also introduced a assistance provided to money market funds during money market funds, at least 10% of assets must be weighted average life requirement of 120 days, this time. in cash, U.S. Treasury securities, or securities that which limits the money market fund’s ability to 80 See Proposing Release supra note 25 at n.91. convert into cash (e.g., mature) within one day and, invest in longer-term floating rate securities. See 81 2010 Adopting Release, supra note 17. for all money market funds, at least 30% of assets current rule 2a–7(c)(2)(ii) and (iii). 82 Commenters have noted the importance of the must be in cash, U.S. Treasury securities, certain 86 See current rule 30b1–7. 2010 reforms in enhancing the resiliency of money other Government securities with remaining 87 See current rule 2a–7(c)(12).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.000 47746 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

directors on a periodic basis.88 Under below, in the fall of 2013), and the dollar lending.’’ 94 Thus, while such this stress testing requirement, each funds’ shadow prices did not deviate redemptions often exemplify rational fund must periodically test its ability to significantly from the funds’ stable risk management by money market fund maintain a stable NAV per share based share prices. Also unlike in 2008, investors, they can also have certain upon certain hypothetical events, money market funds had sufficient contagion effects on the short-term including an increase in short-term liquidity to satisfy investors’ financing markets. Again, despite these interest rates, an increase in shareholder redemption requests, which were similar effects, the 2010 reforms redemptions, a downgrade of or default submitted at a lower rate and over a demonstrated that money market funds on portfolio securities, and widening or longer period than in 2008, suggesting are potentially more resilient today than narrowing of spreads between yields on that the 2010 amendments acted as in 2008. an appropriate benchmark selected by intended to enhance the resiliency of 3. Continuing Consideration of the Need the fund for overnight interest rates and money market funds.91 for Additional Reforms commercial paper and other types of securities held by the fund. This reform In 2013, another debt ceiling impasse As discussed in greater detail in the 92 was intended to provide money market took place, although over a longer Proposing Release, when we adopted fund boards and the Commission a time period and without the Eurozone the 2010 amendments, we better understanding of the risks to crisis as a backdrop. During the worst acknowledged that money market funds’ which the fund is exposed and give two-week period of the 2013 crisis, experience during the financial crisis fund managers a tool to better manage October 3rd through October 16th, raised questions of whether more those risks.89 government and treasury money market fundamental changes to money market funds experienced combined outflows funds might be warranted.95 The DERA 2. The Eurozone Debt Crisis and U.S. of $54.4 billion, which was 6.1% of total Study, discussed throughout this Debt Ceiling Impasses of 2011 and 2013 assets, with approximately 1.5% of Release, has informed our consideration Several significant market events assets flowing out of these funds on of the risks that may be posed by money since our 2010 reforms have permitted October 11th, the single worst day for market funds and our formulation of us to evaluate the efficacy of those outflows of the 2013 impasse. today’s final rules and rule reforms. Specifically, in the summer of Importantly, despite these outflows, amendments. The DERA Study 2011, the Eurozone sovereign debt crisis fund shadow prices were largely contains, among other things, a detailed and an impasse over the U.S. unaffected during this time period. analysis of our 2010 amendments to rule Government’s debt ceiling unfolded, Once the impasse was resolved, assets 2a–7 and some of the amendments’ and during the fall of 2013 another U.S. flowed back into these funds, returning effects to date, including changes in ceiling impasse government and treasury money market some of the characteristics of money occurred. funds to a pre-crisis asset level before market funds, the likelihood that a fund While it is difficult to isolate the the end of the year, indicating their with the maximum permitted weighted effects of the 2010 amendments, these resiliency.93 average maturity (‘‘WAM’’) would events highlight the potential increased ‘‘break the buck’’ before and after the resilience of money market funds after Although money market funds’ 2010 reforms, money market funds’ the reforms were adopted. Most experiences differed in 2008 and in the experience during the 2011 Eurozone significantly, no money market fund Eurozone crisis, the heavy redemptions sovereign debt crisis and the 2011 U.S. needed to re-price below its stable $1.00 money market funds experienced in debt-ceiling impasse, and how money share price. As discussed in greater both periods appear to have negatively market funds would have performed detail in the Proposing Release, as a affected the markets for short-term during September 2008 had the 2010 result of concerns about exposure to financing in similar ways. Academics reforms been in place at that time.96 European financial institutions, in the researching these issues have found, as summer of 2011, prime money market detailed in the DERA Study, that 94 DERA Study, supra note 24, at 34–35 (‘‘It is funds began experiencing substantial ‘‘creditworthy issuers may encounter important to note, however, investor redemptions 90 financing difficulties because of risk has a direct effect on short-term funding liquidity redemptions. But unlike September in the U.S. commercial paper market. Chernenko 2008, money market funds did not taking by the funds from which they and Sunderam (2012) report that ‘creditworthy experience meaningful capital losses in raise financing’’; ‘‘local branches of issuers may encounter financing difficulties the summer of 2011 (or as discussed foreign banks reduced lending to U.S. because of risk taking by the funds from which they raise financing.’ Similarly, Correa, Sapriza, and entities in 2011’’; and that ‘‘European Zlate (2012) finds U.S. branches of foreign banks 88 See current rule 2a–7(c)(10)(v). banks that were more reliant on money reduced lending to U.S. entities in 2011, while 89 See 2009 Proposing Release, supra note 66, at funds experienced bigger declines in Ivashina, Scharfstein, and Stein (2012) document section II.C.3. European banks that were more reliant on money 90 See Proposing Release supra note 25, at section funds experienced bigger declines in dollar II.D.2; DERA Study, supra note 24, at 32. Assets 91 DERA Study, supra note 24, at 33–34. We note lending.’’) (internal citations omitted); Sergey held by prime money market funds declined by that the redemptions in the summer of 2011 also Chernenko & Adi Sunderam, Frictions in Shadow approximately $100 billion (or 6%) during a three- did not take place against the backdrop of a broader Banking: Evidence from the Lending Behavior of week period beginning June 14, 2011. Some prime financial crisis, and therefore may have reflected Money Market Funds, Fisher College of Business money market funds had redemptions of almost more targeted concerns by investors (concern about Working Paper No. 2012–4 (Sept. 2012); Ricardo 20% of their assets in each of June, July, and August exposure to the Eurozone and U.S. government Correa, et al., Liquidity Shocks, Dollar Funding 2011, and one fund had redemptions of 23% of its securities as the debt ceiling impasse unfolded). Costs, and the Bank Lending Channel During the assets during that period after articles began to Money market funds’ experience in 2008, in European Sovereign Crisis, Federal Reserve Board appear in the financial press that warned of indirect contrast, may have reflected a broader range of International Finance Discussion Paper No. 2012– exposure of money market funds to Greece. concerns as reflected in the DERA Study, which 1059 (Nov. 2012); Victoria Ivashina et al., Dollar Investors purchased shares of government money discusses a number of possible explanations for Funding and the Lending Behavior of Global Banks, market funds in late June and early July in response redemptions during the financial crisis. Id. at 7–13. National Bureau of Economic Research Working to these concerns, but then began redeeming 92 See, e.g., Money-Market Funds Shine During Paper No. 18528 (Nov. 2012). government money market fund shares in late July Debt Limit Crisis (10/25/2013), available at http:// 95 See 2009 Proposing Release, supra note 66, at and early August, likely as a result of concerns www.imoneynet.com/news/280.aspx. section III; 2010 Adopting Release, supra note 17, about the U.S. debt ceiling impasse and possible 93 These statistics are based on an analysis of at section I. ratings downgrades of government securities. See information from Crane Data. See also infra section 96 See generally DERA Study, supra note 24, at Proposing Release supra note 25, at section II.D.2. III.C.1. section 4.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47747

In particular, the DERA Study found III. Discussion Many other commenters, on the other hand, expressed their opposition to fees that under certain assumptions the A. Liquidity Fees and Redemption Gates expected probability of a money market and gates.105 Comments on the proposal fund breaking the buck was lower with Today, we are adopting amendments are discussed in more detail below. the additional liquidity required by the to rule 2a–7 that will authorize new 1. Analysis of Certain Effects of Fees 2010 reforms.97 For example, funds in tools for money market funds to use in times of stress to stem heavy and Gates 106 2011 had sufficient liquidity to redemptions and avoid the type of withstand investors’ redemptions a. Background contagion that occurred during the during the summer of 2011.98 The fact financial crisis. These amendments As discussed previously, shareholders that no fund experienced a credit event provide money market funds with the redeem money market fund shares for a during that time also contributed to the ability to impose liquidity fees and number of reasons.107 Shareholders may evidence that funds were able to redemption gates (generally referred to redeem shares because the current withstand relatively heavy redemptions herein as ‘‘fees and gates’’) in certain rounding convention in money market while maintaining a stable $1.00 share circumstances.101 Today’s amendments fund valuation and pricing can create price. Finally, using actual portfolio will allow a money market fund to incentives for shareholders to redeem holdings from September 2008, the impose a liquidity fee of up to 2%, or shares ahead of other investors when DERA Study analyzed how funds would temporarily suspend redemptions (also the market-based NAV per share of a have performed during the financial known as ‘‘gate’’) for up to 10 business fund is lower than $1.00 per share.108 crisis had the 2010 reforms been in days in a 90-day period, if the fund’s Shareholders also may flee to quality, place at that time. While funds holding weekly liquid assets fall below 30% of liquidity, or transparency (or its total assets and the fund’s board of 30% weekly liquid assets are more combinations thereof) during adverse directors (including a majority of its resilient to portfolio losses, funds will economic events or financial market independent directors) determines that ‘‘break the buck’’ with near certainty if conditions.109 Furthermore, in times of capital losses of the fund’s non-weekly imposing a fee or gate is in the fund’s best interests.102 Additionally, under stress, shareholders may simply need or liquid assets exceed 1%.99 The DERA want to withdraw funds for unrelated Study concludes that the 2010 reforms today’s amendments, a money market fund will be required to impose a reasons. In any case, money market would have been unlikely to prevent a liquidity fee of 1% on all redemptions funds may have to absorb quickly high fund from breaking the buck when faced if its weekly liquid assets fall below levels of redemptions that exceed with large credit losses like the ones 10% of its total assets, unless the board internal sources of liquidity. In these 100 experienced in 2008. Based on the of directors of the fund (including a instances, funds will need to sell DERA Study, we believe that, although majority of its independent directors) portfolio securities, perhaps at a loss the 2010 reforms were an important step determines that imposing such a fee either because they incur transitory in making money market funds better would not be in the best interests of the liquidity costs or they must sell assets able to withstand heavy redemptions fund.103 at ‘‘fire sale’’ prices.110 If fund managers when there are no portfolio losses (as These amendments differ in some deplete their funds’ most liquid assets was the case in the summer of 2011 and respects from the fees and gates that we first, this may impose future liquidity the fall of 2013), these reforms do not proposed, which would have required costs (that are not reflected in a $1.00 sufficiently address the potential future funds to impose a 2% liquidity fee on share price based on current amortized situations when credit losses may cause all redemptions, and would have cost valuation) on the non-redeeming a fund’s portfolio to lose value or when permitted the imposition of redemption shareholders because later redemption the short-term financing markets more gates for up to 30 days in a 90-day requests must be met by selling less generally come under stress. period, after a fund’s weekly liquid liquid assets. These effects may be assets fell below 15% of its total assets. heightened if many funds sell assets at After consideration of this data, as In addition, under our proposal, a the same time, lowering asset prices. well as the comments we received on fund’s board (including a majority of During the financial crisis, for example, the proposal, we believe that the independent directors) could have securities sales to meet heavy reforms we are adopting today should determined not to impose the liquidity redemptions in money market funds further help lessen money market funds’ fee or to impose a lower fee. A large and sales of assets by other investors susceptibility to heavy redemptions, number of commenters supported, to improve their ability to manage and varying degrees and with varying (‘‘Federated V Comment Letter’’); Comment Letter mitigate potential contagion from high caveats, our fees and gates proposal.104 of Northern Trust Corporation (Sept. 16, 2013) levels of redemptions, and increase the (‘‘Northern Trust Comment Letter’’). transparency of their risks, while 101 Under the amendments we are adopting today, 105 See, e.g., Comment Letter of Capital Advisors preserving, as much as possible, the government funds are permitted, but not required, Group (Sept. 3, 2013) (‘‘Capital Advisors Comment to impose fees and gates, as discussed below. See Letter’’); Comment Letter of Americans for benefits of money market funds. infra section III.C.1 of this Release. Financial Reform (Sept. 17, 2013) (‘‘Americans for 102 If, at the end of a business day, a fund has Fin. Reform Comment Letter’’); Comment Letter of invested 30% or more of its total assets in weekly Edward D. Jones and Co., L.P. (Sept. 20, 2013) 97 Id. at 30. liquid assets, the fund must cease charging the (‘‘Edward Jones Comment Letter’’). 106 98 Id. at 34. liquidity fee or imposing the redemption gate, See infra section III.K (discussing further the economic effects of the fees and gates amendments). 99 Id. at 38, Table 5. In fact, even at capital losses effective as of the beginning of the next business 107 See Proposing Release, supra note 25, at 156– of only 0.75% of the fund’s non-weekly liquid day. See rule 2a–7(c)(2)(i)(A) and (B), and (ii)(B). 103 172; DERA Study, supra note 24, at 2–4. assets and no investor redemptions, funds are The board also may determine that a lower or higher fee would be in the best interests of the fund. 108 As discussed in section III.B, the floating NAV already more likely than not (64.6%) to ‘‘break the See rule 2a–7(c)(2)(ii)(A); see also infra section amendments help mitigate this incentive for buck.’’ Id. III.A.2.c. institutional prime funds by causing redeeming 100 To further illustrate the point, the DERA Study 104 See, e.g., Form Letter Type A; Comment Letter shareholders to receive the market value of noted that the Reserve Primary Fund ‘‘would have of Fidelity Investments (Sept. 16, 2013) (‘‘Fidelity redeemed shares. broken the buck even in the presence of the 2010 Comment Letter’’); Comment Letter of Federated 109 See Proposing Release, supra note 25, at n.340. liquidity requirements.’’ Id. at 37. Investors, Inc. (Re: Alternative 2) (Sept. 16, 2013) 110 See Proposing Release, supra note 25, at n.341.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47748 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

created downward price pressure in the shareholders who impose such costs on Fees and gates also do not address the market.111 funds through their redemptions and, in shareholder dilution that results when a Liquidity fees and redemption gates certain cases, stop heavy redemptions in shareholder is able to redeem at a stable have been used successfully in the past times of market stress by providing fund NAV that is higher than the market by certain non-money market fund cash boards with additional tools to manage value of the fund’s underlying portfolio management pools to stem redemptions heavy redemptions and improve risk securities.117 Nonetheless, for the during times of stress.112 Liquidity fees transparency. We understand that based reasons discussed in this Release, fees provide investors continued access to on the level of redemption activity that and gates provide funds and their their liquidity (albeit at a cost) while occurred during the financial crisis, boards with additional tools to stem also reducing the incentives for many money market funds would have heavy redemptions and avoid the type shareholders to redeem shares. faced liquidity pressures sufficient to of contagion that occurred during the Liquidity fees, however, will not cross the liquidity thresholds we are financial crisis by allocating liquidity outright stop redemptions. In contrast to adopting today that would allow the use costs to those shareholders who impose fees, redemption gates stop redemptions of fees and gates. Although no one can such costs on funds and by stopping altogether, but do not offer the predict with certainty what would have runs. flexibility of fees.113 Because happened if money market funds had i. Liquidity Fees redemption gates prevent investors from operated with fees and gates during the accessing their investments for a period financial crisis, we believe that money During the financial crisis, some of time, a fund may choose to first market funds would have been better funds experienced heavy redemptions. impose a liquidity fee and then, if able to manage the heavy redemptions Shareholders who redeemed shares needed, impose a redemption gate. that occurred and limit contagion, early bore none of the economic The fees and gates amendments we regardless of the reason for the consequences of their redemptions. are adopting today are designed to redemptions.114 Shareholders who remained in the address certain issues highlighted by the funds, however, faced a declining NAV financial crisis. In particular, the Fees and gates are just one aspect of and an increased probability that their amendments should allow funds to the overall package of reforms we are funds would ‘‘break the buck.’’ As moderate redemption requests by adopting today. We recognize that fees discussed in the Proposing Release and allocating liquidity costs to those and gates do not address all of the suggested by commenters, investors may factors that may lead to heavy have re-assessed their redemption 111 See supra section II.D herein (discussing the redemptions in money market funds. decisions during the crisis if money financial crisis); see also Proposing Release, supra For example, fees and gates do not fully market funds had imposed liquidity fees note 25 at 32–33; DERA Memorandum Regarding eliminate the incentive to redeem ahead because they would have been required Liquidity Cost During Crisis Periods, dated March of other investors in times of stress 115 17, 2014 (‘‘DERA Liquidity Fee Memo’’), available to pay at least some of the costs of their at http://www.sec.gov/comments/s7-03-13/s70313- or fully prevent investors from redemptions.118 It is possible that some 321.pdf. redeeming shares (except during the investors would have made the 112 A Florida local government investment pool duration of a temporary gate) to invest economic decision not to redeem experienced heavy redemptions in 2007 due to its in securities with higher quality, better because the liquidity fees imposed by holdings in SIV securities. The pool suspended 116 redemptions and ultimately reopened but only after liquidity, or increased transparency. the fund and incurred by an investor the pool (and each shareholder’s interest) had been would have been certain, whereas split into two separate pools: one holding the more 114 See, e.g., Comment Letter of Mutual Fund potential future losses would have been illiquid securities previously held by the pool Directors Forum (Sept. 16, 2013) (‘‘MFDF Comment uncertain.119 (‘‘Fund B’’) and one holding the remaining Letter’’) (stating, with respect to the proposed fee securities of the pool (‘‘Fund A’’). Fund A and gates amendments, ‘‘we concur that this In addition, liquidity fees would have reopened, but limited redemptions to up to 15% of approach has the potential to reduce runs during helped offset the costs of the liquidity an investor’s holdings or $2 million without times of stress or crisis’’); UBS Comment Letter provided to redeeming shareholders and penalty, and imposed a 2% redemption fee on any (‘‘We agree that liquidity fees and gates would help potentially protected the funds’ NAVs additional redemptions. Fund B remained closed. money funds address heavy redemptions in an When Fund A reopened, it experienced effective manner and limit the spread of contagion because the cash raised from liquidity withdrawals, but according to state officials, the . . .’’); Form Letter Type D. We also note that some withdrawals were manageable. See Dealbook, NY European enhanced cash funds successfully used liquidity costs are high, but before the fund has Times, Florida Fund Reopens, and $1.1 Billion is fees or gates during the financial crisis to stem imposed fees or gates. Withdrawn; David Evans and Darrell Preston, redemptions. See Elias Bengtsson, Shadow Banking 117 In contrast, the floating NAV requirement for Florida Investment Chief Quits; Fund Rescue and Financial Stability: European Money Market institutional prime funds will address this issue. Approved, Bloomberg (Dec. 4, 2007); Helen Funds in the Global Financial Crisis (2011) See infra section III.B.1. Huntley, State Wants Fund , Tampa Bay (‘‘Bengtsson’’), available at http:// 118 See, e.g., Comment Letter of U.S. Chamber of Times (Dec. 11, 2007); see also infra note 114 papers.ssrn.com/sol3/ Commerce, Center for Capital Markets _ (discussing the successful use by some European papers.cfm?abstract id=1772746&download=yes; Competitiveness (Sept. 17, 2013) (‘‘Chamber II enhanced cash funds of fees or gates during the Julie Ansidei, et al., Money Market Funds in Europe Comment Letter’’) (‘‘[I]f shareholders were to be financial crisis). and Financial Stability, European Systemic Risk charged a fee when a MMF’s liquidity costs are at 113 See Institutional Money Market Funds Board Occasional Paper No. 1, at 36 (June 2012), a premium, they may be discouraged from Association, IMMFA Recommendations for available at redeeming their shares at that time, which would Redemption Gates and Liquidity Fees, available at http://www.esrb.europa.eu/pub/pdf/occasional/ have the effect of slowing redemptions in the _ _ _ http://www.immfa.org/publications/policy- 20120622 occasional paper 1.pdf? MMF.’’); Comment Letter of Charles Schwab positions.html (‘‘Redemption gates and/or a 465916d4816580065dfafb92059615b6. Investment Management, Inc. (Sept. 12, 2013) liquidity fee are methods by which a fund manager, 115 However, as discussed in section III.B herein, (‘‘Schwab Comment Letter’’) (‘‘[W]e agree that the if experiencing difficulty due to extreme market under today’s amendments, institutional prime proposed liquidity fee of 2% would be a strong circumstances, can control redemptions in order to funds will be required to float their NAV. This disincentive to redeem during a crisis . . .’’). ensure that all investors are treated fairly and that reform is designed, in part, to address the incentive 119 See HSBC Comment Letter; see also infra note no ‘first-mover’ advantage exists.’’); cf. G.W. to redeem ahead of other investors in certain money 152–153 and accompanying text. We acknowledge Schwert & P. J. Seguin, Securities Transaction market funds because of current money market fund (as we did in the Proposing Release) that liquidity : An Overview of Costs, Benefits and valuation and pricing methods. fees may not always effectively stave off high levels Unresolved Questions, 49 Financial Analysts 116 Fees and gates lessen but do not fully of redemptions in a crisis; however, liquidity fees, Journal 27 (1993); K.A. Froot & J. Campbell, eliminate the incentive for investors to redeem once imposed, should help reduce the incentive to International Experiences with Securities quickly in times of stress because redeeming redeem shares because investors will pay a fee in Transaction Taxes, in The Internationalization of shareholders will retain an economic advantage connection with their redemptions. See Proposing Equity Markets (J. Frankel, ed., 1994), at 277–308. over shareholders who remain in a fund when Release, supra note 25, at 161.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47749

fees would create new liquidity for the redemption gates during the crisis.124 b. Benefits of Fees and Gates 120 funds. Additionally, to the extent that Like liquidity fees, gates are designed to i. Fees and Gates Address Concerns liquidity fees imposed during the crisis preserve the current benefits of money Related to Heavy Redemptions could have reduced redemption market funds under most market requests at the margin, they would have conditions; however, if approved and As noted above, a large number of allowed funds to generate liquidity monitored by their boards, funds can commenters supported our fees and 128 internally as assets matured. By use gates to respond to a run by directly gates proposal. The primary benefit imposing liquidity costs on redeeming halting redemptions. If funds had been cited by commenters in favor of fees shareholders, liquidity fees, as noted by able to impose redemption gates during and/or gates is that they would address commenters, also treat holding and the crisis, they would have had run risk and/or systemic contagion risk.129 Commenters also argued that redeeming shareholders more available to them a tool to stop 121 fees and gates would protect the equitably. temporarily mounting redemptions,125 interests of all fund shareholders, Liquidity fees, which we believe which if used could have generated particularly non- or late-redeeming would rarely be imposed under normal additional internal liquidity while gates market conditions, are designed to 126 shareholders, treating them more were in place. In addition, gates may equitably.130 Commenters supported preserve the current benefits of have allowed funds to invest the principal stability, liquidity, and a our view that redemption restrictions proceeds of maturing assets in short- could provide a ‘‘cooling off’’ period to market yield, but reduce the likelihood term securities for the duration of the that, in times of market stress, costs that temper the effects of short-term investor gate, protecting the short-term financing panic,131 and that fees or gates could ought to be attributed to a redeeming market, and supporting capital shareholder are externalized on formation for issuers. Gates also would 128 remaining shareholders and on the We note that many participants in the money have allowed funds to directly and fully wider market.122 Even if a liquidity fee market fund industry have previously expressed control redemptions during the crisis, support for imposing some form of a liquidity fee is imposed, fund investors continue to providing time for funds to better or redemption gate when a fund comes under stress have the flexibility to access liquidity as a way of reducing, in a targeted fashion, the communicate the nature of any stresses (albeit at a cost). The Commission fund’s susceptibility to heavy redemptions. See to shareholders and thereby possibly Proposing Release, supra note 25, at n.358. believes, and commenters suggested, mitigating incentives to redeem 129 See, e.g., Form Letter Type A; U.S. Bancorp that if funds could have imposed shares.127 Comment Letter; Comment Letter of Davenport & liquidity fees during the crisis, they Company LLC (Sept. 13, 2013) (‘‘Davenport would likely have been better able to Comment Letter’’); MFDF Comment Letter; manage redemptions, thereby 124 See Comment Letter of Arnold & Porter LLP Comment Letter of Treasury Strategies, Inc. (Mar. on behalf of Federated Investors [Overview] (Sept. 31, 2014) (‘‘Treasury Strategies III Comment Letter’’) ameliorating their impact and reducing 11, 2013) (‘‘Federated II Comment Letter’’) (noting (‘‘We found that [f]ees and [g]ates can stop and contagion effects.123 that gates have ‘‘been demonstrated to address runs prevent runs. . . . We find that highly effective run in a crisis. . . .’’); Comment Letter of BlackRock, prevention is attainable within the approaches ii. Redemption Gates Inc. (Sept. 12, 2013) (‘‘BlackRock II Comment contemplated by the [Proposing] Release, while requiring that fund boards be given discretion to We believe that funds also could have Letter’’) (‘‘Standby liquidity fees and gates would ‘‘stop the run’’ in crisis scenarios.’’); see also supra take protective action. This is the mechanism by benefitted from the ability to impose note 114 (noting that European enhanced cash which [f]ees/[g]ates cause [money market funds] to funds successfully used fees or gates during the internalize the cost of investor protection, while preserving the utility of current CNAV vehicles.’’); 120 Fees paid by investors that redeem shares financial crisis to stem redemptions); The Need to see also The Need to Focus a Light on Shadow should help prevent a fund’s NAV from becoming Focus a Light on Shadow Banking is Nigh, Mark Banking is Nigh, Mark Carney, Financial Times impaired based on liquidity costs, as long as the Carney, Financial Times (June 15, 2014), available (June 15, 2014), available at http://www.ft.com/intl/ liquidity fee imposed reflects the liquidity cost of at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088- cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0. redeeming shares. Fees should also generate 11e3-8f3d-00144feabdc0.html?siteedition= html?siteedition=intl#axzz35rCMZLTy (‘‘By additional liquidity to help funds meet redemption intl#axzz35rCMZLTy (‘‘Money market funds are establishing common policy standards and requests. being made less susceptible to runs. . .by arrangements for co-operation, the reforms 121 establishing an ability for funds to use, for example, See, e.g., Invesco Comment Letter (‘‘Liquidity [including temporary gates] will help to avoid a temporary suspensions of withdrawals. . . .’’); The fees would provide an appropriate and effective fragmentation of the .’’); but Age of Asset Management?, Andrew Haldane (Apr. means to ensure that the extra costs associated with see, e.g., Boston Federal Reserve Comment Letter 4, 2014), available at http:// raising liquidity to meet fund redemptions during (suggesting fees or gates do not address run risk); times of market stress are borne by those www.bankofengland.co.uk/publications/ Systemic Risk Council Comment Letter; Comment responsible for them.’’); Comment Letter of J.P. Documents/speeches/2014/speech723.pdf Letter of American Bankers Association (Sept. 17, Morgan Asset Management (Sept. 17, 2013) (‘‘J.P. (suggesting gates may be a ‘‘suitable’’ tool to ‘‘tackle 2013) (‘‘American Bankers Ass’n Comment Letter’’). market failures’’); but see, e.g., Comment Letter of Morgan Comment Letter’’); UBS Comment Letter; 130 See, e.g., Form Letter Type D (noting that gates Deutsche Investment Management Americas (Sept. but see, e.g., Comment Letter of U.S. Bancorp Asset would ‘‘give funds time to stabilize or, in the event 17, 2013) (‘‘Deutsche Comment Letter’’) (suggesting Management, Inc. (Sept. 16, 2013) (‘‘U.S. Bancorp a fund cannot resume redemptions without that gates can exacerbate a run). Comment Letter’’) (suggesting that liquidity fees breaking the buck, ensure that the funds [sic] 125 harm those that redeem after the fees are imposed See, e.g., U.S. Bancorp Comment Letter shareholders are treated equally in a distribution of and that gates harm those that remain in the fund (suggesting that redemption gates would be the the funds [sic] assets upon dissolution’’); Invesco after the gate is in place). ‘‘most effective option in addressing run risk’’); Comment Letter (‘‘Liquidity fees would provide an 122 See Proposing Release, supra note 25, at n.343. Chamber II Comment Letter (stating that ‘‘a appropriate and effective means to ensure that the 123 See Proposing Release, supra note 25, at 155; redemption gate would stop a ‘run’ in [its] tracks’’). extra costs associated with raising liquidity to meet see also, e.g., Comment Letter of Wells Fargo Funds 126 See, e.g., Chamber II Comment Letter (‘‘[A] fund redemptions during times of market stress are Management, LLC (Sept. 16, 2013) (‘‘Wells Fargo redemption gate also gives [a money market fund] borne by those responsible for them.’’); Comment Comment Letter’’) (‘‘Prime money market fund time for issues in the market to subside and for Letter of Independent Directors Council (Sept. 17, investors, the short-term markets and businesses securities in the portfolio to mature, which would 2013) (‘‘IDC Comment Letter’’); J.P. Morgan that rely on funds for financing would each benefit increase the [money market fund’s] liquidity Comment Letter. We recognize, however, that our from the ability of [f]ees and [g]ates, during levels.’’); Form Letter Type D (suggesting that fees and gates reform does not address other distressed market conditions, to reduce the redemption gates ‘‘would give funds time to shareholder equity concerns, including shareholder susceptibility of subject funds to runs and blunt the stabilize’’). Internal liquidity generated while a gate dilution, that arise as a result of the structural spread of deleterious contagion effects.’’); but see, is in place could prevent funds from having to features in current rule 2a–7 that promote a first- e.g., U.S. Bancorp Comment Letter (suggesting that immediately sell assets at fire sale prices. mover advantage. Our floating NAV reform is liquidity fees would not deter redemptions in times 127 See, e.g., Invesco Comment Letter designed to address this concern for institutional of market stress or prevent contagion because (‘‘Redemption gates have been proven to be an prime money market funds. See infra section III.B. ‘‘investors will choose to pay the [fee] now rather effective means of preventing runs and providing a 131 See, e.g., Form Letter Type D; Invesco than wait for the wind-down of a fund to be ‘cooling off’ period to mitigate the effects of short- Comment Letter; Comment Letter of Reich & Tang completed.’’). term investor panic.’’) Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47750 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

preserve and help restore the liquidity shareholders).137 Liquidity fees increase In contrast, redemption gates will levels of a money market fund that has the cost of redeeming shares, which may provide fund boards with a direct and come under stress.132 Commenters also reduce investors’ incentives to sell immediate tool for stopping heavy echoed our view that fees and/or gates them. Likewise, fees help reduce redemptions in times of stress.142 could reduce or eliminate the likelihood investors’ incentives to redeem shares Unlike liquidity fees, gates are designed that funds would be forced to sell ahead of other investors, especially if to directly stop a run by delaying otherwise desirable assets and engage in fund managers deplete their funds’ most redemptions long enough to allow (1) ‘‘fire sales.’’ 133 Additionally, liquid assets first to meet redemptions, fund managers time to assess the commenters noted that gates would leaving later redemption requests to be condition of the fund and determine the provide boards and advisers with met by selling less liquid assets. appropriate strategy to meet crucial additional time to find the best Several commenters noted that redemptions, (2) liquidity buffers to solution in a crisis, instead of being liquidity fees could ‘‘re-mutualize’’ risk- grow organically as securities in the forced to make decisions in haste.134 taking among investors and provide a portfolio (many of which are very short- We are adopting reforms that will give way to recover costs of liquidity in term) mature and produce cash, and (3) a fund the ability to impose either a times of stress.138 This is because shareholders to assess the liquidity and liquidity fee or a redemption gate liquidity fees allocate at least some of value of portfolio holdings in the fund because we believe, and some the costs of providing liquidity to and for any shareholder or market panic commenters suggested, that fees and redeeming rather than non-redeeming to subside.143 As contemplated by gates, while both aimed at helping funds shareholders and protect fund liquidity today’s amendments, gates definitively to better and more systematically by requiring redeeming shareholders to stop runs for funds that impose them by manage high levels of redemptions, do repay funds for liquidity costs blocking all redemptions for their so in different ways and thus with incurred.139 To the extent liquidity fees duration. somewhat different tradeoffs.135 exceed such costs, they also can help We recognize that redemption gates, if Accordingly, we believe that both fees increase the fund’s net asset value for they are ever imposed, will inhibit the and gates should be available to funds remaining shareholders which would full, unfettered redeemability of money and their boards to provide maximum have a restorative effect if the fund has market fund shares, a principle flexibility for funds to manage heavy suffered a loss. As one commenter has embodied in section 22(e) of the redemptions.136 Liquidity fees are said, a liquidity fee can ‘‘provide a Investment Company Act.144 However, designed to reduce shareholders’ strong disincentive for investors to make as discussed in section III.A.3 below, further redemptions by causing them to incentives to redeem shares when it is section 22(e) of the Investment choose between paying a premium for abnormally costly for funds to provide Company Act is aimed at preventing current liquidity or delaying liquidity liquidity by requiring redeeming funds and their advisers from interfering and benefitting from the fees paid by shareholders to bear at least some of the with shareholders’ redemption rights for redeeming investors.’’ 140 This explicit liquidity costs associated with their improper purposes, such as preservation pricing of liquidity costs in money redemption (rather than transferring all of management fees. Consistent with market funds should offer significant of those costs to remaining that aim, redemption gates under benefits to funds and the broader short- today’s amendments are designed to term financing market in times of Asset Management, LLC (Sept. 17, 2013) (‘‘Reich & benefit the fund and its shareholders potential stress because it should lessen Tang Comment Letter’’). and may be imposed only when a fund’s 132 both the frequency and effect of See, e.g., HSBC Comment Letter; Deutsche board determines that doing so is in the Comment Letter; ICI Comment Letter. shareholder redemptions, which might best interests of the fund.145 We also 133 See, e.g., MSCI Comment Letter; Federated V otherwise result in the sale of fund Comment Letter; Comment Letter of Treasury securities at ‘‘fire sale’’ prices.141 note that, in response to commenter Strategies, Inc. (Sept. 12, 2013) (‘‘Treasury concerns regarding investor access to Strategies Comment Letter’’). We also believe that 137 their investments and the proposed reducing or eliminating the likelihood of fire sales See, e.g., Dreyfus Comment Letter (‘‘We also would in turn help protect other market agree that liquidity fees can deter net redemption duration of redemption gates, under participants that need to sell assets in the market activity while also providing an appropriate ‘‘cost today’s amendments, gates will be of liquidity’’ for investors choosing to exercise the or perhaps mark asset values to market. limited to up to 10 business days in any option to redeem over the option to hold. . . .); see 134 See, e.g., ICI Comment Letter; UBS Comment also Comment Letter of Wells Fargo Funds 90-day period (rather than 30 days in a Letter; IDC Comment Letter; Federated V Comment Management, LLC (Jan. 17, 2013) (available in File 90-day period as proposed).146 As such, Letter. No. FSOC–2012–0003) (‘‘Wells Fargo FSOC the extent to which today’s amendments 135 See, e.g., Invesco Comment Letter (suggesting Comment Letter’’) (stating that a liquidity fee would that gates provide ‘‘the most direct, simple and ‘‘provide an affirmative reason for investors to inhibit the redeemability of money effective method’’ to prevent runs and contagion as avoid redeeming from a distressed fund’’ and market fund shares is limited. well as ‘‘a ‘cooling off’ period to mitigate the effects ‘‘those who choose to redeem in spite of the In fact, we note that money market of short-term investor panic,’’ while fees ‘‘mitigate liquidity fee will help to support the fund’s market- the ‘first-mover advantage’ ’’ and ‘‘provide an based NAV and thus reduce or eliminate the funds are currently permitted to delay appropriate and effective means to ensure that the potential harm associated with the timing of their payments on redemptions for up to extra costs associated with raising liquidity to meet redemptions to other remaining investors’’). fund redemptions during times of market stress are 138 See, e.g., HSBC Comment Letter; Invesco MMF’s liquidity costs are at a premium, they may borne by those responsible for them.’’) Comment Letter; IDC Comment Letter. be discouraged from redeeming their shares at that 136 139 See Treasury Strategies III Comment Letter We note that investors owning securities time, which would have the effect of slowing (‘‘Fees enable investors to access their liquidity, but directly—as opposed to through a money market redemptions in the MMF.’’). at a price . . . , but that is the cost of being able fund—naturally bear liquidity costs. They bear 142 See, e.g., Chamber II Comment Letter (‘‘[A] to assure that a stable NAV product will not cause these costs both because they bear any losses if they redemption gate would stop a ‘run’ in [its] tracks, contagion or fire sales during such periods. Gates have to sell a security at a discount to obtain their because shareholders would be prohibited from do not impose an extra [f]ee on shareholders, which needed liquidity and because they directly bear the redeeming their shares while the gate is in place.’’) is appealing to many shareholders, but have the risk of a less liquid investment portfolio if they sell 143 undesirable effect of restricting access to liquidity their most liquid holdings first to obtain needed See Proposing Release, supra note 25, at n.348. during critical periods. Together, [f]ees and [g]ates liquidity. 144 See section 22(e). provide fund boards with powerful tools to prevent 140 See Proposing Release, supra note 25, at 160 145 See rule 2a–7(c)(2)(i). a run from materializing, to stop a run in progress, n.352 (citing ICI Jan. 24 FSOC Comment Letter). 146 See rule 2a–7(c)(2)(i)(B); see also, infra section and to assure that a stress event does not cause 141 See Chamber II Comment Letter (‘‘[I]f III.A.2.d (discussing the duration of redemption contagion or fire sales.’’). shareholders were to be charged a fee when an gates).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47751

seven days.147 In addition, money that a fund does not need to engage in designated threshold (absent a board market funds currently may suspend fire sales and depress prices because of finding that the fee is not in the best redemptions after obtaining an the imposition of fees, the possibility of interests of the fund), may offer certain exemptive order from the broader market contagion is reduced. benefits to funds with respect to Commission,148 or in accordance with We also note that research in behavioral management of liquidity and rule 22e–3, which requires a fund’s economics suggests that liquidity fees redemption activity. Some commenters board of directors to determine that the may be particularly effective in suggested that, even during non-stress fund is about to ‘‘break the buck’’ dampening a run because, when faced periods, fees and gates could provide (specifically, that the extent of deviation with two negative options, investors fund managers with an incentive to between the fund’s amortized cost price tend to prefer the option that involves carefully monitor shareholder per share and its current market-based only possible losses rather than the concentration and shareholder flow to NAV per share may result in material option that involves certain losses, even lessen the chance that the fund might dilution or other unfair results to when the amount of possible loss is have to impose fees or gates (because investors).149 Under today’s significantly higher than the certain larger redemptions are more likely to amendments, money market fund loss.152 Unlike gates, which temporarily cause the fund to breach the boards will be able to temporarily prevent shareholders from redeeming threshold).156 The fees and gates suspend redemptions after a fund falls shares altogether, once imposed, amendments also may have the below the same threshold that funds liquidity fees will present investors with additional effect of encouraging must cross for boards to impose an economic decision as to whether to portfolio managers to more closely liquidity fees.150 Accordingly, we redeem or remain in a fund. Investors monitor fund liquidity and hold more believe that the gating allowed by fearing that a money market fund may liquid securities to increase the level of today’s amendments extends and suffer losses may prefer to stay in the daily and weekly liquid assets in the formalizes the existing gating fund and avoid paying a liquidity fee fund, as it would tend to lessen the framework, clarifying for investors (despite the possibility that the fund likelihood of a fee or gate being when a money market fund potentially might suffer a future loss) rather than imposed.157 Such an approach could may use a gate as a tool to manage heavy redeem and lock in payment of the also lead to greater investor redemptions and thus prevents any liquidity fee.153 participation in money market funds to investor confusion on when gating may It is possible, however, that liquidity the extent investors seek to invest in a apply. fees might not be fully effective during product with low liquidity risk, thereby Fees and gates also may have different a market-wide crisis because, for increasing the supply of capital levels of effectiveness under different example, shareholders might redeem available to invest in commercial paper. stress scenarios.151 For example, we shares irrespective of the level of their We recognize, however, that such an expect that the imposition of liquidity fund’s true liquidity costs and the approach could perhaps shrink the fees when a fund faces heavy imposition of a liquidity fee.154 In those market for riskier or longer-term redemptions should be able to reduce cases, gates will be able to function as commercial paper, or have a negative the harm to non-redeeming shareholders circuit breakers, creating time for funds effect on yield.158 and thus the likelihood of additional to rebuild their own internal liquidity We also note that funds may take redemptions that might have been made and shareholders to reconsider whether alternate approaches to managing in response to that harm. To the extent redemptions are still desired or liquidity and imposing fees and gates, warranted.155 147 See section 22(e). 156 See, e.g., Comment Letter of Securities 148 There are limited exceptions specified in ii. Management-Related Advantages Industry and Financial Markets Association (Sept. section 22(e) of the Act in which a money market We are also mindful that permitting 17, 2013) (‘‘SIFMA Comment Letter’’) (stating that fund (and any other mutual fund) may suspend some members ‘‘believe the existence of the redemptions or delay payment on redemptions for fund boards to impose fees and/or gates liquidity trigger for the fee and gate will motivate more than seven days, such as (i) for any period (A) after a fund has fallen below a particular fund managers to maintain fund liquidity well in during which the New York Exchange is threshold, and requiring funds to excess of the trigger level, to avoid triggering the fee closed other than customary week-end and holiday impose liquidity fees at a lower or gate. That is to say, the mere existence of the closings or (B) during which trading on the New potential for the fee or gate will result in enhanced York is restricted, or (ii) during any liquidity in money market funds.’’); BlackRock II period in which an emergency exists (as the 152 See, e.g., Proposing Release, supra note 25, at Comment Letter; Comment Letter of Hester Peirce Commission determines by rule or regulation) as a n.355 (citing Daniel Kahneman, Thinking, Fast and and Robert Greene (Sept. 17, 2013) (‘‘Peirce & result of which (A) disposal by the fund of Slow (2011), at 278–288); see also HSBC Comment Greene Comment Letter’’); see also HSBC Global securities owned by it is not reasonably practical or Letter; Schwab Comment Letter (‘‘A liquidity fee Asset Management, Liquidity Fees; a proposal to (B) it is not reasonably practical for the fund to would force early redeemers to pay for the costs of reform money market funds (Nov. 3, 2011) (‘‘HSBC determine the value of its net assets. The their redemption, without knowing whether the 2011 Liquidity Fees Letter’’) (a liquidity fee ‘‘will Commission also has granted orders in the past fund was actually going to experience losses or not. result in more effective pricing of risk (in this case, allowing funds to suspend redemptions. See, e.g., This is a powerful disincentive.’’); but see Comment liquidity risk) . . . [and] act as a market-based In the Matter of The Reserve Fund, Investment Letter of Melanie L. Fein Law Offices (Sept. 10, mechanism for improving the robustness and Company Act Release No. 28386 (Sept. 22, 2008) 2013) (‘‘Fein Comment Letter’’) (suggesting liquidity fairness’’ of money market funds); Comment Letter [73 FR 55572 (Sept. 25, 2008)] (order); Reserve fees are unlikely to ‘‘prevent institutional [money of BlackRock, Inc. (Dec. 13, 2012) (available in File Municipal Money-Market Trust, et al., Investment market fund] investors from reallocating their assets No. FSOC–2012–0003) (‘‘BlackRock FSOC Company Act Release No. 28466 (Oct. 24, 2008) [73 in a crisis’’). Comment Letter’’) (‘‘A fund manager will focus on FR 64993 (Oct. 31, 2008)] (order). 153 See, e.g., Proposing Release, supra note 25, at managing both assets and liabilities to avoid 149 Rule 22e–3(a)(1). Unlike under today’s n.355 (citing Daniel Kahneman, Thinking, Fast and triggering a gate. On the liability side, a fund amendments, a fund that imposes redemptions Slow (2011), at 278–288); see also HSBC Comment manager will be incented to know the underlying gates pursuant to rule 22e–3 must do so Letter; Schwab Comment Letter. clients and model their behavior to anticipate cash permanently and in anticipation of liquidation. 154 See DERA Study, supra note 24, at 7–14 flow needs under various scenarios. In the event a 150 See rule 2a–7(c)(2)(i). (discussing different possible explanations for why fund manager sees increased redemption behavior 151 We note that under today’s amendments, a shareholders may redeem from money market funds or sees reduced liquidity in the markets, the fund fund’s board may determine that it is in the best in times of stress). manager will be incented to address potential interests of a fund to impose a fee and then later 155 See, e.g., Comment Letter of Department of the problems as early as possible.’’). determine to lift the fee and impose a gate, or vice Treasury, Commonwealth of Virginia (Sept. 17, 157 See, e.g., Proposing Release, supra note 25, at versa, subject to the limitations on the duration of 2013) (‘‘Va. Treasury Comment Letter’’); Chamber II n.365. fees and gates. See rule 2a–7(c)(2)(i) and (ii). Comment Letter; Dreyfus Comment Letter. 158 See infra section III.K.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47752 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

which may differentially affect the further of the risks associated with suggested that sophisticated investors in short-term funding markets. For money market funds, particularly that particular might be able to predict that example, a fund that imposes a fee or money market funds’ liquidity may, at fees and gates may be imposed and may gate may decide to immediately build times, be impaired.161 In addition, as redeem shares before this occurs.165 liquidity by investing all maturing noted above, fees and gates also could While we recognize that there is risk securities in highly liquid assets, encourage shareholders to monitor of pre-emptive redemptions, the benefits particularly if the fund wants to remove funds’ liquidity levels and exert market of having effective tools in place to the fee or gate as soon as possible. discipline over the fund to reduce the address runs and contagion risk leads us Another fund may plan to impose a fee likelihood that the imposition of fees or to adopt the proposed fees and gates or gate for a set period of time, in which gates will become necessary in that reforms, with some modifications. We case, there would be no reason to stop fund.162 believe several of the changes we are investing in less liquid short-term making in our final reforms will commercial paper provided it matured c. Concerns Regarding Fees and Gates mitigate this risk and dampen the effects while the fee or gate was in place. The i. Pre-Emptive Runs and Broader Market on other money market funds and the first strategy would likely have the Concerns broader markets if pre-emptive capital formation effect of lowering We acknowledge the possibility that, redemptions do occur. participation in short-term funding in market stress scenarios, shareholders As discussed below, the shorter maximum time period for the markets, whereas the second strategy might pre-emptively redeem shares if imposition of gates and the smaller size may defer the impact until a later time, they fear the imminent imposition of of the default liquidity fee that we are possibly after market conditions have fees or gates (either because of the adopting in these final amendments, as improved. fund’s situation or because other money compared to what we proposed, are market funds have imposed redemption iii. Transparency expected to lessen further the risk of restrictions).163 A number of We recognize, and certain pre-emptive runs.166 We understand commenters suggested investors would commenters noted,159 that the prospect that the potential for a longer gate or do so.164 Some commenters also of fees and gates being implemented higher liquidity fee before a restriction when a fund is under stress should help is in place may increase the incentive 161 We recognize that the level of board discretion make the risk of investing in money in the fees and gates amendments may make it more for investors to redeem at the first sign market funds more salient and difficult for investors to predict when fees and/or of any potential stress at a fund or in the transparent to investors, which may gates will imposed; however, we are adopting markets.167 We believe that by limiting help sensitize them to the risks of certain thresholds and maximums that we believe the maximum time period that gates will provide investors with notice as to the possible investing in money market funds. On imposition of fees and gates. Additionally, today we may be imposed to 10 business days in the other hand, we note that other are adopting a requirement that funds disclose their any 90-day period (down from the commenters argued that fees and gates percentage of weekly liquid assets on a daily basis proposed 30 days), investor concerns would not improve transparency of risk on their Web sites and, thus, shareholders should regarding an extended loss of access to for investors.160 Having considered be aware when a fund is approaching these thresholds. See rule 2a–7(h)(10)(ii)(B). cash from their investment should be these comments, however, we believe 162 See Proposing Release, supra note 25, at n.366. mitigated. Indeed, some money market that there will be an appreciable The disclosure of fees and gates also could funds today retain the right to delay increase in transparency as a result of advantage larger funds and fund groups if the payment on redemption requests for up our fees and gates amendments. The ability to provide financial support reduces or to seven days, as all registered eliminates the need to impose fees and/or gates disclosure amendments we are adopting (whose imposition may be perceived to be a investment companies are permitted to today will require funds to provide competitive detriment). do under the Investment Company Act, disclosure to investors regarding the 163 See, e.g., Proposing Release, supra note 25, at and we are not aware that this possibility of fees and gates being 163–167, n.361. possibility has led to any pre-emptive imposed if a fund’s liquidity is 164 See, e.g., Comment Letter of Novelis (July, 16, runs historically.168 In addition, we note impaired. We believe such disclosure 2013) (‘‘Novelis Comment Letter’’); Comment Letter of State Investment Commission, Commonwealth of that under section 22(e), the will benefit investors by informing them Kentucky (Sept. 9, 2013) (‘‘Ky. Inv. Comm’n Commission also has the authority to, Comment Letter’’); Boston Federal Reserve by order, suspend the right of 159 See, e.g., ICI Comment Letter; Comment Letter Comment Letter; Comment Letter of Hester Peirce redemption or allow the postponement of Myra Page (July 19, 2013) (‘‘Page Comment and Robert Greene, Working Paper: Opening the Letter’’). Gate to Money Market Fund Reform (Apr. 8, 2014) of payment of redemption requests for 160 See, e.g., Comment Letter of Thrivent (‘‘Peirce & Greene II Comment Letter’’). Some more than seven days. The Commission Financial for Lutherans (Sept. 17, 2013) (‘‘Thrivent commenters were concerned that news of one used this authority, for example, with Comment Letter) (‘‘The imposition of a liquidity fee money market fund imposing a redemption restriction could trigger a system-wide run by or gate will always be a surprise to the investors 165 See, e.g., MFDF Comment Letter; Va. Treasury that do not redeem quickly enough to avoid it. The investors in other money market funds. See, e.g., Samuel Hanson, David Scharfstein, and Adi Comment Letter; Goldman Sachs Comment Letter. need to impose such a fee or gate will not be 166 transparent to the investor unless redemption Sunderam (Sept. 16, 2013) (‘‘Hanson et al. See Comment Letter of Federated Investors, activity is disclosed in a timely manner providing Comment Letter’’); Deutsche Comment Letter; Inc. (Apr. 25. 2014) (‘‘Federated XI Comment sufficient time for investors to react.’’); Capital Boston Federal Reserve Comment Letter (suggesting Letter’’). Advisors Comment Letter. Two commenters also further that ‘‘because of the relative homogeneity in 167 See J.P. Morgan Comment Letter (‘‘The expressed concern that the ability to impose fees many [money market funds’ holdings], the potential of total loss of access to liquidity for up and gates would perpetuate shareholder reliance on imposition of a liquidity fee or redemption gate on to thirty (30) days will be a concern for investors, sponsor support. See Capital Advisors Comment one fund may incite runs on other funds which are and could exacerbate a pre-emptive run.’’); Letter; Thrivent Comment Letter. As discussed not subject to such measures’’) (citation omitted). In Federated V Comment Letter (‘‘Shareholders will herein, we believe fees and gates and the disclosure addition, one commenter, drawing an analogy to find it increasingly difficult to compensate for their associated with fees and gates will provide banks prior to the adoption of federally insured loss of liquidity the longer the suspension of investors certain benefits, including informing deposits, noted that although withdrawal redemptions continues. It is therefore important for investors further of the risks associated with money suspensions were commonly used by banks in Alternative 2 to limit the suspension of market funds. We further believe that the disclosure response to fleeing depositors, the specter of redemptions to a period in which the potential requirements adopted today regarding sponsor suspensions themselves were often the cause of benefits to shareholders of delaying redemptions support should help ameliorate concerns regarding such investor flight. See, e.g., Comment Letter of outweigh the potential disruptions caused by the shareholder reliance on sponsor support. See infra Committee on Capital Markets Regulation (Sept. 17, delay.’’). sections III.E.7, III.E.9.g and III.F.3. 2013) (‘‘Comm. Cap. Mkt. Reg. Comment Letter’’). 168 See section 22(e).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47753

respect to the Reserve Primary Fund. To specifically when, and under what can predict whether any particular fund our knowledge, this authority also has circumstances, fees and gates will be will impose a fee or gate, even if another not historically led to pre-emptive imposed.171 Board discretion also fund has done so, and thus perhaps less redemptions. We believe that the gating should allow boards to act decisively if likely they will redeem assuming that allowed by today’s amendments extends they become concerned liquidity may one fund imposing such a restriction and formalizes this existing gating become impaired and to react to means other funds may soon do so. framework, clarifying for investors expected, as well as actual, declines in Moreover, we believe that funds’ when a money market fund potentially liquidity levels, given their funds’ ability to impose fees and gates once may use a gate as a tool to manage heavy investor base and other characteristics. weekly liquid assets drop below 30% redemptions and thus prevents any Likewise, increased board discretion will substantially mitigate the broader investor confusion on when gating may should lessen the likelihood that effects of pre-emptive runs, should they apply. sophisticated investors can occur. A money market fund that We believe that the maximum 10 preferentially predict when a fee or gate imposes a fee or gate with substantial business day gating period we are is going to be imposed because remaining internal liquidity is in a adopting today is a similarly short sophisticated investors, like any other better position to bear those enough period of time (as compared to investor, will not know what specific redemptions without a broader market the seven days a fund may delay circumstances a fund board will deem impact because it can satisfy those payment on redemption requests) that appropriate for the imposition of fees or redemption requests through existing or many investors may not be unduly gates.172 We recognize that internally generated cash and not burdened by such a temporary loss of sophisticated investors may monitor the through asset sales (other than perhaps liquidity.169 Thus, these investors may weekly liquid assets of funds and seek sales of government securities that tend have less incentive to redeem their to redeem before a fund drops below the to increase in value and liquidity in investments pre-emptively before the 30% weekly liquid asset threshold. We times of stress). Thus, pre-emptive runs, imposition of a gate. For similar reasons, believe, however, that a sophisticated if they were to occur, under these the reduction in the default liquidity fee investor may be dissuaded from circumstances are less likely to generate to 1% (down from the proposed 2%), redeeming in these circumstances adverse contagion effects on other discussed further below, may also because the fund still has a substantial money market funds or the short-term lessen shareholders’ incentives to amount of internal liquidity. In financing markets. redeem pre-emptively as fewer investors addition, redemptions when the fund We note some commenters suggested may consider it likely that a liquidity still has this much internal liquidity that concerns about pre-emptive run fee will result in an unacceptable loss would not lead to fire sales or other risks from fees and gates are likely 174 on their investment.170 such adverse effects. overstated. One commenter noted In addition, we expect that the We also believe that increased board that the ‘‘element of uncertainty additional discretion we are granting flexibility will reduce the occurrence of inherent in a board’s discretion to fund boards to impose a fee or gate at pre-emptive redemptions by impose a fee or gate’’ would diminish 175 any time after a fund’s weekly liquid shareholders who seek to redeem any possible gaming by investors. assets have fallen below the 30% because another money market fund has Another commenter further noted that required minimum, a much higher level imposed a fee or gate. Increased board ‘‘appropriate portfolio construction and of remaining weekly liquid assets than flexibility will likely result in different daily transparency’’ would reduce the proposed, should mitigate the risk of funds imposing different redemption likelihood of anticipatory 176 pre-emptive redemptions. This board restrictions at different times, redemptions. For example, as discretion should reduce the incentive particularly considering that after discussed below, our amendments of shareholders from trying to pre- crossing the 30% threshold each fund’s require that each money market fund emptively redeem because they will be board will be required to make a best disclose daily on its Web site its level able to less accurately predict interests determination with respect to of weekly liquid assets. This means that the imposition of a fee or gate.173 As if one money market fund imposes a fee 169 See, e.g., Federated V Comment Letter (stating such, it will be less likely that investors or gate, investors in other money market that 10 calendar days ‘‘would be a significantly funds will have the benefit of full shorter period than proposed by the Commission, transparency on whether the money while still allowing prime [money market funds] 171 See Wells Fargo Comment Letter (‘‘The ability more than a week to address whatever problem led for fund investors to frequently and aggressively market fund in which they are invested to the suspension of redemptions. This would also ‘game’ and avoid the potential imposition of Fees is similarly experiencing liquidity stress be consistent with the comments of some of the or Gates is undermined by the element of and thus is likely to impose a fee or gate. investors who indicated to Federated that they uncertainty inherent in a fund board’s discretion to Pre-emptive redemptions and contagion probably could not go more than two weeks without impose a Fee or a Gate.’’); see also Proposing access to the cash held in their [money market Release, supra note 25, at n.362. Additionally, we effects due to a lack of transparency fund].’’); see also infra section III.A.2.d (discussing believe that requiring investors in institutional the maximum duration of temporary redemption prime funds to redeem their shares at floating NAV 174 See, e.g., SIFMA Comment Letter; Wells Fargo gates under today’s amendments). should lower the incentive to run pre-emptively Comment Letter; Dreyfus Comment Letter; see also 170 We note that under our final amendments, the when investors anticipate that a gate will be Chamber II Comment Letter (stating that ‘‘unlike 1% default liquidity may be raised by a fund’s imposed as a result of a credit event. See infra with the current conditions of [r]ule 22e–3 under board (up to 2%) if it is in the best interests of the section III.B for a discussion of the floating NAV the [Investment Company Act], a redemption gate fund. See rule 2a–7(c)(2)(ii)(A). However, given the requirement. would allow the MMF to remain in operation after empirical information regarding liquidity costs in 172 Although funds’ Web site disclosure will the gate is lifted. This, in turn, will provide MMF money market fund eligible securities in the indicate when a fund is approaching the weekly investors with comfort regarding the ultimate financial crisis, as discussed in the DERA Liquidity liquid asset thresholds for imposing a fee or gate, redemption of their investment and make any large- Fee Memo, which supported the reduction in the investors will not know the circumstances under scale redemptions less likely.’’); Comment Letter of size of the default liquidity fee to 1%, money which a board will deem such a restriction to be Artie Green (Aug. 29, 2013) (‘‘Green Comment market fund shareholders may estimate that a fee in the best interests of the fund. See rule 2a– Letter’’) (‘‘Fund shareholders would be less likely as high as 2% will be unlikely and that depending 7(h)(10)(ii)(B). to panic if they know they will have access to their on the circumstances, a fee of less than 1% could 173 Boards will also be required to make a best assets when the fund reopens after a short be appropriately determined by the board of interests determination if they determine to change suspension of redemptions.’’). directors. See DERA Liquidity Fee Memo, supra the level of the default liquidity fee or to not impose 175 See Wells Fargo Comment Letter. note 111. the default fee. See rule 2a–7(c)(2)(ii). 176 See Dreyfus Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47754 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

(which may have occurred in the crisis) that this paper fails to consider redeem should a liquidity event occur may therefore be reduced. Some numerous restrictions in bank products for which fees or gates could be commenters also have previously similar to fees and gates that do not imposed. Furthermore, the paper also indicated that a liquidity fee or gate appear to have triggered pre-emptive assumes that no investor could foresee should not accelerate a run, stating that runs on banks.183 In particular, the the possibility of a shock to a money such redemptions would likely trigger commenter noted that all banks are market fund that reduces the fund’s the fee or gate and that, once triggered, required ‘‘to retain contractual authority value or liquidity despite the events of the fee or gate would then lessen or halt as to most deposits to postpone 2008 that should have informed redemptions.177 withdrawals (gating) or impose early investors that fund NAVs can change Additionally, we note that while redemption fees and to reserve the right over time and that liquidity levels may many European money market funds are to impose restrictions—either gates or fluctuate. In addition, under our floating able to suspend redemptions and/or fees or both—on redemptions of all bank NAV reforms, price levels of impose fees on redemptions, we are not deposits other than institutional prime money market funds aware that their ability to do so has accounts. . . .’’ 184 likely will fluctuate, and today’s reforms historically led to pre-emptive runs. We note that the model of fees or will also require additional disclosures Most European money market funds are gates in the FRBNY staff paper has a that will convey important information subject to legislation governing number of features and assumptions to investors about the fund’s value Undertakings for Collective Investment different than the reforms we are which in turn may help prevent run in Transferable Securities (‘‘UCITS’’), adopting today. For example, the behavior to the extent it is based on which also covers other collective paper’s model assumes the fees or gates uninformed decision-making. investments, and which permits them to are imposed only when liquid assets are These differences in our reforms as suspend temporarily redemptions of fully depleted. In contrast, under our compared to the model in the FRBNY units.178 For example, in Ireland, UCITS reforms fees or gates may be imposed staff paper, along with the additional are permitted to temporarily suspend while the fund still has substantial disclosures that we are adopting today redemptions ‘‘in exceptional cases liquid assets and, as discussed above, that will convey important information where circumstances so require and we believe investors may be dissuaded to investors about the fund’s value, suspension is justified having regard to from pre-emptively redeeming from should in our view significantly the interest of the unit-holders.’’ 179 funds with substantial internal liquidity mitigate any potential for substantial Similarly, many money market funds in because the fund is more likely to be investor runs before fees and gates are Europe are also permitted to impose fees able to readily satisfy redemptions imposed. Accordingly, the FRBNY staff on redemptions.180 without adversely impacting the fund’s paper’s findings regarding the risks of We also note that a commenter pricing.185 Moreover, under our reforms pre-emptive redemptions, because they discussed a paper by the staff of the (unlike the model), a fund board has rely on different facts and assumptions Federal Reserve Bank of New York discretion in the decision of when to than are being implemented in today’s (‘‘FRBNY’’) entitled ‘‘Gates, Fees, and impose fees or gates, which as discussed reforms, are not likely to apply to Preemptive Runs.’’ 181 The FRBNY staff above should reduce the incentive for money market funds following today’s paper constructs a theoretical model of investors to run, because they will be reforms. fees or gates used by a financial able to less accurately predict As noted above, the new daily intermediary and finds ‘‘that rather than specifically when, and under what transparency to shareholders on funds’ being part of the solution, redemption circumstances, fees or gates will be levels of weekly liquid assets should fees and gates can be part of the imposed.186 Another significant provide additional benefits, including problem.’’ 182 This commenter argued difference is that our reforms include a helping shareholders to understand if floating NAV for institutional prime their fund’s liquidity is at risk and thus 177 See, e.g., Proposing Release, supra note 25, at money market funds, which constitute a a fee or gate more likely and, therefore, n.364. sizeable portion of all money market should lessen the chance of contagion 178 See, e.g., UCITS IV Directive, Article 84 funds, but the model assumes a stable from shareholders redeeming (permitting a UCITS to, in accordance with indiscriminately in response to another applicable national law and its instruments of NAV. As discussed below, we believe incorporation, temporarily suspend redemption of the floating NAV requirement may fund imposing a fee or gate. Investors its units); Articles L. 214–19 and L. 214–30 of the encourage those investors who are least will be able to benefit from this French Monetary and Financial Code (providing able to bear risk of loss to redirect their disclosure when assessing each fund’s that under exceptional circumstances and if the circumstances, rather than having to interests of the UCITS units holders so demand, investments to other investment UCITs may temporarily suspend redemptions); see opportunities (e.g., government money infer information from, or react to, the also Coll. 7.2R United Kingdom Financial Conduct market funds), and this may have the problems observed at other funds. Authority Handbook (allowing the temporary secondary effect of removing from the Nevertheless, investors might mimic suspension of redemptions ‘‘where due to other investors’ redemption strategies exceptional circumstances it is in the interest of all funds those investors most prone to the unitholders in the authorized fund’’). even when those other investors’ 179 See Regulation 104(2)(a) of S.I. No. 352 of 183 See Federated XI Comment Letter. decisions are not necessarily based on 2011. 184 See id. (citations omitted). The commenter superior information.187 General stress 180 See, e.g., HSBC Comment Letter (‘‘We are in states that, other than with respect to demand the process of rolling out the ability for the Board deposit accounts, ‘‘banks (1) are required . . . to 187 See Proposing Release, supra note 25, at n.363; of Directors to impose trigger based liquidity fees reserve the right to require seven days’ advance see also Hanson et al. Comment Letter (‘‘news that in our [money market funds] where current notice of a withdrawal from [money market deposit one [money market fund] has initiated redemption regulation allows. At this time we are working on accounts], NOW accounts and other savings restrictions could set off a system-wide run by implementation in our flagship ‘‘Global Liquidity accounts; (2) are not required to allow early investors who are anxious to redeem their shares Fund’’ range domiciled in Dublin.’’). withdrawal from [certificates of deposit] and other before other funds also initiate such fees or 181 See Federated XI Comment Letter. time deposits; and (3) are allowed to impose early restrictions’’); Boston Federal Reserve Comment 182 See Gates, Fees and Preemptive Runs, Federal withdrawal fees on time deposits if they choose to Letter (‘‘[B]ecause of the relative homogeneity in Reserve Bank of New York Staff Report No. 670 permit an early withdrawal from a .’’ many [money market funds’] holdings, the (Apr. 2014), available at http:// 185 See supra at text following note 172. imposition of a liquidity fee or redemption gate on www.newyorkfed.org/research/staff_reports/ 186 See supra notes 171–173 and accompanying one fund may incite runs on other funds which are sr670.pdf. text. not subject to such measures’’ (citation omitted)).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47755

in the short-term markets or fear of of the tools is in the fund’s best a fund more time to generate greater stress at a particular fund could trigger interests. liquidity so that it will be able to redemptions as shareholders try to Further, to the extent that liquidate with less harm to avoid a fee or gate. As noted above, commenters’ concerns about potential shareholders. Additionally, to the extent however, even if investors redeem, their loss in trust or risk of a run when a fee a fund’s board determines to close the redemptions eventually could cause a or gate is lifted is tied to investor fund and liquidate after the fund has fee or gate to come down, thereby concerns about the sufficiency of the imposed a fee or temporary gate, we lessening or halting redemptions and fund’s liquidity levels, we note that, anticipate that this would more mitigating contagion risk.188 In sum, we under today’s amendments, funds will commonly occur because the imposition are persuaded that fees and gates are be required to disclose information of the fee or gate was the result of regarding their liquidity (e.g., daily and important tools that can be used to halt idiosyncratic stresses on the fund.194 In weekly liquid assets) on a daily basis. redemptions and prevent contagion this regard, we note that at least one during periods of market stress. Such disclosure, assuming adequate liquidity, may help ameliorate concerns commenter who suggested that a money ii. Impact on a Fund After Imposing a that investors will run or shift their market fund would likely be forced to Fee or Gate investment elsewhere after a fund lifts liquidate after imposing a fee or gate, its redemption restrictions because also noted that ‘‘in a systemic crisis’’ Commenters have suggested that once investors will be able to see that a fund where many funds may be faced with fees and gates are imposed, they may is sufficiently liquid. To the extent heavy redemptions and thus the not be easily lifted without triggering a heavy redemptions resume after a fund possibility of imposing fees and gates, run.189 Similarly, other commenters lifts a fee or gate, we also note that a money market funds ‘‘may have a warned that imposing a fee or gate fund board may again impose a fee, or greater likelihood of avoiding would not help a fund recover from a gate if the fund has not yet exceeded the liquidation after the systemic crisis [has] crisis but rather force it into liquidation 10 business day maximum gating subsided.’’ 195 because investors would lose trust in period, if it is in the best interests of the the fund and seek to invest in a money fund.191 Additionally, while we iii. Investors’ Liquidity Needs market fund that has not imposed a fee recognize that fees and gates may cause A number of commenters expressed or gate.190 We acknowledge that there is some investors to leave a fund once it concern that fees or gates could impair a risk that investors may redeem from a has lifted a fee or gate (or, in the case money market funds’ use as liquid fund after a fee or gate is lifted. We of a fee, while the fee is in place), which investments, in particular because believe this is less likely following the may affect efficiency, competition, and redemption restrictions (especially imposition of a fee, however, because capital formation, we believe it is gates) would limit or deny shareholders investors will continue to have the possible that some investors, ready access to their funds.196 ability to redeem while a fee is in place particularly those that were not seeking Commenters noted such a lack of and, therefore, may experience less to redeem during the imposition of the disruption and potentially less loss in fee or gate, may choose to stay in the liquidity could have detrimental trust. In any event, we believe that it is fund. In this regard, we note that, as consequences for investors, including, important that money market funds discussed above, a liquidity fee would for example, corporations and benefit those investors who were not institutions using liquidity accounts for have these tools to give funds the ability 197 to obtain additional liquidity in an seeking to redeem while a fund’s cash management, retail investors orderly fashion if a liquidity was under stress by more needing immediate access to cash such occurs, notwithstanding the risk that the equitably allocating liquidity costs as in a medical emergency or when 198 imposition of a fee or gate may cause among redeeming and non-redeeming purchasing a home, and state and some subsequent loss in trust in a fund shareholders.192 In addition, to the local governments that need to make or may lead to a resumption in heavy extent a fund’s drop in weekly liquid payroll or service payments when 199 redemptions once a fee or gate is lifted. assets was the result of an external due. Further, we think it is important to event, if such event resolves while a fee We recognize that liquidity fees and observe that whenever a fee or gate is or gate is place, some investors may redemption gates could affect imposed, the fund may already be under choose to stay in the fund after the fee shareholders by potentially limiting, stress from heavy redemptions that are or gate is lifted. partially or fully (as applicable), the draining liquidity, and the purpose of In addition, we recognize that a fund redeemability of money market fund the fees and gates amendments is to give board may determine to close a fund shares under certain conditions, a the fund’s board additional tools to and liquidate after the fund has imposed principle embodied in the Investment address this external threat when the a fee or temporary gate (or instead of imposing a fee or temporary gate) board determines that using one or both 194 See infra note 195 and accompanying text. 193 pursuant to amended rule 22e–3. We 195 See J.P. Morgan Comment Letter. 188 See SIFMA Comment Letter (‘‘[Some] note, however, that even if a fund 196 See, e.g., Comment Letter of the Boeing members point out that if a fund’s liquidity ultimately liquidates, its disposition is Company (Sept. 9, 2013) (‘‘Boeing Comment breaches the trigger level, the gate and fee, likely to be more orderly and efficient Letter’’); Boston Federal Reserve Comment Letter; themselves, will stem any exodus and damper its if it previously imposed a fee or gate. In BlackRock II Comment Letter. 197 effect.’’). fact, imposing a fee or gate should give See, e.g., Boeing Comment Letter; Capital 189 See, e.g., Comment Letter of T. Rowe Price Advisors Comment Letter. Associates, Inc. (Sept. 17, 2013) (‘‘T. Rowe Price 198 See, e.g., Comment Letter of the SPARK Comment Letter’’). 191 See rule 2a–7(c)(2)(i)(B) (limiting the Institute, Inc. (Sept. 16, 2013) (‘‘SPARK Comment 190 See, e.g., Schwab Comment Letter (‘‘[W]e have imposition of gates to 10 business days in any 90- Letter’’); Comment Letter of Vanguard (Sept. 17, a hard time seeing how any fund that actually day period). 2013) (‘‘Vanguard Comment Letter’’). imposed fees and/or redemption gates would ever 192 See supra note 121 and accompanying text. 199 See, e.g., Comment Letter of Chief Financial be able to recover and be a viable fund again. 193 See infra section III.A.4 herein discussing Officer, State of Florida (Sept. 12, 2013) (‘‘Fla. CFO Investor trust in that fund would be lost.’’); amendments to rule 22e–3 that will allow a board Comment Letter’’); Comment Letter of Treasurer Goldman Sachs Comment Letter; J.P. Morgan to close and liquidate a fund if the fund’s weekly and Comptroller, St. Louis, Missouri (Sept. 17, Comment Letter. liquid assets have dropped below 10%. 2013) (‘‘St. Louis Treasurer Comment Letter’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47756 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Company Act.200 In our view, however, viewed as detrimental to funds, but iv. Investor Movement Out of Money these reforms should not unreasonably rather should be viewed as an interim Market Funds impede the use of money market funds measure boards can employ in worse as liquid investments. First, under case scenarios where the alternative Some commenters expressed concern normal circumstances, when a fund’s would likely be a result potentially that the possibility of fees and gates liquidity is not under stress, the fees more detrimental to investors’ overall being imposed could result in and gates amendments will not affect interests. To the extent that some diminished investor appeal and/or money market funds or their investors may be sufficiently concerned utility of affected money market funds, shareholders. Fees and gates are tools about their ability to access their and could cause investors to either for funds to use in times of severe investment to meet certain obligations, abandon or severely restrict use of 206 market or internal stress. Second, even such as payroll or bills, we believe they affected money market funds. For when a fund experiences stress, the fees may choose to manage their money example, commenters suggested that and gates amendments we are adopting market fund investments so as to be able fees and gates would drive sweep today do not require money market to meet these obligations if a account money out of money market funds to impose fees and gates when it redemption gate should be imposed.203 funds.207 Commenters warned that fees is not in the best interests of the fund. While we recognize these commenter and gates may cause investors to shift Accordingly, we believe these tools can concerns regarding liquidity, we believe investments into other assets, assist funds facing liquidity shortages that the overall benefits and protections government money market funds, FDIC- during periods of unusual stress, while that are provided by the fees and gates insured accounts and other bank preserving the benefits of money market amendments to all investors in these products, riskier and/or less regulated funds for investors and the short-term money market funds outweigh these investments, or other alternative stable funding markets by not affecting the concerns. Furthermore, we note that the value products.208 Conversely, other day-to-day operations of a fund in final amendments have been modified commenters predicted only minor periods without stress. In fact, a number and tailored to mitigate some potentially effects on investor demand and/or that of commenters observed that fees and disruptive consequences of fees and investor demand would decrease less gates would be the most effective option gates. For example, under the final under the proposed fees and gates of achieving the Commission’s reform amendments, gates cannot be imposed alternative than under the proposed goals,201 and would preserve as much as for more than 10 business days in any floating NAV alternative.209 possible the current benefits of money 90-day period, so, to the extent an We recognize that, as suggested by market funds and/or be less onerous investor’s access to his/her money is certain commenters, our amendments day-to-day on funds and investors.202 inhibited, it is for a limited period of could cause some shareholders to With respect to liquidity fees, we also time, which may allow an investor to redeem their prime money market fund note that investors will not be better prepare for and withstand a shares and move their assets to prohibited from redeeming their possible gate. We also note, as discussed alternative products that do not have the investments; rather, they may access above, that funds are currently ability to impose fees or gates because their investments at any time, but their permitted to impose permanent the potential imposition of a fee or gate redemptions will be subject to a fee that redemption gates in certain could make investment in a money is designed to make them bear at least circumstances.204 Therefore, we believe market fund less attractive due to less some of the costs associated with their that the gating allowed by today’s access to liquidity rather than amendments extends and formalizes the 206 See, e.g., Ky. Inv. Comm’n Comment Letter; externalizing those costs to the existing gating framework, clarifying for Boeing Comment Letter; Schwab Comment Letter; remaining fund shareholders. With investors when a money market fund American Bankers Ass’n, Comment Letter. respect to gates, we recognize that they potentially may use a gate as a tool to 207 See Fin. Info. Forum Comment Letter will temporarily prevent investors from manage heavy redemptions and thus (‘‘Charging a liquidity fee and imposing gates effectively removes money market funds as a sweep redeeming their investments when prevents any investor confusion on vehicle since these accounts are designed to be a imposed. However, we believe gates (as when gating may apply. While we liquidity product and firms will no longer be able well as fees) will rarely be imposed in recognize that the permanent to guarantee liquidity.’’); Comment Letter of M&T normal market conditions. In our view, redemption gates allowed under rule Banking Corporation (Oct. 1, 2013) (‘‘M&T Bank Comment Letter’’) (suggesting fees and gates would in those likely rare situations where a 22e–3 have not yet been used by money ‘‘drive most commercial banking clients from prime gate would be imposed, investors would market funds, we note that investors money market fund sweep accounts’’); SIFMA (in the absence of the gating have widely utilized money market Comment Letter. mechanism) potentially be left in worse funds as cash management vehicles 208 See, e.g., Northern Trust Comment Letter; shape if the fund were, for example, even with the possibility of these M&T Bank Comment Letter; Schwab Comment Letter; but see Invesco Comment Letter (suggesting forced to engage in the sale of assets and permanent gates under an existing rule. that investor opposition to fees and gates could be thus incur permanent losses; or worse, Moreover, to the extent an investor addressed in part by greater education regarding the if the fund were forced to liquidate wants to invest in a money market fund circumstances in which the gates would be because of a severe liquidity crisis. without the possibility of fees and/or imposed); Peirce and Greene Comment Letter (suggesting that to the extent gates in particular Thus, we believe that allowing fund gates, it may choose to invest in a make money market funds less attractive to certain boards to impose gates should not be government money market fund, which investors, this would be ‘‘a positive step toward is not subject to the fees and gates helping them find appropriate investments for their 200 See infra Section III.A.3 (discussing the requirements.205 needs.’’); see also Comment Letter of Fidelity rationale for the exemptions from the Investment Investments (Apr. 22, 2014) (‘‘Fidelity DERA Company Act). Comment Letter’’); Comment Letter of BlackRock, 203 201 See, e.g., Fidelity Comment Letter; Deutsche We recognize that some investors may choose Inc. (Apr. 23, 2014) (‘‘BlackRock DERA Comment Comment Letter; Comment Letter of SunTrust Bank to move their money out of affected money market Letter’’). and SunTrust Investment Services (Sept. 16, 2013) funds due to concern that a fee or gate may be 209 See, e.g., Comment Letter of Cathy Santoro (‘‘SunTrust Comment Letter’’). imposed in the future. For a discussion of investor (Sept. 17, 2013) (‘‘Santoro Comment Letter’’); 202 See, e.g., Comment Letter of Plan Investment movement out of money market funds, see infra Comment Letter of Arnold & Porter LLP on behalf Fund, Inc. (Sept. 16, 2013) (‘‘Plan Inv. Fund section III.K. of Federated Investors (Costs of Implementing the Comment Letter’’); IDC Comment Letter; HSBC 204 See rule 22e–3. Proposals) (Sept. 17, 2013) (‘‘Federated X Comment Comment Letter. 205 See infra section III.C.1. Letter’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47757

certain liquidity.210 As noted above, this however, may reallocate their assets to shorter-term duration, which could could affect efficiency, competition, and investment alternatives that are not encourage issuers to fund themselves capital formation. We agree with one subject to fees and gates, such as with shorter-term debt.216 Shortening commenter that suggested it is difficult government money market funds.213 debt maturity would increase the to estimate the extent to which assets One potential issue related to market frequency at which issuers would need might shift from prime funds to efficiency that several commenters to refinance, leaving both issuers and government funds or other raised was a potential shortage of the broad financial system more alternatives.211 As discussed above, eligible government securities if vulnerable to refinancing risk.217 One some investors may determine they are investors reallocate assets from funds such commenter further noted that comfortable investing in money market that are subject to fees and gates into basing the threshold for fees and gates funds that may impose fees and gates, government funds.214 We anticipate that on weekly liquid assets will because fees and gates will likely be any increase in demand for eligible ‘‘discourage[e] prime money market imposed only during times of stress and government securities because of the funds from drawing down on their should not affect the daily operations of fees and gates requirement would likely buffers of liquid assets [due to fear of money market funds during normal be accompanied by an additional crossing below the fees and gates market conditions.212 Other investors, increase in demand arising from thresholds] precisely when they should investors that reallocate assets from do so from a system-wide perspective, 210 See Comment Letter of SunGard Institutional institutional prime funds because of the i.e., in a system-wide liquidity and Brokerage Inc. (Sept. 13, 2013) (‘‘SunGard Comment floating NAV requirement. As such, we funding crisis.’’ 218 In addition, some Letter’’) (finding in a survey of its corporate, discuss the reforms’ joint impact on the government and pension plan customers that 76% commenters were concerned about a of respondents would decrease their use of money demand for eligible government loss of funding or other adverse impacts market funds substantially or entirely, but that only securities and possible repercussions on on state and local governments as a 22% of respondents would stop using money the economy and capital formation in market funds entirely); Comment Letter of Fidelity result of the fees and gates section III.K below. 219 (Feb. 3, 2012) (available in File No. 4–619) amendments. We discuss these (‘‘Fidelity Feb. 3 Comment Letter’’) (finding in a In addition, a number of commenters concerns in section III.K below. survey of their retail money market fund customers noted that a possible shift out of affected that 43% would stop using a money market fund money market funds could ultimately 2. Terms of Fees and Gates with a 1% non-refundable redemption fee charged lead to a decrease in the funding of, or if the fund’s NAV per share fell below $0.9975 and As discussed above, we are adopting 27% would decrease their use of such a fund); other adverse effects on, the short-term provisions that, unlike the proposal, Comment Letter of Federated Investors, Inc. on the financing markets.215 The Commission will allow a money market fund the IOSCO Consultation Report on Money Market Fund recognizes the expected benefits from 220 Systemic Risk Analysis and Reform Options (May flexibility to impose fees (up to 2%) 25, 2012) available at http://www.iosco.org/library/ today’s amendments may be and/or gates (up to 10 business days in pubdocs/pdf/IOSCOPD392.pdf (‘‘Federated IOSCO accompanied by adverse effects on a 90-day period) 221 after the fund’s Comment Letter’’) (stating that they anticipate ‘‘that issuers that access the short-term weekly liquid assets have crossed below many investors will choose not to invest in MMFs financing markets with consequent that are subject to liquidity fees, and will redeem 30% of its total assets, if the fund’s existing investments in MMFs that impose a effects on competition and capital board of directors (including a majority liquidity fee’’ but noting that ‘‘[s]hareholder formation. As discussed in greater detail of its independent directors) determines attitudes to redemption fees on MMFs are in section III.K below, the magnitude of that doing so is in the best interests of untested’’); but see Invesco Comment Letter these effects, including any effects on 222 (suggesting that investor opposition to fees and the fund. We are also adopting gates could be addressed in part by greater competition, efficiency, and capital amendments that will require a money education regarding the circumstances in which the formation, will depend on the extent to market fund, if its weekly liquid assets gates would be imposed). which investors reallocate their fall below 10% of its total assets, to 211 See Comment Letter of Federated Investors, investments within or outside the impose a 1% liquidity fee on each Inc. (Demand and Supply of Safe Assets) (Apr. 23, money market fund industry and which 2014) (‘‘Federated DERA I Comment Letter’’) shareholder’s redemption, unless the (suggesting an ‘‘inability to predict how many assets alternatives investors choose. fund’s board of directors (including a might shift from prime and municipal MMFs to Some commenters also suggested that government MMFs in response to adoption [of] fees and gates could motivate money 216 See Hanson et al. Comment Letter; Deutsche [a]lternative 1 or 2, or a combination thereof’’ and market funds to hold securities of even Comment Letter. recommending that the Commission consider a 217 See generally Hanson et al. Comment Letter; ‘‘range of outcomes’’ when analyzing a possible Deutsche Comment Letter. shift out of prime money market funds and into requirement, and that investor acceptance of fees 218 government money market funds). The commenter and gates for these funds may be different. See, e.g., See, e.g., Hanson et al. Comment Letter. also noted that it has ‘‘not found any basis for ICI Comment Letter (suggesting a fund that is 219 See, e.g., Comment Letter of Governor, estimating the extent to which prime and municipal subject to fees and gates and a floating NAV will Commonwealth of Massachusetts (Deval L. Patrick) MMF shareholders would prefer bank instruments be ‘‘a fund which nobody will want’’); see also infra (Sept. 17, 2013) (‘‘Mass. Governor Comment to government MMFs.’’ See id. section III.B for a discussion of the floating NAV Letter’’); Comment Letter of Office of the Governor, 212 See, e.g., Invesco Comment Letter (‘‘[W]e requirement and any investor movement out of State of New Hampshire (Oct. 4, 2013) (‘‘NH believe that additional education about the purpose money market funds as result of such requirement. Governor Letter’’); Comment Letter of Treasurer, and operation of the proposed liquidity fees and 213 Government money market funds also will not State of North Carolina (Sept. 19, 2013) (‘‘NC redemptions gates and the circumstances in which be subject to the floating NAV requirement adopted Treasurer Comment Letter’’); Comment Letter of 42 they might be implemented would increase greatly today. See infra section III.C.1. In addition, as noted Members of U.S. Congress (Oct. 28, 2013) (‘‘42 MMF investors’ willingness to accept them.’’); above, all money market funds today have the Members of U.S. Congress Comment Letter’’). Some Goldman Sachs Comment Letter (‘‘[S]ome of our option to impose a permanent redemption gate and commenters cited the role of municipal money investors have told us that they could accept the liquidate under rule 22e–3 under the Investment market funds as a funding mechanism for state and prospect of liquidity fees and gates. . . .’’); Company Act. While we recognize that these local governments, arguing such role might be Comment Letter of Tom Garst (Aug. 30, 2013) permanent redemption gates have not yet been used endangered by the proposed reforms. See, e.g., (‘‘Garst Comment Letter’’) (suggesting that gates by money market funds, we note that they have not Fidelity Comment Letter; J.P. Morgan Comment would be the ‘‘most acceptable alternative’’ out of led to the migration of investors away from money Letter. those proposed); Capital Advisors Comment Letter market funds. 220 See infra notes 300–302 and accompanying (‘‘[W]e think shareholders may accept a cost of 214 See, e.g., Fidelity DERA Comment Letter. text. liquidity in a stressful situation. . . .’’). We note 215 See, e.g., MFDF Comment Letter; Comment 221 Rule 2a–7(c)(2)(i)(B). that, under today’s amendments, institutional prime Letter of Arizona Association of County Treasurers 222 Rule 2a–7(c)(2)(i). The fund must reject any funds will be subject to the fees and gates (Sept. 16, 2013) (‘‘Ariz. Ass’n of County Treasurers redemption requests it receives while the fund is requirements as well as a floating NAV Comment Letter’’); Northern Trust Comment Letter. gated. See rule 2a–7(c)(2)(i)(B).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47758 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

majority of its independent directors) Commenters ranged widely over additional board discretion to impose determines that such a fee would not be whether and to what extent the trigger fees and gates in advance of that in the best interests of the fund, or for fees and gates should be an objective point.233 Thus, our final approach— determines that a lower or higher fee test or left to the discretion of fund while still a hybrid approach—is (not to exceed 2%) would be in the best boards. On one hand, a group of significantly more discretionary than interests of the fund.223 The proposal commenters expressed concern about under our proposal. As we indicated in would have required funds (absent a giving money market fund boards the Proposing Release, we believe a board determination otherwise) to discretion to impose fees and gates.227 hybrid approach offers the possibility of impose a 2% liquidity fee on all For example, some commenters noted achieving many of the benefits of both redemptions, and would have permitted that board discretion could create a purely discretionary trigger and a fully the imposition of redemption gates for uncertainty among investors,228 and that automatic trigger. We recognize that a up to 30 days in a 90-day period, after boards might be reticent, due to the discretionary trigger allows a fund board a fund’s weekly liquid assets fell below possible impact of the decision, to act in the flexibility to determine when a 15% of its total assets. In addition, a time of crisis.229 restriction is necessary, and thus allows unlike in the proposal, today’s On the other hand, a large group of the board to trigger the fee or gate based amendments will allow a fund to commenters generally argued in favor of on current market conditions and the impose a fee or gate at any point giving boards more discretion over specific circumstances of the fund. whether to impose a fee or gate.230 For throughout the day after a fund’s weekly A purely discretionary trigger, example, a number of commenters liquid assets have dropped below however, creates the risk that a fund 224 expressly noted that fees should be at 30%. board may be reluctant to impose the discretion of fund boards instead of As in the proposal, any fee or gate restrictions, even when they would being automatically triggered at a imposed under today’s amendments benefit the fund and the short-term particular liquidity threshold.231 A must be lifted automatically after the financing markets. As commenters number of other commenters argued money market fund’s level of weekly indicated,234 a board may choose not to more generally that, when heavy liquid assets rises to or above 30%, and impose a fee or gate for commercial redemptions are already underway or it can be lifted at any time by the board reasons—for example, out of fear that clearly foreseeable, boards should be of directors (including a majority of doing so would signal trouble for the able to impose fees and gates even independent directors) if the board individual fund or fund complex (and before a set liquidity threshold or some determines to impose a different thus may incur significant negative other objective threshold has been redemption restriction (or, with respect business and reputational effects) or crossed.232 to a liquidity fee, a different fee) or if it could incite redemptions in other We continue to believe that a hybrid determines that imposing a redemption money market funds in the fund approach that at some point imposes a restriction is no longer in the best complex in anticipation that fees may be default fee that boards can opt out of or interests of the fund.225 As amended, imposed in those funds as well. We are change best ensures that fees and gates rule 22e–3 also will permit the also concerned that purely discretionary will be imposed when it is appropriate. permanent suspension of redemptions triggers could cause some funds to use Based on commenter feedback, and liquidation of a money market fund fees and gates when they are not under however, we believe that such a hybrid if the fund’s level of weekly liquid stress and in contravention of the approach could benefit from the default assets falls below 10% of its total principles underlying the Investment fee acting more as a floor for board assets.226 Company Act. If, for example, a fund’s consideration when liquidity has been NAV began to fall due to losses incurred a. Thresholds for Fees and Gates significantly depleted and from in the portfolio, a board with full i. Discretionary Versus Mandatory discretion to impose fees on fund Thresholds 227 See, e.g., BlackRock II Comment Letter; Capital Advisors Comment Letter; Fidelity Comment Letter; redemptions could impose a fee solely As proposed, a fund would have been HSBC Comment Letter; cf. Comment Letter of The to recover those losses and repair the Independent Trustees of the Fidelity Fixed-Income fund’s NAV, even if that fund’s liquidity required (unless the board determined and Asset Allocation Funds (Sept. 10, 2013) otherwise) to impose a default liquidity (‘‘Fidelity Trustees Comment Letter’’) (suggesting is not being stressed. fee, and would have been permitted to that the Commission should have the ability to As discussed in the Proposing impose a gate, after the fund’s weekly impose a fee on prime money market funds when Release, we recognize that although an a fund’s weekly liquid assets fall below 15%). liquid assets dropped below 15% of its 228 See, e.g., BlackRock II Comment Letter; automatic trigger set by the Commission total assets. In addition, a fund would Fidelity Comment Letter. may mitigate some of the potential have had to wait to impose a fee or gate 229 See, e.g., Capital Advisors Comment Letter; concerns associated with a fully until the next business day after it HSBC Comment Letter (‘‘[S]ome commentators have discretionary trigger, it also may create crossed below the 15% threshold. suggested that a fund board may be too the risk of imposing costs on commercially conflicted to decide whether to impose a liquidity fee.’’). shareholders, such as those related to 223 Rule 2a–7(c)(2)(ii). If a fund imposes a 230 See, e.g., Chamber II Comment Letter; Dreyfus board meetings or liquidity fees liquidity fee, a fund’s board can later vary the level Comment Letter; Invesco Comment Letter. themselves, when funds are not truly of the liquidity fee (subject to the 2% limit) if the 231 See, e.g., Federated V Comment Letter; HSBC distressed or when liquidity is not board determines that a different fee level is in the Comment Letter; T. Rowe Price Comment Letter; abnormally costly. As indicated by a best interests of the fund. Rule 2a–7(c)(2)(i)(A) and Peirce & Green Comment Letter; cf., BlackRock (ii)(B). Comment Letter (advocating a mandatory gate after number of commenters and discussed 224 See rule 2a–7(c)(2)(i). assets dropped below 15% weekly liquid assets, but above, an automatic trigger also could 225 Rule 2a–7(c)(2)(i)(A)–(B) and (ii)(B). also allowing money market fund boards ‘‘the result in shareholders pre-emptively 226 See rule 22e–3(a)(1). To mirror the proposed ability to impose a gate before weekly liquid assets redeeming their shares to avoid a fee or fees and gates amendments to rule 2a–7, the fell below 15% of total assets if the [b]oard believed proposed amendments to rule 22e–3 would have set this was in the best interest of the [money market a threshold of below 15% weekly liquid assets for fund]’’). 233 See supra section III.A.1.c.i (discussing the a fund to permanently close and liquidate. For a 232 See., e.g., BlackRock II Comment Letter; impact of board discretion on possible pre-emptive discussion of amended rule 22e–3, see infra section Chamber II Comment Letter; Federated V Comment runs); see also Wells Fargo Comment Letter. III.A.4. Letter. 234 See supra note 229.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47759

gate.235 In addition, commenters citing a survey of its members, liquid assets below the regulatory suggested that a fund’s liquidity could suggested fund boards be given minimum could indicate current or quickly evaporate once heavy discretion to impose a liquidity fee future liquidity problems or forecast redemptions begin and that a fund when weekly liquid assets fall below a impending heavy redemptions, or it board should not have to wait until the specified threshold, and that a default could be the result of idiosyncratic fund’s weekly liquid assets breach the liquidity fee could be imposed at a stresses that may be resolved without default liquidity fee threshold or until specified lower level of weekly liquid intervention—in either case, the money the next business day in order to act.236 assets (unless the board determines market fund’s board, in consultation In light of these risks and in response otherwise).239 Another commenter with the fund’s investment adviser, is to the comments discussed above, we proposed a blended trigger for the best suited to determine whether fees have determined to increase the amount imposition of gates at 30% weekly and gates can address the situation.244 of board discretion under the fees and liquid assets or a drop in NAV below Some commenters recommended that gates amendments so that funds may $0.995, whichever comes first.240 the default liquidity fee threshold be impose fees or gates before the default As discussed in this section, we have lowered to 10% weekly liquid assets.245 liquidity fee threshold is reached and so been persuaded by commenters that These commenters generally argued that they can better tailor the redemption boards should be allowed some a 10% threshold, rather than a 15% restrictions to their particular flexibility to impose a fee or gate when threshold, would produce fewer ‘‘false circumstances. Additionally, the heavy redemptions are underway or positives’’—instances when a money amendments will allow fund boards to clearly foreseeable. As was suggested by market fund is, in fact, not experiencing impose fees and gates the same day that a commenter,241 we are adopting a stress on its liquidity but is nonetheless a fund experiences or foresees heavy tiered threshold for the imposition of required (absent a board finding) to redemptions and, thus, funds will not fees and gates, with a higher threshold impose a liquidity fee—which should have to wait until the next day to act.237 for discretionary fees and gates and a prevent unnecessary board meetings This increased flexibility should better lower threshold for default liquidity that would not be in the interest of allow fund boards to prevent or stem fees. We believe this tiered approach shareholders or market stability.246 As heavy redemptions before they occur, or will allow boards to determine with was discussed in the Proposing Release, as soon as possible after they begin or greater flexibility the best line of the threshold for a default liquidity fee are anticipated.238 defense against heavy redemptions and should indicate distress in a fund and be a threshold few funds would cross in ii. Threshold Levels to tailor that defense to the specific circumstances of the fund. We also the ordinary course of business. As discussed above, funds will be believe this tiered approach will allow Commission staff analysis shows that permitted to impose fees and gates after boards to act quickly to stem heavy from March 2011 through October 2012, a fund’s weekly liquid assets have redemptions. This approach also there was only one month that any dropped below 30%, and will be recognizes, however, that at a certain funds reported weekly liquid assets required to impose a liquidity fee after point (under the amended rule, a drop below 15% and only one month that a a fund’s weekly liquid assets drop below 10% weekly liquid assets), boards fund reported weekly liquid assets below 10%, unless the fund’s board should be required to consider what, if below 10%.247 determines such fee is not in the best any, action should be taken to address interests of the fund. As proposed, the a fund’s liquidity. weekly liquid assets, as daily liquid assets tend to threshold for the imposition of fees and We are adopting a threshold of less be the most liquid. Thus, we believe that basing the gates would have been a drop below threshold on weekly liquid assets rather than daily than 30% weekly liquid assets at which liquid assets provides a better picture of the fund’s 15% weekly liquid assets and a fund’s fund boards will be able to impose overall liquidity position. In addition, a fund’s board could have determined that a fee discretionary fees and gates, as was levels of daily liquid assets may be more volatile would not be in the best interests of the suggested by a commenter.242 As 30% because they are typically used first to satisfy day- fund. to-day shareholder redemptions, and thus more weekly liquid assets is the minimum difficult to use as a gauge of fund distress. Various commenters proposed required under rule 2a–7, we believe it Commenters did not specifically suggest a threshold modifications or substitutes to the is an appropriate threshold at which based on daily liquid assets. 244 proposed 15% weekly liquid assets fund boards should be able to consider For a discussion of the factors a board may threshold. For example, one commenter, wish to consider in determining whether to impose fees and gates as measures to stop heavy fees and gates, see infra section III.A.2.b herein. For redemption activity that may be a discussion of the factors a board may wish to 235 See supra section III.A.1.c.i for a discussion building in a fund.243 A drop in weekly consider in determining the level of a liquidity fee, regarding pre-emptive run risk and increased board see infra section III.A.2.c herein. discretion. 245 239 See, e.g., Federated V Comment Letter; 236 See, e.g., Federated II Comment Letter; Dreyfus See SIFMA Comment Letter. Comment Letter of Chairman, Federated Funds 240 Comment Letter. See Capital Advisors Comment Letter. Board of Directors (on behalf of Independent 237 Although funds will have to wait until a 241 See SIFMA Comment Letter; but see, e.g., Trustees of Federated Funds) (Sept. 16, 2013) fund’s weekly liquid assets drop below 30% in Peirce & Greene Comment Letter (suggesting the (‘‘Federated Funds Trustees Comment Letter’’); order to impose a fee or gate, we believe the higher Commission should adopt entirely discretionary HSBC Comment Letter. threshold of 30% for discretionary fees and gates gates). 246 See Federated II Comment Letter; HSBC should assuage concerns about having to wait to 242 See Capital Advisors Comment Letter. As Comment Letter. impose redemption restrictions until a fund’s discussed below, we have not included an NAV 247 See Proposing Release supra note 25, at 177. weekly liquid assets breach the default liquidity fee trigger along with the weekly liquid assets trigger Our staff conducted an analysis of Form N–MFP threshold. (as suggested by the commenter) because we do not data that showed that if the default fee triggering 238 See, e.g., Treasury Strategies III Comment believe that a fund’s NAV is an appropriate trigger threshold was between 25–30% weekly liquid Letter (‘‘We found that [f]ees and [g]ates can stop for liquidity fees and redemption gates. See infra assets, funds would have crossed this threshold and prevent runs, provided that they are note 253 and accompanying text. every month except one during the period, and if implemented effectively through policy and 243 As was discussed in the Proposing Release, we it was set at between 20–25% weekly liquid assets, preemptive action by fund boards.’’). For example, considered a threshold based on the level of daily some funds would have crossed it nearly every if a fund board believes that a fund’s weekly liquid liquid assets rather than weekly liquid assets. We other month. The analysis further showed that assets are likely to fall below the 10% weekly liquid noted in the Proposing Release that we expect that during the period, there was one month in which asset threshold for a default liquidity fee, it could a money market fund would meet heightened funds reported weekly liquid assets below 15% choose to impose a liquidity fee prior to the fund shareholder redemptions first by depleting the (four funds in June 2011) and one month in which breaching this threshold. fund’s daily liquid assets and next by depleting its Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47760 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

In light of commenters’ concerns and commenter noted that the most the fund’s weekly liquid assets have the Commission staff analysis, and in appropriate rules-based threshold fallen below 30% or 10%, respectively. recognition of the increased board would be if the shadow price fell to Moreover, once a fund has crossed discretion to impose fees and gates that $0.9975 or below.251 Another below a weekly liquid asset threshold, we are adopting in today’s amendments, commenter also suggested that, to the a board is not prevented from taking we have determined that a threshold of extent the Commission moved forward into account whether the fund’s NAV or 10% weekly liquid assets (down from with a rules-based threshold, ‘‘defaults, shadow price has deteriorated in the proposed 15%) is an appropriate acts of insolvency, significant considering whether to impose fees or threshold for the imposition of a default downgrades or determinations that a gates. Finally, the fees and gates liquidity fee. We believe that the portfolio security no longer presents amendments are intended to address the flexibility in today’s amendments minimum credit risk’’ should be added liquidity of the fund and its ability to justifies a decrease in the default to the situations in which a board could meet redemptions, not to address every liquidity fee threshold, particularly impose a fee or gate.252 possible circumstance that may because fund boards will be allowed to We do not believe a drop in a fund’s adversely affect a money market fund impose discretionary fees and gates, if it NAV (or shadow price, to the extent the and its holdings. However, if a is in the best interests of a fund, at any money market fund is a stable value particular circumstance, such as a time after a fund’s weekly liquid assets fund), or a default, act of insolvency, default, act of insolvency, significant drop below 30%—i.e., before the default significant downgrade or determination downgrade, or increased credit risk, 248 liquidity fee threshold is reached. that a portfolio security no longer affects the liquidity of a fund such that Our proposal, which, as noted above, set presents minimum credit risk, would be its weekly liquid assets drop below the a higher threshold for the default the appropriate threshold for the 30% threshold for imposition of fees imposition of fees and gates. First, as we liquidity fee or the imposition of a gate, and gates, a fund could then impose a discussed in the Proposing Release, we did not include board discretion to use fee or gate. these tools prior to reaching this are concerned that a money market fund threshold. Under today’s amendments, being able to impose a fee only when Another commenter suggested basing however, the 10% default liquidity fee the fund’s NAV or shadow price has the threshold for redemption gates on threshold is designed effectively as a fallen by some amount may in certain the level at which a money market floor to require fund boards to focus on cases come too late to mitigate the fund’s liquidity would force it to sell a fund’s liquidity and to consider what potential consequences of heavy assets.254 This particular commenter action to take, if any, before liquidity is redemptions on a fund’s liquidity and to was concerned that a threshold based on further depleted. Additionally, fully protect investors.253 Heavy 15% weekly liquid assets might Commission staff analysis shows that a redemptions can impose adverse otherwise cause funds close to the 10% threshold for the default liquidity economic consequences on a money threshold to start selling assets to avoid fee is also a threshold few funds would market fund even before the fund crossing the threshold, which could cross in the ordinary course of actually suffers a loss. They can deplete have a larger destabilizing effect on the business.249 the fund’s most liquid assets so that the markets.255 We appreciate the Some commenters on the fees and fund is in a substantially weaker commenter’s concerns and believe that gates threshold suggested moving away position to absorb further redemptions the higher weekly liquid asset threshold from weekly liquid asset levels as the or losses. Second, the thresholds we are for the imposition of fees and gates and triggering mechanism.250 One adopting today are just that—thresholds. the increased board flexibility included If it is not in the best interests of a fund, in today’s amendments should lessen a fund reported weekly liquid assets below 10% a board is not required to impose a such a risk. In particular, as discussed (one fund in May 2011). Based on this data and above in section III.A.1.c.i, we believe industry comment, we proposed a default fee liquidity fee or redemption gate when threshold of 15% weekly liquid assets. that the 30% weekly liquid assets 248 See rule 2a–7(c)(2)(i); cf. Treasury Strategies III for giving boards the discretion to impose threshold will allow a money market Comment Letter (suggesting that fees and gates will redemption restrictions. See supra note 230. fund to impose a fee or gate while it still better prevent a run if they are imposed intraday). 251 See HSBC Comment Letter; see also Comment has substantial remaining internal 249 See Proposing Release supra note 25, at 177 Letter of HSBC Global Asset Management Ltd (Feb. liquidity, thus putting it in better (setting forth a chart that show from March 2011 15, 2013) (available in File No. FSOC–2012–0003) through October 2012, there was only one month (‘‘HSBC FSOC Comment Letter’’) (suggesting setting position to bear redemptions without a that any funds reported weekly liquid assets below the market-based NAV trigger at $0.9975). This broader market impact because it can 15% and only one month that a fund reported commenter asserted that such a trigger would satisfy redemption requests through weekly liquid assets below 10%). Because liquidity ensure that shareholders only pay a fee when internally generated cash and not data reported to the Commission is as of month end, redemptions would actually cause the fund to suffer it could be the case that more than one money a loss and thus redemptions clearly disadvantage through asset sales (other than perhaps market fund’s level of weekly liquid assets fell remaining shareholders. sales of government securities that tend below 10% on other days of the month during our 252 See Federated II Comment Letter. to increase in value and liquidity in period of study. However, this number may 253 As we also discussed in the Proposing Release, times of stress). In addition, the board overestimate the percentage of funds that are a threshold based on shadow price raises questions expected to impose a default liquidity fee because about whether and to what extent shareholders flexibility in today’s amendments could funds may increase their risk management around differentiate between realized (such as those from result in funds imposing gates at their level of weekly liquid assets in response to the security defaults) and market-based losses (such as different times and, thus, to the extent default liquidity fee to avoid breaching the default those from market interest rate changes) when funds determine to dispose of their liquidity fee threshold, or that many funds may considering a money market fund’s shadow price. impose fees and/or gates after they cross the 30% If shareholders do not redeem in response to assets to raise liquidity, it could also threshold, allowing them to repair their liquidity market-based losses (as opposed to realized losses), result in funds disposing assets at prior to reaching the 10% threshold. it may be inappropriate to base a fee on a fall in different times, lessening any potential 250 But see Fidelity Comment Letter (‘‘We also the fund’s shadow price if such a fall is only strain on the markets. favor using the weekly liquid asset level as the temporary. On the other hand, a temporary decline measure because it is the best indicator of liquidity in the shadow price using market-based factors can and is less susceptible to extraneous factors. In lead to realized losses from a shareholder’s 254 Comment Letter of James Angel (Georgetown/ addition, the weekly liquidity structure reflects perspective if redemptions cause a fund with an Wharton) (Sept. 17, 2013) (‘‘Angel Comment daily liquidity within its calculation.’’). As noted in impaired NAV to ‘‘break the buck.’’ See Proposing Letter’’). section III.A.2.a.i, a number of commenters argued Release supra note 25, at 179–180. 255 Angel Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47761

b. Board Determinations when making a best interests up of the fund’s shareholder base and In the Proposing Release, we determination. They were not meant to previous shareholder redemption discussed a number of factors that a be a one-size-fits-all or exhaustive list of patterns; and/or the fund’s experience, fund’s board of directors may want to factors. We agree with the commenter if any, with the imposition of fees and/ consider in determining whether to who suggested an exclusive list of or gates in the past. impose a liquidity fee or redemption factors could be counter-productive. We Some commenters urged the gate.256 We received a variety of recognize that there are differences Commission to affirm that a board’s comments related to these factors and, among funds and that the markets are deliberations would be protected by the 266 more generally, about board dynamic, particularly in a crisis business judgment rule. One determinations regarding fees and gates. situation. Accordingly, an exhaustive commenter was particularly concerned Some commenters suggested that the list of factors may not address each about the threat of litigation if boards Commission provide additional fund’s particular circumstances and were not protected by the rule, as it guidance on the nature and scope of the could quickly become outdated. Instead, could ‘‘chill the board’s ability to act in findings that boards can make.257 A we believe a fund board should consider a manner that would be highly commenter asked the Commission to any factors it deems appropriate when counterproductive in times of market provide an expanded list of examples determining whether fees and/or gates stress.’’ 267 While sensitive to this and a non-exclusive list of factors to be are in the best interests of a fund. We commenter’s concerns, we do not considered by boards with respect to note that these factors may include the believe it would be appropriate for us to imposing a fee or gate.258 The broader systemic effects of a board’s address the application of the business commenter added that the Commission decision, but point out that the judgment rule because the business should clarify that boards need to applicable standard for a board’s judgment rule is a construct of state law consider only those factors they determination under the amended rule and not the federal securities laws. reasonably believe to be relevant, not all is whether a fee or gate is in the fund’s Other commenters proposed that factors or examples that the Commission best interests. boards should be permitted to might generally suggest.259 Nonetheless, we believe it is reasonably determine and commit In contrast, another commenter, an appropriate to provide certain themselves in advance to a policy to not industry group representing fund guideposts that boards may want to allow a fee or gate to ever be imposed directors, supported the Commission keep in mind, as applicable and on a fund.268 We disagree. A blanket providing only minimal guidance on appropriate, when determining whether decision on the part of a fund board to what factors boards might consider.260 a fund should impose fees or gates and not impose fees or gates, without any This commenter argued that ‘‘providing are providing such guidance in this knowledge or consideration of the any guidance on what factors boards Release. As recognized in the Proposing particular circumstances of a fund at a should consider (beyond the very Release, there are a number of factors a given time, would be flatly inconsistent general and non-exclusive examples in board may want to consider. These may with the fees and gates amendments we the Proposing Release) is likely to be include, but are not limited to: relevant are adopting today, which, at a counter-productive.’’ 261 The commenter indicators of liquidity stress in the minimum, require a fund to impose a also suggested that the Commission markets and why the fund’s weekly liquidity fee when its weekly liquid clarify that a ‘‘best interests of the fund’’ liquid assets have fallen (e.g., Have assets have dropped below 10%, unless standard would not demand that boards weekly liquid assets fallen because the the fund’s board affirmatively finds that place significant emphasis on the fund is experiencing mounting such fee is not in the best interests of broader systemic effects of their redemptions during a time of market the fund. As discussed above, we decision.262 stress or because a few large believe that when a fund falls below The ‘‘best interests’’ standard in shareholders unexpectedly redeemed 10% weekly liquid assets, its liquidity today’s amendments recognizes that shares for idiosyncratic reasons is sufficiently stressed that its board each fund is different and that, once a unrelated to current market conditions should be required to consider, based on fund’s weekly liquid assets have or the fund?); the liquidity profile of the the facts and circumstances at that time, dropped below the minimum required fund and expectations as to how the what, if any, action should be taken to by rule 2a–07, a fund’s board is best profile might change in the immediate address a fund’s liquidity. We regard suited, in consultation with the fund’s future, including any expectations as to fees and gates as additional tools for adviser, to determine when and if a fee how quickly a fund’s liquidity may boards to employ when necessary and or gate is in the best interests of the decline and whether the drop in weekly appropriate to protect the fund and its fund.263 The factors we set forth in the liquid assets is likely to be very short- shareholders. We note, however, that Proposing Release were intended only term (e.g., Will the decline in weekly our amendments do not require funds to as possible factors a board may consider liquid assets be cured in the next day or impose fees and gates when it is not in two when securities currently held in a fund’s best interests. 256 See Proposing Release, supra note 25, at 178– the fund’s portfolio qualify as weekly Certain commenters cited operational 264 179. liquid assets?); for retail and challenges with respect to fees and gates 257 See, e.g., ABA Business Law Section Comment government money market funds, Letter; Comment Letter of Bar and board quorum requirements, given Committee on Investment Management Regulation whether the fall in weekly liquid assets that in a crisis a board’s independent (Sept. 26, 2013) (‘‘NYC Bar Committee Comment has been accompanied by a decline in 265 Letter’’); Federated X Comment Letter; but see, e.g., the fund’s shadow price; the make- 266 See, e.g., Dreyfus Comment Letter; Chamber II MFDF Comment Letter. Comment Letter; MFDF Comment Letter; IDC 258 See NYC Bar Committee Comment Letter. 264 As discussed in the Proposing Release, many Comment Letter. 259 Id. money market funds ‘‘ladder’’ the maturities of 267 See MFDF Comment Letter. 260 See MFDF Comment Letter. their portfolio securities, and thus it could be the 268 See Goldman Sachs Comment Letter; ABA 261 Id. case that a fall in weekly liquid assets will be Business Law Section Comment Letter. These 262 See id. rapidly cured by the portfolio’s maturity structure. commenters were concerned that uncertainties over 263 For a discussion of why the Commission is See Proposing Release, supra note 25, at 179. a fee or gate could lead to pre-emptive runs. We adopting a hybrid approach to the imposition of 265 Likewise, a floating NAV fund’s board may discuss pre-emptive runs in section III.A.1.c.i of fees and gates, see supra section III.A.2.a.i. wish to consider any drops in the fund’s NAV. this Release.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47762 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

board members may not be readily recognize that ‘‘the primary role of the to enable the board to make the available on short notice.269 board is oversight’’ and acknowledge determinations under the rule. Commenters thus proposed that the ‘‘both the ability and practical necessity c. Size of Liquidity Fee quorum requirement be relaxed to of delegating day-to-day decision- require only the approval of a majority making functions to a fund’s officers Today’s amendments will permit a of independent directors available and investment adviser/administrator money market fund to impose a rather than of all independent pursuant to procedures approved by the discretionary liquidity fee of up to 2% directors.270 board.’’ 275 A few other commenters after its weekly liquid assets drop below We have not made the requested suggested that the Commission provide 30% of its total assets. We are also change. The requirement that a majority guidance that an adviser must provide adopting a default liquidity fee of 1% of independent directors make a the board certain information, guidance that must be imposed if a fund drops determination with respect to a fund or a recommendation on whether to below 10% weekly liquid assets, unless matter is not unique to today’s impose a fee or gate.276 a fund’s board determines not to impose amendments. This requirement is We believe that a fund’s board, and such a fee, or to impose a lower or widely used in the Investment Company not its adviser, is the appropriate entity higher fee (not to exceed 2%) because it Act and its rules, including a number of to determine (within the constructs of is in the best interests of the fund.280 As other exemptive rules.271 As we have the rule) when and how a fund will proposed, the amendments would have emphasized, independent directors are impose liquidity fees and/or redemption required funds to impose a default the ‘‘independent watchdogs’’ of a fund, gates. As discussed above, given the role liquidity fee of 2% after a fund’s weekly and the Investment Company Act and of independent directors, a fund’s board liquid assets dropped below 15% of its its rules rely on them to protect investor is in the best position to determine total assets, although (as under our final interests.272 A determination with whether a fee or gate is in the best amendments) fund boards could have respect to fees and gates by less than a interests of the fund.277 The Investment determined not to impose the fee or to majority of independent directors would Company Act and its rules require many lower the fee. not provide the level of independent other fund fees and important matters to We received a wide range of oversight we are seeking in today’s be approved by a fund’s board, comments on the size and structure of amendments, or in carrying out the including a majority of independent the proposed liquidity fee.281 A few purposes of the Investment Company directors, and we do not believe that commenters expressly supported a Act. The decision to impose redemption liquidity fees and redemption gates default fee of 2%.282 One commenter restrictions on a fund’s investors has should be treated differently.278 expressed concern that a maximum 2% significant ramifications for We note that although the final rule fee may be insufficient in times of crisis shareholders, and it is one that we amendments contemplate that and urged the Commission to permit believe should be entrusted only to a information from a fund’s adviser will greater flexibility in setting an even fund’s board, including its independent inform the board’s determination higher fee if necessary.283 directors. We note, however, that involving a fee or gate,279 we are not Other commenters explicitly argued today’s amendments do not require a charging a fund’s adviser with specific against a default fee of 2%.284 One best interests determination to be made duties under today’s amendments. As commenter noted that 2% would be at an in-person meeting and, thus, fund the board is the entity charged with excessive ‘‘since it is far higher than the boards, including their independent overseeing the fund and determining actual cost of liquidity paid by money directors, could hold meetings whether a fee or gate is in the fund’s market funds even at the height of the telephonically or through any other best interests, we believe the board financial crisis.’’ 285 Other commenters technological means by which all should dictate the information and described a 2% fee as punitive 286 and directors could be heard.273 analysis it needs from the adviser in arbitrary.287 A number of commenters Some commenters asserted that a order to inform its decision. favored instead a default fee of 1% fund’s adviser or sponsor should have Nonetheless, as a matter of course and while also allowing boards discretion to greater input regarding the imposition of in light of its fiduciary duty to the fund, set a higher or lower fee.288 a fee or gate.274 For example, one an adviser should provide the board commenter urged the Commission to with necessary and relevant information 280 See rule 2a–7(c)(2)(ii)(A). 281 We note that prior to issuing the proposal, commenters had suggested liquidity fee levels 269 See Comment Letter of PFM Asset 275 See Ropes & Gray Comment Letter. ranging from 1% to 3% could be effective. See, e.g., Management, LLC (Sept. 17, 2013) (‘‘PFM Asset 276 See NYC Bar Committee Comment Letter; Comment Letter of Vanguard (Jan. 15, 2013) Mgmt. Comment Letter’’); ABA Business Law Comment Letter of the Independent Trustees of the (available in File No. FSOC–2012–0003) Section Comment Letter; Comment Letter of Ropes Wilmington Funds (Sept. 17, 2013) (‘‘Wilmington (‘‘Vanguard FSOC Comment Letter’’) & Gray LLP (Sept. 17, 2013) (‘‘Ropes & Gray Trustees Comment Letter’’); ABA Business Law (recommending a fee of between 1 and 3%); Comment Letter’’). Section Comment Letter. BlackRock FSOC Comment Letter (recommending a 270 See id. 277 If a fund’s adviser was charged with standby liquidity fee of 1%); ICI Jan. 24 FSOC 271 See, e.g., rule 12b–1 and rule 15a–4. determining when to impose fees and gates, it could Comment Letter (recommending a 1% fee). 272 See Role of Independent Directors of choose, irrespective of its fiduciary duty, to act in 282 See J.P. Morgan Comment Letter; Ropes & Gray Investment Companies, Investment Company Act its own interests rather than the interests of fund Comment Letter; Schwab Comment Letter; Wells Release No. 24082 (Oct. 15, 1999). shareholders by, for example, not imposing a fee or Fargo Comment Letter. 273 The Commission has previously recognized gate for fear that it would negatively impact the 283 See Ropes & Gray Comment Letter. that fund boards can hold meetings telephonically adviser’s reputation. We note that the role of 284 See, e.g., Fidelity Trustees Comment Letter; or through other technological means by which all independent directors on a fund board should Fidelity Comment Letter; Invesco Comment Letter; directors can be heard simultaneously. See, e.g., counteract any similar concerns on the part of Comment Letter of Roundtable rule 15a–4 (permitting the approval of an interim interested directors. (Sept. 17, 2013) (‘‘Fin. Svcs. Roundtable Comment advisory contract by a fund board at a meeting in 278 See, e.g., section 15(a)–(c); rule 12b–1 and rule Letter’’). which directors may participate by any means of 22c–2. 285 See Invesco Comment Letter. communication that allows all directors 279 Because a fund’s adviser is responsible for 286 See, e.g., Fidelity Trustees Comment Letter; participating to hear each other simultaneously managing the portfolio, it is the entity that will have Fidelity Comment Letter. during the meeting). direct access to information on the fund’s liquidity. 287 See, e.g., Fin. Svcs. Roundtable Comment 274 See, e.g., NYC Bar Committee Comment Letter; As noted below, a fund’s adviser should provide the Letter. Ropes & Gray Comment Letter; PFM Asset Mgmt. board with all necessary and relevant information 288 See Dreyfus Comment Letter; SIFMA Comment Letter. to make the determinations under the rule. Comment Letter; Northern Trust Comment Letter;

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47763

As suggested by commenters, the We received a number of comments As discussed in the Proposing amendments we are adopting today will on DERA’s analysis of liquidity costs.294 Release, we have attempted to set the impose a default liquidity fee of 1%, Some commenters agreed that DERA’s default liquidity fee high enough to that may be raised or lowered (or not analysis supports a default liquidity fee deter shareholder redemptions so that imposed at all) by a fund’s board. As of 1% and that 1% is the appropriate funds can recoup costs of providing discussed below, we are persuaded by level for the fee.295 Other commenters, liquidity to redeeming shareholders in a commenters that 2% may be higher than however, took issue with DERA’s crisis and so that the fund’s liquidity is most liquidity costs experienced when methodology in examining liquidity not depleted, but low enough to permit selling money market securities in a costs and, one commenter suggested a investors who wish to redeem despite crisis, and may thus result in a penalty default fee ‘‘as low as’’ 0.50% may be the cost to receive their proceeds for redeeming shareholders over and appropriate.296 without bearing disproportionate above paying for the costs of their costs.297 Based on the comments we liquidity.289 We are also persuaded by at issuance are not reported in TRACE and hence received on the proposal, we believe commenters that fund boards may be DERA’s sample differs from what money market funds hold. Nevertheless, the samples constructed that a default fee of 1% strikes this reluctant to impose a fee that is lower from TRACE provide estimates for costs of liquidity balance. Although we have looked to than the default liquidity fee for fear of during market stress since the selected securities the DERA study as confirming our being second-guessed—by the market, have similar time-to-maturity and credit risk decision based on comments we 290 characteristics as those permitted under rule 2a–7. the Commission, or otherwise. DERA included in the samples only trades of bonds received supporting the 1% fee, we Accordingly, commenters supporting with fewer than 120 days to maturity and with a recognize commenters’ critiques of the the 1% default fee have persuaded us trade size of at least $100,000. DERA classified methodology used in the DERA that 1% is the correct default fee level. bonds with credit ratings equal to AAA, AA+, AA, or AA¥ as Tier 1 eligible securities. The average analysis. We also note, however, that Furthermore, analysis by Commission days to maturity for Tier 1 securities in the sample DERA acknowledged in its staff of liquidity costs of certain is 67 days, which roughly reflects the 60-day memorandum that its samples were not corporate bonds during the financial weighted average maturity limit specified in rule perfectly analogous to money market 2a–7. Bonds with credit ratings equal to A+, A, or crisis further confirms that a reduced ¥ fund holdings, but that the samples 291 A represent Tier 2 eligible securities. The average default fee of 1% is appropriate. days to maturity for Tier 2 securities in the sample nevertheless ‘‘provide estimates for DERA staff estimated increases in is 28 days, which is somewhat lower than the 45- costs of liquidity during market stress transaction spreads for certain corporate day weighted average maturity limit required by since the selected securities have bonds that occurred during the financial rule 2a–7. 294 similar time-to-maturity and credit risk 292 See, e.g., Comment Letter of SIFMA (Apr. 23, crisis. Relative to transaction spreads 2014) (‘‘SIFMA II Comment Letter’’); Comment characteristics as those permitted under observed during the pre-crisis period Letter of Dreyfus Corporation (Apr. 23, 2014) Rule 2a–7.’’ 298 Moreover, at least one from January 2, 2008 to September 11, (‘‘Dreyfus DERA Comment Letter’’); Comment Letter commenter who took issue with DERA’s of Invesco (Apr. 23, 2014) (‘‘Invesco DERA 2008, average transaction spreads samples agreed, based on its own increased by 54.1 bps for Tier 1 eligible Comment Letter’’). 295 See SIFMA II Comment Letter (‘‘Data in the independent analysis, that a default securities and by 104.4 bps for Tier 2 [DERA] Liquidity [Fee Memo] support that a lower liquidity fee of 1% is appropriate.299 eligible securities during the period default level [from the level proposed] will Furthermore, because we recognize that from September 12, 2008 to October 20, effectively compensate money market funds for the establishing any fixed fee level may not 2008. These estimates indicate that cost of liquidity during market turmoil. . . . A 100 basis point (1%) default level for the liquidity fee precisely address the circumstances of a market stress increases the average cost will more closely approximate the fund’s cost of particular fund in a crisis, we are of obtaining liquidity by an amount providing liquidity during a crisis period for a permitting (as in the proposal) fund closer to 1% than 2%.293 portfolio comprised largely of Tier 1 securities.’’); Dreyfus DERA Comment Letter (‘‘We read [DERA’s boards to alter the level of the default analysis] and interpret the average spread liquidity fee and to tailor it to the BlackRock II Comment Letter; Fidelity Comment calculations contained [in the DERA Liquidity Fee Letter. specific circumstances of a fund. As Memo] to support a [default liquidity fee] of 1% 289 amended, rule 2a–7 will permit fund See, e.g., SIFMA Comment Letter (‘‘Our and not 2%, as proposed.’’); Fidelity DERA members’ consensus is that a redemption fee of 100 Comment Letter (supporting a 1% liquidity fee and boards to increase (up to 2%), decrease basis points will adequately compensate a money suggesting the empirical market data examined by (to, for example, 0.50% as suggested by market fund for the costs of liquidating assets to DERA in its Liquidity Fee Memo is ‘‘critical in a commenter), or not impose the default honor redemptions in times of market stress, and order for the SEC to determine the size of a liquidity avoid imposing a punitive charge on fee,’’ but noting that the methodology in DERA’s shareholders.’’); Fidelity Comment Letter (‘‘We have analysis ‘‘overstates the estimates of absolute during the week immediately following the Lehman examined the liquidation costs for our money spreads.’’) Brothers bankruptcy). market funds that sold securities during the period 297 296 See Invesco DERA Comment Letter (suggesting See, e.g., SIFMA Comment Letter; Fidelity immediately following the bankruptcy of Lehman concerns with the data and methodology used in Trustees Comment Letter; Fidelity Comment Letter Brothers and determined that the highest DERA’s analysis); BlackRock DERA Comment Letter (suggesting a 2% fee would be punitive); see also liquidation cost was less than 50 basis points of face (suggesting the methodology used in DERA’s supra note 281. value. Recognizing that liquidation costs in a future analysis was not ‘‘the appropriate methodology to 298 See DERA Liquidity Fee Memo, supra note market stress scenario may be greater, we think it measure the true cost of liquidity in MMFs,’’ 111. Some commenters suggested we should is reasonable to set a liquidation fee at 100 basis particularly the use of TRACE data); Comment analyze liquidity spreads in actual money market points or one percent.’’). Letter of Federated Investors Inc. (Liquidity Fee) fund portfolios. See Federated DERA II Comment 290 See SIFMA Comment Letter. (Apr. 23, 2014) (‘‘Federated DERA II Comment Letter; BlackRock DERA Comment Letter; Fidelity 291 See DERA Liquidity Fee Memo, supra note Letter’’) (suggesting it generally agrees with DERA’s DERA Comment Letter. However, as one commenter 111. methodology, but believes that a more appropriate acknowledged, this information is not publicly 292 See id. default liquidity fee may be ‘‘as low as’’ 0.50% available, and we note that only one commenter on 293 DERA obtained information on trades in Tier because ‘‘use of [TRACE] bond data as the basis for the DERA Liquidity Fee Memo provided specific 1 and Tier 2 eligible securities, as defined in rule spread analysis led DERA to find significantly information in this area. See BlackRock DERA 2a–7 from TRACE (Trade Reporting and larger spreads than it would have found had it Comment Letter; Fidelity DERA Comment Letter Compliance Engine) between January 2, 2008 based its analysis on the short-term instruments in (providing specific information on spreads during through December 31, 2009, and formed a Tier 1 which MMFs actually invest’’); see also Fidelity the financial crisis and stating that a 1% default and a Tier 2 sample. TRACE provides transaction DERA Comment Letter (supporting a 1% default liquidity fee is appropriate). We believe one data records for TRACE eligible securities that have a liquidity fee, but suggesting that the spreads cited point is not adequate for us to draw conclusions on maturity of more than a year at issuance. Money in DERA’s analysis are higher than those it has seen liquidity costs in money market funds during the market instruments, sovereign debt, and debt it its experience and that its independent analysis crisis. securities that have a maturity of less than a year reflects average spreads between 0.12% and 0.57% 299 See Fidelity DERA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47764 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

1% liquidity fee if it is in the best default liquidity fee as creating the cost of providing liquidity when interests of the fund. presumption that a liquidity fee should determining if the default liquidity fee As proposed and supported by be 1%. If a fund board believes based on is in the fund’s best interests. In commenters,300 we are limiting the market liquidity costs at the time or addition, we note that under today’s maximum liquidity fee that may be otherwise that a liquidity fee is more amendments, a fund board also could, imposed by a fund to 2%. As with the appropriately set at a lower or higher as suggested by a commenter, determine default fee, we seek to balance the need (up to 2%) level, it should consider that the default fee is not in the best for liquidity costs to be allocated to doing so. Once a liquidity fee has been interests of the fund and instead gate the redemptions with shareholders’ need to imposed, the fund’s board would likely fund for a period of time, possibly later redeem absent disproportionate costs. need to monitor the imposition of such imposing a liquidity fee. We also believe setting a limit on the fee, including the size of the fee, and Furthermore, we have determined not level of a liquidity fee provides notice whether it continues to be in the best to explicitly tie the default liquidity fee to investors about the extent to which a interests of the fund.303 to market indicators. As discussed in liquidity fee could impact their Other commenters argued for even the Proposing Release, we believe there investment. In addition, as recognized more flexible approaches and/or are certain drawbacks to such a by at least one commenter,301 the staff entirely different standards for setting a ‘‘market-sized’’ liquidity fee.309 First, it has noted in the past that fees greater fee.304 For example, a commenter may be difficult for money market funds than 2% raise questions regarding argued against having any default fee to rapidly determine precise liquidity whether a fund’s securities remain and instead supported allowing the costs in times of stress when the short- ‘‘redeemable.’’ 302 We note that if a fund board to tailor the fee to encompass the term financing markets may generally be continues to be under stress even with cost of liquidity to the fund.305 Different illiquid.310 Similarly, the additional a 2% liquidity fee, the fund board may commenters similarly argued that burdens associated with computing a consider imposing a temporary liquidity fees should be carefully market-sized liquidity fee could make it redemption gate under amended rule calibrated in relation to a fund’s actual more difficult for funds and their boards 2a–7 or liquidating the fund pursuant to cost of liquidity.306 A commenter noted to act quickly and proactively to stem amended rule 22e–3. this calibration could be achieved by, heavy redemptions. Second, a market- As recognized in the Proposing rather than setting a fixed fee in sized liquidity fee does not signal in Release, there are a number of factors a advance, delaying redemptions for up to advance the size of the liquidity fee board may want to consider in seven days to allow the fund to shareholders may have to pay if the determining the level of a liquidity fee. determine the size of the fee based on fund’s liquidity is significantly These may include, but are not limited actual transaction costs incurred on stressed.311 This lack of transparency to: changes in spreads for portfolio each day’s redemptions.307 Finally, a may hinder shareholders’ ability to securities (whether based on actual commenter proposed a flexible make well-informed investment sales, dealer quotes, pricing vendor redemption fee whereby redemptions decisions because investors may invest mark-to-model or matrix pricing, or would occur at basis point NAV (i.e., funds without realizing the extent of the otherwise); the maturity of the fund’s NAV to the fourth decimal place) plus costs they could incur on their portfolio securities; changes in the 1%.308 redemptions. liquidity profile of the fund in response As discussed above, the amendments Finally, commenters proposed various to redemptions and expectations we are adopting today incorporate potential exemptions from the default regarding that profile in the immediate substantial flexibility for a fund board to future; whether the fund and its determine when and how it imposes 309 See Proposing Release, supra note 25, at 183; intermediaries are capable of rapidly liquidity fees. We believe that including see also HSBC FSOC Comment Letter (suggesting putting in place a fee of a different in the amended rule a 1% default fee that the amount of the liquidity fee charged could that may be modified by the board is the be based on the anticipated change in the market- amount from a previously set liquidity based NAV of the fund’s portfolio from the fee or the default liquidity fee; if the best means of directing fund boards to redemption, assuming a horizontal slice of the fund is a floating NAV fund, the extent a liquidity fee that may be appropriate fund’s portfolio was sold to meet the redemption to which liquidity costs are already built in stressed market conditions, while at request). the same time providing flexibility to 310 Our staff gave no-action assurances to money into the NAV of the fund; and the fund’s market funds relating to valuation during the experience, if any, with the imposition boards to lower or raise the liquidity fee financial crisis because determining pricing in the of fees in the past. We note that fund if a board determines that a different fee then-illiquid markets was so difficult. See boards should not consider our 1% would better and more fairly allocate Investment Company Institute, SEC Staff No-Action liquidity costs to redeeming Letter (Oct. 10, 2008) (not recommending enforcement action through January 12, 2009, if 300 See, e.g., SIFMA Comment Letter. shareholders. We would encourage a money market funds used amortized cost to shadow 301 See NYC Bar Assoc. Comment Letter. fund board, if practicable given any price portfolio securities with maturities of 60 days 302 Section 2(a)(32) defines the term ‘‘redeemable timing concerns, to consider the actual or less in accordance with Commission interpretive security’’ as a security that entitles the holder to guidance and noting: ‘‘You state that under current market conditions, the shadow pricing provisions of receive approximately his proportionate share of 303 A board may change the level of a liquidity rule 2a–7 are not working as intended. You believe the fund’s net asset value. The Division of fee at any time if it determines it is in the best that the markets for short-term securities, including Investment Management informally took the interests of the fund to do so. Similarly, once a gate commercial paper, may not necessarily result in position that a fund may impose a redemption fee is imposed, the fund’s board would likely monitor discovery of prices that reflect the fair value of of up to 2% to cover the administrative costs the imposition of the gate and whether it remains securities the issuers of which are reasonably likely associated with redemption, ‘‘but if that charge in the best interests of the fund to continue to be in a position to pay upon maturity. You should exceed 2 percent, its shares may not be imposing the gate. considered redeemable and it may not be able to further assert that pricing vendors customarily used 304 See, e.g., Fin. Svcs. Roundtable Comment hold itself out as a mutual fund.’’ See John P. Reilly by money market funds are at times not able to Letter; Schwab Comment Letter; Santoro Comment & Associates, SEC Staff No-Action Letter (July 12, provide meaningful prices because inputs used to Letter; Invesco Comment Letter. 1979). This position is currently reflected in rule derive those prices have become less reliable 305 23c–3(b)(1), which permits a maximum 2% See Fin. Svcs. Roundtable Comment Letter. indicators of price.’’). repurchase fee for interval funds and rule 22c– 306 See Invesco Comment Letter; Ropes & Gray 311 A liquidity fee based on market indicators 2(a)(1)(i),which similarly permits a maximum 2% Comment Letter. would not provide notice to shareholders of the redemption fee to deter frequent trading in mutual 307 See Ropes & Gray Comment Letter. potential level of a liquidity fee like our maximum funds. 308 See Capital Advisors Comment Letter. 2% fee and default fee level of 1% provide.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47765

liquidity fee. For example, a commenter d. Duration of Fees and Gates have to re-impose the fee shortly suggested an exemption for all thereafter, which could cause investor We are adopting, as proposed, a 319 shareholders to redeem up to $1 million requirement that any fee or gate be lifted confusion. We note that a fund’s for incidental expenditures without a board can always determine that it is in 312 automatically once the fund’s weekly fee. Other commenters argued that a liquid assets have risen to or above 30% the best interests of the fund to lift a fee fee should not be imposed on newly of the fund’s total assets. We are also before the fund’s level of weekly liquid purchased shares.313 For several assets is restored to 30% of its total adopting, with certain modifications independent reasons, we do not assets. from the proposal as discussed below, a currently believe that there should be We also received a number of requirement that a money market fund exemptions to the default liquidity fee. comments on the duration of must lift any gate it imposes within 10 First, because the circumstances under redemption gates.320 For example, some business days and that a fund cannot which liquidity becomes expensive commenters described the maximum impose a gate for more than 10 business historically have been infrequent, we 30-day term for gating as reasonable,321 days in any 90-day period. As proposed, believe the imposition of fees and gates including a commenter that noted it the amendments would have allowed will also be infrequent. As long as would not be in favor of a shorter time funds to impose a gate for up to 30 days funds’ weekly liquid assets are above period.322 Another commenter stated its the regulatory threshold (i.e. 30%), fund in any 90-day period. support for the Commission’s proposed shareholders should continue to enjoy Several commenters noted positive 30-day time limit for redemption aspects of the Commission’s proposed gates.323 In addition, an industry group unfettered liquidity for money market 316 fund shares.314 The likely limited and duration for fees and gates. Some commented that although its members infrequent use of liquidity fees leads us commenters, however, suggested that had varying views, some stressed the to believe exemptions are generally the duration of liquidity fees, like the importance of the maximum 30-day unnecessary. Second, liquidity fees are duration of redemption gates, should be period to allow the fund adequate time 317 meant to impose at least some of the limited to a number of days. We to replenish its liquidity as securities cost of liquidity on those investors who continue to believe that the appropriate mature.324 are seeking liquidity by redeeming their duration limit on a liquidity fee is the On the other hand, in response to our shares. Allowing exemptions to the point at which a fund’s assets rise to or request for comment on the appropriate default liquidity fee would run counter above 30% weekly liquid assets. Thirty duration of redemption gates, including to this purpose and permit some percent weekly liquid assets is the our request for comment on a 10-day investors to avoid bearing at least some minimum required under rule 2a–7 and maximum gating period, some of their own costs of obtaining liquidity thus a fee (or gate) would appear to no commenters raised concerns with the and could serve to further harm the longer be justified once a fund’s level of proposed 30-day maximum gating liquidity of the fund, potentially weekly liquid assets has risen to this period.325 For example, one commenter requiring the imposition of a liquidity level. If we were to limit the imposition noted that ‘‘denying investors access to fee for longer than would otherwise be of liquidity fees to a number of days, a their cash for more than a brief period’’ necessary. Third, as suggested by fund might have to remove a liquidity would ‘‘create serious hardships.’’ 326 commenters and discussed in section fee while it is still under stress and thus This commenter expressed doubt that it III.C.7.a below, exemptions to the it would not gain the full benefits of would take boards ‘‘much more than a default liquidity fee would increase the imposing the fee.318 Additionally, if a week to resolve what course of action cost and complexity of the amendments fund was required to remove the fee would best serve the interest of their for funds and intermediaries because while it was still under stress, it may shareholders’’ and suggested an funds would have to develop the alternate maximum gating period of up systems and policies to track, for for purposes of determining each shareholder’s to 10 calendar days.327 A second redemption limit would be more complicated, example, the amount of each cumbersome, and costly than the changes required 319 shareholder’s redemption, and could to implement the full gate, [and] that this As discussed in the Proposing Release, we facilitate gaming on the part of investors complicated structure lends itself to arbitrary or considered whether a fee or gate should be lifted automatically before a fund’s weekly liquid assets because investors could attempt to fit inconsistent application across the industry and potential inequitable treatment among were completely restored to their required their redemptions within the scope of shareholders.’’ Id. minimum—for example, after they had risen to 315 an exemption. 316 25%. However, we believe that such a requirement See, e.g., HSBC Comment Letter; Dreyfus would be inappropriate for the same reasons we are Comment Letter; SIFMA Comment Letter; UBS not limiting the length of time the fee is imposed. 312 Comment Letter. See Capital Advisors Comment Letter. 320 See, e.g., UBS Comment Letter (supporting a 313 317 See ABA Business Law Section Comment See BlackRock II Comment Letter (‘‘We would maximum time period that would require a gated Letter; Wilmington Trustees Comment Letter; also recommend that a MMF not be open with a fund to reopen or liquidate thereafter). liquidity fee for more than 30 days.’’); Federated V Federated V Comment Letter. 321 See, e.g., Dreyfus Comment Letter; Page 314 Comment Letter (suggesting that liquidity fees See Proposing Release, supra note 25, at n.342. Comment Letter. 315 See, e.g., Federated V Comment Letter (‘‘Any should be subject to the same duration limits as 322 redemption gates and proposing a limit of 10 See Dreyfus Comment Letter (noting that attempt to create exceptions, such as allowing shortening the maximum gating period might not be calendar days); J.P. Morgan Comment Letter; see redemptions free of any liquidity fee up to a set enough time for a fund’s liquidity levels to also UBS Comment Letter (noting that ‘‘there dollar amount or percentage of the shareholder’s adequately recover). should be a maximum time period during which account balance, would add significant operational 323 See HSBC Comment Letter. hurdles to the proposed reform. In order to be the liquidity fee . . . could be imposed’’). 324 See SIFMA Comment Letter. applied equitably, prime [money market funds] 318 We note that, unlike a redemption gate, a 325 would have to take steps to assure that liquidity fee does not prohibit a shareholder from See, e.g., SIFMA Comment Letter; J.P. Morgan intermediaries were implementing the exceptions accessing its investment; this distinction, in our Comment Letter; Fla. CFO Comment Letter; on a consistent basis.’’); Fidelity Comment Letter view, justifies imposing a limited duration on the Federated V Comment Letter. (urging the Commission not to adopt partial gates, imposition of a gate while not doing so for the 326 See Federated II Comment Letter; Federated V which like an exception to a liquidity fee, would, imposition of fees. We also note that, once a fund’s Comment Letter. for example, except a certain amount of weekly liquid assets drop below the regulatory 327 See Federated II Comment Letter (‘‘Federated redemptions (e.g., up to $250,000 per shareholder) minimum (30%), it is limited to purchasing only had previously proposed limiting any suspension of from a gate that has been imposed). The commenter weekly liquid assets, which should increase the redemptions to five or ten business days. stated ‘‘that the challenges and costs associated fund’s liquidity and potentially bring it back above Alternative 2, on the other hand, would set the limit with [partial gates] outweigh the benefits. The the weekly liquid asset threshold. See rule 2a– in terms of calendar days. Federated therefore systems enhancements necessary to track holdings 7(d)(4)(iii). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47766 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

commenter added that the potential lengthy liquidation.334 As discussed cycle. Similarly, a retail investor may total loss of liquidity for up to 30 days above, it remains one of our goals to determine to invest in a money market could further exacerbate pre-emptive preserve the benefits of money market fund for cash management purposes runs and even be destabilizing to the funds for investors. Accordingly, upon because a money market fund’s short-term liquidity markets, and consideration of the comments received, potential for yield as compared to the suggested an alternative maximum we have modified the final rules to limit interest on a savings or checking gating period of up to 10 calendar the redeemability of money market fund account outweighs the possibility of a days.328 Additionally, some members of shares for a shorter period of time.335 money market fund imposing a gate and an industry group suggested that gating Some commenters suggested that the delaying payment of the investor’s bills for a shorter period of time would be longer a potential redemption gate may for up to 10 business days. more consistent with investors’ liquidity be imposed, the greater the possibility While we believe temporary gates needs and the requirements of the that investors may try to pre-emptively should be limited to a short period of Investment Company Act.329 redeem from a fund before the gate is in time, we also recognize that gates may We have carefully considered the place.336 We recognize this concern and be the most effective, and probably only, comments we received, both on the believe that if gates are limited to 10 way for a fund to stop a run for the duration of gates and on the possibility business days, investors may be less duration of the gating period. As one of pre-emptive runs as a result of inclined to try to redeem before a gate commenter stated, ‘‘[s]uspending potential gates, and have been is imposed because 10 business days is redemptions would allow a [b]oard to persuaded that gates should be limited a relatively short period of time and deal with large-scale redemptions to a shorter time period of up to 10 after that time investors will have access directly, by effectively calling a ‘time business days.330 As discussed in the to their investment.337 out’ until the [b]oard can decide how to Proposing Release and reiterated by We also believe that by limiting gates deal with the circumstances prompting commenters,331 we recognize the strong to 10 business days, investors may be the redemptions.’’ 338 Accordingly, we preference embodied in the Investment better able to account for the possibility believe gates, even those that are limited Company Act for the redeemability of of redemption gates when determining to up to 10 business days, will be a open-end investment company their investment allocations and cash valuable tool for funds to limit heavy shares.332 Additionally, as was echoed management policies. For example, an redemptions in times of stressed by a number of commenters,333 we employer may determine that money liquidity.339 understand that investors use money market funds continue to be a viable We also recognize, as suggested by market funds for cash management and cash management tool because even if a some commenters,340 that temporary a lack of access to their investment for fund imposes a gate, the employer could gates should provide a period of time for a long period of time can impose potentially still meet its payroll funds to gain internal liquidity. In this substantial costs and hardships. Indeed, obligations, depending on its payroll regard, we note that weekly liquid assets many shareholders in the Reserve generally consist of government Primary Fund informed us about these 334 See Kevin McCoy, Primary Fund Shareholders securities, cash, and assets that will costs and hardships during that fund’s Put in a Bind, USA Today, Nov. 11, 2008, available mature in five business days,341 and that at http://usatoday30.usatoday.com/money/perfi/ funds/2008-11-11-market-fund-side_N.htm once a fund has dropped below 30% recommends limiting a temporary suspension of (discussing hardships faced by Reserve Primary weekly liquid assets (the required redemptions to not more than ten calendar days.’’); Fund shareholders due to having their regulatory minimum, and the threshold Federated V Comment Letter; Federated X shareholdings frozen, including a small business for the imposition of gates), the fund can Comment Letter; see also Federated Funds Trustees owner who almost was unable to launch a new 342 Comment Letter; J.P. Morgan Comment Letter business, and noting that ‘‘Ameriprise has used purchase only weekly liquid assets. (suggesting a 10-day gating period). ‘hundreds of millions of dollars’ of its own liquidity Accordingly, because the securities a 328 See J.P. Morgan Comment Letter. for temporary loans to clients who face financial fund may purchase once it has imposed 329 See SIFMA Comment Letter. hardships while they await final repayments from a gate will mature, in large part, in five 330 In a change from the proposal, the maximum the Primary Fund’’); John G. Taft, Stewardship: business days, we believe a limit of 10 gating period in the final amendments uses Lessons Learned From the Lost Culture of Wall business days rather than calendar days to better Street (2012), at 2 (‘‘Now that the Reserve Primary business days for the imposition of a reflect typical fund operations and to mitigate Fund had suspended redemptions of Fund shares gate should provide a fund with an potential gaming of the application of gates during for cash, our clients had no access to their cash. adequate period of time in which to weekends or periods during which a fund might not This meant, in many cases, that they had no way generate internal liquidity.343 already typically accept redemption requests. If a to settle pending securities purchases and therefore fund imposes a gate, it is not required to impose no way to trade their portfolios at a time of historic the gate for 10 business days. Rather, a fund can lift market volatility. No way to make minimum 338 See Federated V Comment Letter. a gate before 10 business days have passed and we required distributions from plans. No 339 As discussed in supra note 148, as necessary, would expect a board would promptly do so if it way to pay property taxes. No way to pay college the Commission also has previously granted orders determines that it is in the best interests of the fund. tuition. It meant bounced checks and, for retirees, allowing funds to suspend redemptions to address We note that a money market fund board would interruption of the cash flow distributions they exigent circumstances. See, e.g., In the Matter of: likely meet regularly during any period in which a were counting on to pay their day-to-day living Centurion Growth Fund, Inc., Investment Company redemption gate is in place. See supra note 303. expenses.’’). Act Release Nos. 20204 (Apr. 7, 1994) (notice) and Additionally, a fund’s board may also consider 335 We recognize that rule 22e–3 does not limit 20210 (Apr. 11, 1994) (order); In the Matter of permanently suspending redemptions in gates to a short period of time, but under that rule, Suspension of Redemption of Open-End Investment preparation for fund liquidation under rule 22e–3 a gate is permanent and a fund must liquidate Company Shares Because of the Current Weather if the fund approaches the 10 business day gating thereafter. See rule 22e–3. Emergency, Investment Company Act Release No. limit. 336 See, e.g., J.P. Morgan Comment Letter; 10113 (Feb. 7, 1978). 331 See, e.g., SIFMA Comment Letter. Federated XI Comment Letter. 340 See, e.g., SIFMA Comment Letter; Dreyfus 332 See Investment Trusts and Investment 337 See, e.g., Federated V Comment Letter (‘‘[A 10- Comment Letter. Companies: Hearings on S. 3580 Before a Subcomm. day maximum gating period] would also be 341 See rule 2a–7(a)(34). of the Senate Comm. on Banking and , consistent with the comments of some of the 342 See rule 2a–7(d)(4)(iii). 76th Cong., 3d Sess. 291–292 (1940) (statement of investors who indicated to Federated that they 343 See J.P. Morgan Comment Letter (‘‘Ten (10) David Schenker, Chief Counsel, Investment Trust probably could not go more than two weeks without calendar days should provide [money market funds] Study, SEC); see also section 22(e) (limiting delays access to the cash held in their [money market an opportunity to rebuild significant amounts of in payments on redemptions to up to seven days). fund].’’) In addition, we note that 10 business days liquidity since the 2010 amendments to Rule 2a– 333 See, e.g., Federated II Comment Letter; is not significantly longer than funds are statutorily 7 require [money market funds] to invest at least Federated V Comment Letter; SIFMA Comment permitted to delay payment on redemptions. See 30% of their portfolios in assets that can provide Letter. section 22(e). weekly liquidity.’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47767

We further recognize that 10 business provisions of the Investment Company In addition, gates will be limited in days is not significantly longer than the Act to permit a fund to institute that they can be imposed only for seven days funds are already permitted liquidity fees and redemption gates.347 limited periods of time and only when to delay payment of redemption In the absence of an exemption, a fund’s weekly liquid assets are proceeds under section 22(e) of the imposing gates could violate section stressed. This aspect of gates, therefore, Investment Company Act. We note, 22(e) of the Act, which generally is akin to rule 22e–3, which also however, that while section 22(e) allows prohibits a mutual fund from provides an exemption from section funds to delay payment on redemption suspending the right of redemption or 22(e) to permit money market fund requests, it does not prevent postponing the payment of redemption boards to suspend redemptions of fund shareholders from redeeming shares. proceeds for more than seven days, and shares to protect the fund and its Even if a fund delays payment on imposing liquidity fees could violate shareholders from the harmful effects of redemptions pursuant to section 22(e), rule 22c–1, which (together with section a run on the fund, and to minimize the redemptions can continue to mount at 22(c) and other provisions of the Act) potential for disruption to the securities the fund.344 Unlike payment delays requires that each redeeming markets.350 under section 22(e), the temporary gates shareholder receive his or her pro rata We are also providing exemptions we are adopting today will allow a fund portion of the fund’s net assets. The from rule 22c–1 to permit a money a cooling off period during which Commission is exercising its authority market fund to impose liquidity fees redemption pressures do not continue to under section 6(c) of the Act to provide because such fees can benefit the fund mount while the fund builds additional exemptions from these and related and its shareholders by providing a liquidity, and the fund’s board can provisions of the Act to permit a money more systematic and equitable continue to evaluate the best path market fund to institute liquidity fees allocation of liquidity costs.351 In forward. Additionally, temporary gates and redemption gates notwithstanding addition, based on the level of the may also provide a cooling off period for these restrictions.348 As discussed in the liquidity fee imposed, a fee may shareholders during which they may Proposing Release and in more detail secondarily benefit a fund by helping to gather more information about a fund, below, we believe that such exemptions repair its market-based NAV. allowing them to make more well- do not implicate the concerns that We are permitting money market informed investment decisions after a Congress intended to address in funds to impose fees and gates in gate is lifted. enacting these provisions, and thus they limited situations because they may Finally, one commenter asked the are necessary and appropriate in the provide substantial benefits to money Commission to clarify that the time public interest and consistent with the market funds, the short-term financing limit for redemption gates may ‘‘occur protection of investors and the purposes markets for issuers, and the financial in multiple separate periods within any fairly intended by the Act. system, as discussed above. However, we are adopting limitations on when ninety-day period (as well as We do not believe that the temporary and for how long money market funds consecutively), and if so, whether the gates we are allowing in today’s can impose these restrictions because ninety-day period is a rolling period amendments will conflict with the we recognize that fees and gates may which is recalculated on a daily purposes underlying section 22(e), impose hardships on investors who rely basis.’’ 345 As indicated in the Proposing which was designed to prevent funds on their ability to freely redeem shares Release, the intent of the 90-day limit on and their investment advisers from (or to redeem shares without paying a redemption gates is to ensure that funds interfering with the redemption rights of fee).352 We did not receive comments do not circumvent the time limit on shareholders for improper purposes, suggesting changes to the proposed redemption gates 346—for example, by such as the preservation of management exemptions and, thus, we are adopting reopening on the 9th business day for 349 fees. Rather, under today’s them as proposed.353 one business day before re-imposing a amendments, the board of a money gate for potentially another 10 business market fund can impose gates to benefit 4. Amendments to Rule 22e–3 day period. Accordingly, when the fund and its shareholders by making Currently, rule 22e–3 allows a money determining whether a fund has been the fund better able to protect against market fund to permanently suspend gated for more than 10 business days in redemption activity that would harm redemptions and liquidate if the fund’s a 90-day period, the fund should remaining shareholders, and to allow board determines that the deviation account for any multiple separate gating time for any market distress to subside between the fund’s amortized cost price periods and assess compliance with the and liquidity to build organically. per share and its market-based NAV per 90-day limit on rolling basis, calculated daily. 347 See rule 2a–7(c)(2). 350 See 2010 Adopting Release, supra note 17, at 348 3. Exemptions to Permit Fees and Gates Section 6(c). To clarify the application of text following n.379. liquidity fees and redemption gates to variable 351 See rule 2a–7(c)(2) (providing that, The Commission is adopting, as contracts, we are also amending rule 2a–7 to notwithstanding rule 22c–1, among other proposed, exemptions from various provide that, notwithstanding section 27(i) of the provisions, a money market fund may impose a Act, a variable insurance contract issued by a liquidity fee under the circumstances specified in registered separate account funding variable the rule). 344 For example, if on day one, fifty shareholders insurance contracts or the sponsoring insurance 352 See rule 2a–7(c)(2)(i) and (ii); cf. 2010 place redemptions requests with a fund, there is company of such separate account may apply a Adopting Release, supra note 17, at text following nothing to stop another fifty shareholders from liquidity fee or redemption gate to contract owners n.379 (‘‘Because the suspension of redemptions placing redemption requests on day two. The fund’s who allocate all or a portion of their contract value may impose hardships on investors who rely on liquidity may continue to be strained because it is to a subaccount of the separate account that is their ability to redeem shares, the conditions of required to pay out redemption proceeds to all fifty either a money market fund or that invests all of [rule 22e–3] limit the fund’s ability to suspend shareholders from day one within seven days (and its assets in shares of a money market fund. See rule redemptions to circumstances that present a the next day, to all fifty shareholders from day two) 2a–7(c)(2)(iv). Section 27(i)(2)(A) makes it unlawful significant risk of a run on the fund and potential and it must do so at day one’s NAV (and the next for any registered separate account funding variable harm to shareholders.’’) day, at day two’s NAV). insurance contracts or the sponsoring insurance 353 But see NYC Bar Committee Comment Letter 345 See Comment Letter of Stradley Ronon company of such account to sell a variable contract (discussing section 22(e) and the Commission’s Stevens & Young, LLP (Sept. 17, 2013) (‘‘Stradley that is not a ‘‘redeemable security.’’ authority to allow gates under that section). As Ronon Comment Letter’’). 349 See 2009 Proposing Release, supra note 66, at discussed above, we are adopting the proposed 346 See Proposing Release, supra note 25, at 189. n.281 and accompanying text. amendments to rule 22e–3 pursuant to section 6(c).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47768 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

share may result in material dilution or the rule when the fund’s liquidity is if fees and/or gates are in the best unfair results to investors or existing significantly stressed. A money market interests of a fund. shareholders.354 Today, we are fund whose weekly liquid assets have In addition, operational costs may be amending rule 22e–3 to also permit (but fallen below 10% of its total assets incurred by, or spread among, a fund’s not require) the permanent suspension (whether that fund has previously transfer agents, sub-transfer agents, of redemptions and liquidation of a imposed a fee or gate, or not) may rely recordkeepers, accountants, portfolio money market fund if the fund’s level of on the rule to permanently suspend accounting departments, and weekly liquid assets falls below 10% of redemptions and liquidate.359 Under custodian.364 Funds also may seek to its total assets.355 As proposed, the amended rule 22e–3, stable value funds modify contracts with financial amendments would have allowed for also will continue to be able to suspend intermediaries or seek certifications permanent suspension of redemptions redemptions and liquidate if the board from intermediaries that they will apply and liquidation after a money market determines that the deviation between a liquidity fee on underlying investors’ fund’s level of weekly liquid assets fell its amortized cost price per share and its redemptions. Money market fund below 15%.356 market-based NAV per share may result shareholders also may be required to Commenters generally supported our in material dilution or other unfair modify their own systems to prepare for proposed retention of rule 22e–3 357 and results to investors or existing possible future liquidity fees, or to did not suggest changes to our proposed shareholders.360 Thus, a stable value manage gates, although we expect that amendments. We are making a money market fund that suffers a default only some shareholders will be required conforming change in the proposed will still be able to suspend to make these changes.365 weekly liquid asset threshold below redemptions and liquidate before a A number of commenters suggested which a fund may permanently gate and credit loss leads to redemptions and a that the operational costs and burdens liquidate, however, in order to fall in its weekly liquid assets. of implementing and administrating fees correspond to other changes in the 5. Operational Considerations Relating and gates would be manageable.366 proposal related to weekly liquid asset to Fees and Gates Some commenters noted that liquidity thresholds for fees and gates. For the fees and redemption gates would be reasons discussed above, we have a. Operational Costs more practicable, and less costly and determined to raise the initial threshold As discussed in the Proposing burdensome to implement and maintain below which a fund board may impose Release, we recognize that money than the other proposed reform fees and gates, but lower the threshold market funds and others in the alternative (floating NAV).367 Another for imposition of a default liquidity fee. distribution chain (depending on the commenter added that the systems Due to the absolute and significant structure) will incur some operational modifications for fees and gates, nature of a permanent suspension of costs in establishing or modifying especially absent a requirement to net redemptions and liquidation, we believe systems to administer a liquidity fee or each shareholder’s redemptions each the lower default fee threshold would temporary gate.361 These costs may day, would be ‘‘far less costly and also be the appropriate threshold for relate to the development of procedures onerous’’ than the operational board action under rule 22e–3.358 A and controls for the imposition of challenges posed by the floating NAV permanent suspension of redemptions liquidity fees or updating systems for reform alternative.368 One commenter could be considered more draconian confirmations and account statements to estimated that implementing fees and because there is no prospect that the reflect the deduction of a liquidity fee gates would require only ‘‘minimal fund will re-open—instead the fund will from redemption proceeds.362 enhancements’’ to its core custody/fund simply liquidate and return money to Additionally, these costs may relate to accounting systems at ‘‘minimal shareholders. Therefore, we do not the establishment of new or modified costs.’’ 369 This commenter further noted believe that the 30% weekly liquid asset systems or procedures that will allow that most systems enhancements would threshold for discretionary fees and funds to administer temporary gates.363 likely be required with respect to the gates, which is designed to provide We also recognize that money market systems of transfer agents and boards with significant flexibility to funds may incur costs in connection restore a fund’s liquidity in times of with board meetings held to determine 364 See ICI Comment Letter; see also Comment stress, would be an appropriate Letter of State Street Corporation (Sept. 17, 2013) threshold under which fund boards 359 We note that a money market fund would not (‘‘State Street Comment Letter’’) (suggesting that have to impose a fee or a gate before relying on rule transfer agents and intermediaries will need to could permanently close a fund. 22e–3. For example, if the fund drops below the modify their systems to accommodate fees and Amended rule 22e–3 will allow all 10% weekly liquid asset threshold, its board may gates). money market funds, not just those that determine that a liquidity fee is not in the best 365 Many shareholders use common third party- maintain a stable NAV as currently interests of the fund and instead decide to suspend created systems and thus would not each need to contemplated by rule 22e–3, to rely on redemptions and liquidate. modify their systems. 360 See rule 22e–3(a)(1). 366 See, e.g., ICI Comment Letter; HSBC Comment 361 Some commenters also suggested that affected Letter, Federated X Comment Letter; Invesco 354 See rule 22e–3(a)(1). money market funds may have to examine whether Comment Letter. 355 See id. shareholder approval is required to amend 367 See, e.g., SunTrust Comment Letter; Federated 356 The proposed weekly liquid asset threshold organizational documents, investment objectives or X Comment Letter; Angel Comment Letter. One corresponded with the proposed threshold for the policies. See, e.g., Ropes & Gray Comment Letter; commenter argued that for investors, intermediaries imposition of a default fee and/or redemption gates. Fidelity Comment Letter. and fund complexes alike, the estimated costs of 357 See, e.g., ICI Comment Letter (supporting the 362 See, e.g., ICI Comment Letter (‘‘[T]he nature of fees and gates ‘‘are dramatically lower’’ than under retention of rule 22e–3); Stradley Ronon Comment the liquidity fee would entail changes to support a the proposed floating NAV alternative. See Letter, (discussing rule 22e–3 and master/feeder separate fee type, appropriate tax treatment, and Federated X Comment Letter. funds); Dreyfus Comment Letter; but see Peirce & investor reporting, including transaction 368 See, e.g., ICI Comment Letter (‘‘System Green Comment Letter (suggesting that the confirmation statements that reference fees charged modifications for liquidity fees and gates, especially requirement in rule 22e–3 that ‘‘a fund’s board have and applicable tax information for customers.’’). absent the net redemption requirement, are far less made an irrevocable decision to liquidate the fund 363 See ICI Comment Letter (‘‘Temporary gating onerous and costly, however, than the extensive . . . unnecessarily dissuades boards from using also would require fund transfer agent and programming and other system changes necessary redemption suspensions’’). intermediary system providers to ensure that their to implement a floating NAV as contemplated by 358 Cf. Proposing Release supra note 25, at 195– systems can suppress redemption activity while the SEC’s proposal.’’) 196. supporting all other transaction types.’’). 369 See State Street Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47769

intermediaries, although their systems within omnibus accounts,378 and certain it has made its daily investment and would likely already include ‘‘basic commenters expressed concern over may lessen the difficulty and costs functionality to accommodate liquidity transparency with respect to fees and related to developing a trading system fees and gates.’’ 370 Similarly, another gates for shareholders investing through that can ensure an account has commenter noted that the operational omnibus accounts.379 sufficient funds to cover the trade itself issues of fees and gates could be solved We understand that the plus the possibility of a liquidity fee. if the industry and all its stakeholders implementation of fees and gates (as With respect to omnibus accounts, we were given sufficient implementation with any new regulatory requirement) is continue to believe that liquidity fees time.371 This commenter cited its not without its operational challenges; should be handled in a manner similar ongoing efforts to implement liquidity however, we have sought to minimize to redemption fees, which currently fees at its Dublin-domiciled money those challenges in the amendments we may be imposed to deter market timing market fund complex as an example that are adopting today. Based on the of mutual fund shares.384 As discussed the operational challenges and costs comments discussed above, we now in the Proposing Release, we understand would not be prohibitive.372 recognize that a liquidity fee could that financial intermediaries themselves Conversely, a number of commenters either be applied to each redemption generally impose redemption fees to expressed concern over the operational separately or on a net basis. As record or beneficial owners holding burdens and related administrative costs indicated by the relevant commenter, through that intermediary.385 We with the fees and gates requirements.373 our proposal contemplated net recognize commenters’ concerns Some commenters argued that the redemptions as an investor-friendly regarding the uniform application of implementation and administration of manner of applying a liquidity fee.380 liquidity fees through omnibus fees and gates would present significant However, in light of the comments, we accounts. We believe, however, that the operational challenges, in particular are persuaded that such an approach benefits and protections afforded to with respect to omnibus accounts, may be too operationally difficult and funds and their investors by the fees and sweep accounts, intermediaries and the costly for funds to apply and, thus, we gates amendments justify the investors that use them.374 One are not requiring funds to apply a application of these amendments in the 381 commenter argued that, to reduce liquidity fee on a net basis. context of omnibus accounts. In this operational burdens, a liquidity fee We also recognize commenters’ regard, we note, as we did in the should be applied to each redemption concerns regarding the application of Proposing Release, that funds or their separately—rather than net fees and gates in the context of sweep transfer agents may contract with redemptions—in an affected money accounts. We note that during normal intermediaries to have them impose market fund.375 This commenter also market conditions, fees and gates should liquidity fees. As we also noted in the not impact sweep accounts’ (or any expressed concern that intermediaries Proposing Release, we understand that other investor’s) investment in a money would not know whether their sweeps some money market fund sponsors may market fund.382 would be subject to a liquidity fee or We also note that, want to review their contractual temporary gate until after the daily unlike our proposal, the amendments arrangements with their funds’ financial we are adopting today will allow fund investment is made.376 For example, the intermediaries and service providers to boards to institute a fee or gate at any possibility of a liquidity fee would determine whether any contractual time during the day.383 require intermediaries to develop To the extent a modifications are necessary or advisable trading systems to ensure that for each sweep account’s daily investment is to ensure that liquidity fees are appropriately applied to beneficial transaction ‘‘the investor has sufficient made at the end of the day, we believe owners of money market fund shares. funds to cover the trade itself plus the this change should reduce concerns that the sweep account holder will find out We further understand that some money possibility of a liquidity fee.’’ 377 about a redemption restriction only after market fund sponsors may seek Commenters also suggested that a fee or certifications or other assurances that gate could not be uniformly applied 378 See Coal. of Mutual Fund Invs. Comment these intermediaries and service Letter; SunTrust Comment Letter. 370 providers will apply any liquidity fees See id. 379 See Coal. of Mutual Fund Invs. Comment 371 See HSBC Comment Letter. The commenter to the beneficial owners of money Letter; Goldman Sachs Comment Letter. market fund shares. We also recognize also noted that a variable liquidity fee, if available 380 See Proposing Release, supra note 25, at n.373 in a timely manner, should not create any (discussing the application of a liquidity fee and that money market funds and their operational impediments. stating that ‘‘[i]f the shareholder of record making transfer agents and intermediaries may 372 See id. the redemption was a direct shareholder (and not need to engage in certain 373 See, e.g., Comment Letter of TIAA–CREF a financial intermediary), we would expect the fee communications regarding a liquidity (Sept. 17, 2013) (‘‘TIAA–CREF Comment Letter’’); to apply to that shareholder’s net redemption for J.P. Morgan Comment Letter; Fin. Svcs. Roundtable the day.’’); see also ICI Comment Letter (‘‘Currently, fee. Comment Letter; Goldman Sachs Comment Letter. systems used to process money market fund With respect to those commenters 374 See, e.g., SunTrust Comment Letter; Comment transactions do not have the ability to assess a fee who expressed concern over the Letter of Coalition of Mutual Fund Investors (Sept. by netting one or more purchases against one or transparency of fees and gates for 17, 2013) (‘‘Coal. of Mutual Fund Invs. Comment more redemptions. This process would be highly Letter’’); Schwab Comment Letter. complex and require a significant and costly omnibus investors, we note that fees 375 See ICI Comment Letter (expressing concern redesign of the processing functionality used by and gates will be equally transparent for that funds, record keepers and intermediaries funds and intermediaries today.’’ (footnote all investors. Investors, both those that would have to develop complex operational omitted)). invest directly and those that invest systems that could apply a fee with respect to a 381 See ICI Comment Letter (noting that ‘‘[a]bsent through omnibus accounts, should have shareholder’s net redemptions for a particular day further definition, it would be challenging for funds and tracking the ‘‘shareholder of record’’ to whom (and intermediaries assessing the fee) to determine access to information about a fund’s such a fee would apply). how a shareholder of record requirement applies to weekly liquid assets, which will be 376 See id. multiple accounts of a given beneficial 377 See Fin. Svcs. Roundtable Comment Letter; owner. . . .’’). 384 See rule 22c–2. Our understanding of how see also Fin. Info. Forum Comment Letter 382 As discussed herein, however, we recognize financial intermediaries handle redemption fees in (suggesting liquidity fees could cause investors [to] that sweep accounts may be unwilling to invest in mutual funds is based on Commission staff over-trade their account by settling an amount a money market fund that could impose a gate. See discussions with industry participants and service greater than their balance due to a liquidity fee not supra section III.A.1.c.iv and infra note 641. providers. known at the time of order entry). 383 See rule 2a–7(c)(2)(i). 385 See Proposing Release, supra note 25, at 191.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47770 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

posted on the fund’s Web site. All vary among funds, shareholders and Some of the comments we received money market fund investors also their service providers. regarding the costs of fees and gates should receive copies of a fund’s In the Proposing Release, we included alternate estimates of prospectus, which will include estimated a range of hours and costs that implementation costs.393 For example, disclosure on fees and gates. may be required to perform activities one commenter indicated that its costs We note that some commenters typically involved in making systems for implementing fees and gates would expressed concern about the costs and modifications, such as those described likely be in the range of $400,000 to burdens associated with the above. We estimated that a money $500,000.394 This commenter further combination of fees and gates and a market fund (or others in the explained that cost of the fees and gates floating NAV requirement for distribution chain) would incur one- alternative ‘‘reflects the ability of the institutional prime funds.386 As we time systems modification costs that affected entity to custom-design its own stated in the Proposing Release, we do range from $1,100,000 to $2,200,000.389 approach to implementation, as well as not expect that there will be any We further estimated that the one-time the fact that the necessary changes significant additional costs from costs for entities to communicate with would not be for use in day-to-day combining the two approaches that are shareholders about the liquidity fee or operations, but only for rare not otherwise discussed separately with gate would range from $200,500 to occasions.’’ 395 respect to each of the fees and gates and $340,000.390 In addition, we estimated A number of other commenters, floating NAV reforms.387 As we that the costs for a shareholder mailing however, expressed concern that the discussed in the Proposing Release, it is would range between $1.00 and $3.00 fees and gates amendments would likely that implementing a combined per shareholder.391 impose significant costs and burdens, approach will save some percentage We also recognized in our proposal higher than those estimated in the over the costs of implementing each that depending on how a liquidity fee or Proposing Release.396 For example, one alterative separately as a result of gate is structured, mutual fund groups commenter estimated that it would cost synergies and the ability to make a and other affected entities already may it a total of approximately $11 million variety of changes to systems at a single have systems that can be adapted to in largely one-time costs, reflecting costs time. We do not expect that combining administer a fee or gate at minimal cost, of $9 million to implement fees and the approaches will create any new in which case the costs may be less than gates as well as $2 million for the 397 costs as a result of the combination the range we estimated above. For related modifications in disclosure. itself.388 Accordingly, we estimate, as example, some money market funds Another commenter indicated that the we did in the proposal, that the costs of may be part of mutual fund groups in implementation costs of fees and gates 398 implementing a combined approach which one or more funds impose would be an estimated $1,697,000. would at most be the sum of the costs deferred sales loads under rule 6c–10 or Similarly, an industry group conducting of each alternative, but may likely be redemption fees under rule 22c–2, both a survey of its members found that the less. of which require the capacity to 393 We note that some commenters provided b. Cost Estimates administer a fee upon redemptions and industry-wide estimates of approximately $800 may involve systems that could be million to $1.75 billion for initial implementation As we indicated in the Proposing adapted to administer a liquidity fee. of fees and gates, and estimates of approximately Release, the costs associated with the We estimated that a money market fund $80 to $350 million for annual ongoing costs. See fees and gates amendments will vary ICI Comment Letter; Invesco Comment Letter. As shareholder whose systems required discussed herein, we have analyzed a variety of depending on how a fee or gate is modifications to account for a liquidity commenter estimates and provided cost estimates structured, including its triggering event fee or gate would incur one-time costs on a per-fund basis (including a fund’s distribution and the level of a fee, as well as on the ranging from $220,000 to $450,000.392 chain). We are unable, however, to verify the capabilities, functions and accuracy or make a relevant comparison between our per-fund cost estimates and the broad range of sophistication of the systems and 389 We estimated that these costs would be costs provided by these commenters that apply to operations of the funds and others attributable to the following activities: (i) Project all U.S. prime money market fund investors and/ involved in the distribution chain, planning and systems design; (ii) systems or the entire industry because we are unable to including transfer agents, accountants, modification, integration, testing, installation, and estimate how many intermediaries will be affected deployment; (iii) drafting, integrating, by the fees and gates amendments. custodians and intermediaries. These implementing procedures and controls; and (iv) 394 See Federated X Comment Letter. costs relate to the development of preparation of training materials. See also 395 See id. As discussed above, another procedures and controls, systems’ Proposing Release, supra note 25, at n.245 commenter indicated that implementing fees and modifications, training programs and (discussing the bases of our estimates of operational gates would only require ‘‘minimal enhancements’’ and related costs in Proposing Release). shareholder communications and may to its core custody/fund accounting systems at 390 We estimated that these costs would be ‘‘minimal costs,’’ and that most transfer agency and attributable to the following activities: (i) Modifying intermediary systems would likely already include 386 See, e.g., Dreyfus Comment Letter (suggesting the Web site to provide online account information ‘‘basic functionality to accommodate liquidity fees the combination of both proposed reform options and (ii) written and telephone communications and gates.’’ See State Street Comment Letter. Also would be ‘‘excessive and unduly harmful to the with investors. See also Proposing Release, supra as discussed above, an additional commenter noted utility of [money market funds] without offering note 25, at n.245 (discussing the bases of our that, with respect to its Dublin-domiciled money any additional benefit’’); Northern Trust Comment estimates of operational and related costs in market fund complex that is currently Letter (suggesting the combination of both proposed Proposing Release). implementing the ability to impose liquidity fees, reform options would ‘‘be very costly to 391 Total costs of the mailing for individual funds the implementation process has created costs but implement’’). For a discussion of the possible would vary significantly depending on the number that these costs have not been prohibitive. See movement out of money market funds as result of of shareholders who receive information from the HSBC Comment Letter. today’s reforms, see infra section III.K. But see State fund by mail (as opposed to electronically). 396 See, e.g., IDC Comment Letter; Comment Street Comment Letter (‘‘State Street does not 392 We estimated that these costs would be Letter of Dechert LLP (Sept. 17, 2013) (‘‘Dechert believe there would be any new costs other than attributable to the following activities: (i) Project Comment Letter’’); SPARK Comment Letter. those listed by the staff from a fund accounting, planning and systems design; (ii) systems 397 See Fidelity Comment Letter. custody or fund administrator point of view by modification, integration, testing, installation; and 398 See Comment Letter of Financial Information combining the two alternatives.’’). (iii) drafting, integrating, implementing procedures Forum (Sept. 17, 2013) (‘‘Fin. Info. Forum Comment 387 See Proposing Release, supra note 25, at 249; and controls. See also Proposing Release, supra Letter’’) (‘‘Based on the available information, one see also infra section III.B.8 for a discussion of the note 25, at n.245 (discussing the bases of our back office processing service provider estimates costs associated with the floating NAV requirement. estimates of operational and related costs in the implementation cost of . . . Alternative 2 at 388 See State Street Comment Letter. Proposing Release). $1,697,000.’’)

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47771

implementation costs relating to costs of $220,000 to $450,000 for a continue to believe our estimates in the liquidity fees would likely be $2 million money market fund shareholder whose Proposing Release are appropriate. or more, according to 36% of survey systems (including related procedures We also recognize that funds may respondents.399 The group also noted and controls) required modifications to incur costs in connection with board that initial costs would be particularly account for a liquidity fee or redemption meetings held to determine if fees and/ significant for distributors and gate. or gates are in the best interests of the intermediaries, with 60% of fund. In the Proposing Release, we We recognized in our proposal that respondents estimating initial costs at estimated an average annual time cost of adding new capabilities or capacity to a $2 million or more.400 In addition, the approximately $9,895 per fund in system will entail ongoing annual survey found initial costs associated connection with each such board maintenance costs and understand these with gates to range from $1 million to meeting.408 We did not receive costs generally are estimated as a $10 million.401 comments on this estimate. As Based on the information provided by percentage of initial costs of building or discussed in section IV.A.3 herein, we commenters, as well as the operational expanding a system. We also recognized are revising our estimate from $9,895 changes in the final rule, we are that ongoing costs related to fees and per fund to $10,700 as result of updated increasing our estimates for gates may include training costs. In the industry data.409 implementation costs for fees and gates. proposal, we estimated that the costs to Although we have estimated the costs Three of the four commenters who maintain and modify the systems that a single affected entity would incur, provided estimates suggested that the required to administer a fee or gate (to we anticipate that many money market implementation costs would be around accommodate future programming funds, transfer agents, and other affected $2,000,000 or more.402 In addition, we changes), to provide ongoing training, entities may not bear the estimated costs estimate that a fund’s ability to impose and to administer the fee or gate on an on an individual basis. Instead, the costs a fee or gate intra-day (as opposed to the ongoing basis would range from 5% to of systems modifications likely would end of the day, as contemplated by the 15% of the one-time costs. We be allocated among the multiple users of proposal) may result in increased understand that funds may impose the systems, such as money market fund operational costs related to the varying liquidity fees and that the cost members of a fund group, money market implementation of fees and gates. of varying liquidity fees could exceed funds that use the same transfer agent or Accordingly, we have increased our this range, but because such costs custodian, and intermediaries that use original estimate of $1,100,000 to depend on to what extent the fees might systems purchased from the same third $2,200,000 403 for one-time systems vary, we do not have the information party. Accordingly, we expect that the modification costs to a higher estimate necessary to provide a reasonable cost for many individual entities may be 404 of $1,750,000 to $3,000,000. We estimate of how much more (if any) less than the estimated costs due to continue to estimate that the one-time varying fees might cost to implement. economies of scale in allocating costs costs for entities to communicate with among this group of users. shareholders (including systems costs One commenter indicated a lower estimate of approximately $164,000 for 6. Tax Implications of Liquidity Fees related to communications) about fees 405 and gates would range from $200,500 to annual ongoing costs. Another commenter, an industry group that As discussed in the Proposing $340,000. In addition, we are increasing Release, we understand that liquidity the estimated cost for a shareholder surveyed its members, indicated that ongoing annual costs of implementing a fees may have certain tax implications mailing from between $1.00 and $3.00 for money market funds and their per shareholder to between $2.00 and liquidity fee are likely to range from 410 10% to 20% of initial costs.406 The same shareholders. We understand that for $3.00 per shareholder, recognizing that federal income tax purposes, it is unlikely such a mailing would cost commenter indicated that ongoing annual costs related to redemption gates shareholders of mutual funds that $1.00. We continue to estimate one-time impose a redemption fee pursuant to were estimated as 10% to 20% of initial 407 rule 22c–2 under the Investment 399 cost by 33% of survey respondents. SIFMA Comment Letter. The survey also Company Act generally treat the included the following results for implementation Based on these estimates, which are redemption fee as offsetting the costs: 24% in the $2 million to $5 million range, largely similar to our estimates of 5– 8% in the $5 million to $10 million range, and 4% shareholder’s amount realized on the 15% in the Proposing Release, we in the $10 million to $15 million range. redemption (decreasing the 400 Id. The commenter’s survey indicated that shareholder’s gain, or increasing the 40% of asset managers would incur $2 to $5 million 405 See Federated X Comment Letter. shareholder’s loss, on redemption).411 in initial costs. 406 See SIFMA Comment Letter. The survey 401 Id. The survey indicated costs of $1 million to indicated 10% to 15% of initial costs for 17% of $2 million according to 17% of respondents, $2 respondents, 15% to 20% of initial costs for 12% 408 See Proposing Release, supra note 25, at 549. million to $5 million according to another 17% of of respondents, and 20+% of initial costs for 8% of 409 See infra section IV.A.3 (discussing the PRA respondents, and $5 million to $10 million respondents. With respect to distributor/ estimates for board determinations under the fees according to 8% of respondents. intermediary respondents, the commenter indicated and gates amendments and noting that certain 402 See supra notes 394–401 and accompanying that ongoing annual costs for a liquidity fee are estimates have increased from those in the proposal text. estimated as 10% to 20% of initial costs by 29% as a result of the increased number of funds that 403 We note that, in the Proposing Release, our of distributor/intermediary respondents (evenly may cross the higher weekly liquid assets threshold estimate was based on a money market fund that split between those who estimate 10% to 15% of of 30% (as compared to 15%) for the imposition of determined it would only impose a flat liquidity fee initial cost and those who estimate 15% to 20%). fees and gates). of a fixed percentage known in advance and have For asset managers, the commenter indicated that 410 As discussed above, the liquidity fee we are the ability to impose a gate. This estimate was based ongoing annual costs for a liquidity fee are adopting today is analogous to a redemption fee on our proposal, which included less flexibility estimated to be 10% to 15% of initial costs by 20% under rule 22c–2, which allows mutual funds to than today’s amendments. Accordingly, our revised of respondents, 15% to 20% of initial costs by 10% recover costs associated with frequent mutual fund estimates account for a money market fund that has of respondents and 20+% of initial costs by 20% share trading by imposing a redemption fee on the ability to vary the level of a fee at imposition of respondents. shareholders who redeem shares within seven days or thereafter, or impose a gate. 407 See SIFMA Comment Letter. The commenter of purchase. 404 As with our estimate in the Proposing Release, note that the 33% of survey respondents were 411 Cf. 26 CFR 1.263(a)–2(e) (commissions paid in these amounts reflect the costs of one-time systems evenly split between those who estimated 10% to sales of securities by persons who are not dealers modifications for a money market fund and/or 15% of initial cost and those who estimated 15% are treated as offsets against the selling price); see others in its distribution chain. to 20% of initial cost. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47772 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Consistent with this characterization, Commenters were concerned with income during the year will operate to funds generally treat the redemption fee this possibility—that investors may qualify these distributions as as having no associated tax effect for the have to recognize capital gains or dividends.418 fund.412 We understand that a liquidity reduced losses if a fund makes a Finally, as discussed in the Proposing fee will be treated for federal income tax distribution to shareholders in order to Release, we understand that the tax purposes consistently with the way that avoid ‘‘breaking the buck’’ on the upside treatment of a liquidity fee may impose funds and shareholders treat as a result of excessive fees.415 certain operational costs on money redemption fees under rule 22c–2. Commenters noted that such market funds and their financial If, as described above, a liquidity fee distributions and the resulting capital intermediaries and on shareholders. has no direct federal income tax gains or losses upon disposition of However, we have been informed that consequences for the money market investors’ shares would require funds the Treasury Department and the IRS fund, that tax treatment will allow the and intermediaries to start tracking today will propose new regulations fund to use 100% of the fee to help investors’ basis in shares of a fund.416 In exempting all money market funds from repair a market-based NAV per share order to avoid such basis tracking, certain transaction reporting that was below $1.00. If redemptions commenters suggested that the Treasury requirements.419 This exemption is to be involving liquidity fees cause a stable Department and the Internal Revenue formally applicable for calendar years value money market fund’s shadow Service (‘‘IRS’’) issue guidance stating beginning on or after the date of price to reach $1.0050, however, the that when a money market fund is publication in the Federal Register of a fund may need to distribute to the required to make a payment of excess Treasury Decision adopting those remaining shareholders sufficient value fees in order to avoid breaking the buck, proposed regulations as final to prevent the fund from breaking the the fund should be deemed to have regulations. The Treasury Department buck on the upside (i.e., by rounding up sufficient earnings and profits to treat and the IRS have informed us, however, to $1.01 in pricing its shares).413 We the distribution as a taxable that the text of the proposed regulations understand that any such distribution dividend.417 will state that persons subject to would be treated as a dividend to the Although these events are transaction reporting may rely on the extent that the money market fund has hypothetically possible, the scenario proposed exemption for all calendar sufficient earnings and profits. Both the that would lead to a payment of excess years prior to the final regulations’ fund and its shareholders would treat fees to fund shareholders without formal date of applicability. Therefore, these additional dividends the same as sufficient earnings and profits is subject the Treasury Department and IRS relief they treat the fund’s routine dividend to many contingencies that make it described above is available distributions. That is, the additional unlikely to occur. First, as we discussed immediately. dividends would be taxable as ordinary above, under normal market conditions, Thus, even in the unlikely event that income to shareholders and would be we believe funds will rarely impose some shareholders’ bases in their shares eligible for deduction by the funds. liquidity fees. Second, we believe it is change due to non-dividend In the absence of sufficient earnings highly unlikely that shareholders would distributions, neither fund groups nor and profits, however, some or all of redeem with such speed and in such their intermediaries will need to track these additional distributions would be volume that the redemptions would the tax bases of money market fund treated as a return of capital. Receipt of create a danger of breaking the buck on shares. On the other hand, if there are a return of capital would reduce the the upside before a fund could remove any non-dividend distributions by recipient shareholders’ basis (and thus a fee. Third, the distributions to avoid money market funds, the affected could decrease a loss, or create or breaking the buck might not exceed the shareholders will need to report in their increase a gain for the shareholder in fund’s earnings and profits. For this annual tax filings any resulting gains 420 the future when the shareholder purpose, we understand that the fund’s or reduced losses upon the sale of redeems the affected shares). Thus, in earnings and profits take into account affected money market fund shares. We the event of any return of capital the fund’s income through the end of are unable to quantify with any distributions, as we noted in the the taxable year. Thus, unless the specificity the tax and operational costs Proposing Release, there is a possibility additional distribution occurs very close discussed in this section because we are that the fund, other intermediaries, and to the end of the taxable year, some of unable to predict how often liquidity the shareholders might become subject the money market fund’s subsequent fees will be imposed by money market to tax-reporting or tax-payment funds and how often redemptions obligations that do not affect stable reporting requirements. We have been informed value money market funds currently that, today, the Department of the Treasury and the 418 A portion of this subsequent income may also operating under rule 2a–7.414 IRS are proposing new regulations to exempt all have to be distributed to avoid breaking the buck money market funds from transaction reporting on the upside. However, if the fund attracts new obligations. As we describe below, funds and shareholders, we understand that some of the also Investment Income and Expenses (Including brokers may rely on this exemption immediately. subsequent income can be retained, with its Capital Gains and Losses), IRS Publication 550, at We note that at least one commenter indicated that associated earnings and profits qualifying the 44 (fees and charges you pay to acquire or redeem funds and intermediaries may want to provide earlier distributions as dividends. shares of a mutual fund are not deductible. You can certain tax information to their investors even if it 419 See infra section III.B.6.a. usually add acquisition fees and charges to your is not required. See ICI Comment Letter. 420 Redemptions subject to a liquidity fee would 415 cost of the shares and thereby increase your basis. See, e.g., Fidelity Comment Letter; BlackRock almost always result in losses, but gains are A fee paid to redeem the shares is usually a II Comment Letter; Wells Fargo Comment Letter. possible in the unlikely event that a shareholder reduction in the redemption price (sales price).), 416 See, e.g., ICI Comment Letter; Fidelity received a return of capital distribution with respect available at http://www.irs.gov/pub/irs-pdf/ Comment Letter; BlackRock II Comment Letter; to some shares. Because a later redemption of the p550.pdf. SIFMA Comment Letter; but see, e.g., State Street shares by the shareholder would be for $1.00 each, 412 See ICI Comment Letter (‘‘Pursuant to section [Appendix 4] (suggesting that a liquidity fee causing there would be small gains with respect to those 311(a)(2) of the Internal Revenue Code, corporations the shadow price to exceed $1.0049 would not redemptions. If the money market fund making (including investment companies) do not recognize result in special distribution to shareholders but such a non-dividend distribution is a floating NAV gain or loss upon a redemption of their shares.’’). most likely be recorded as income to the fund and money market fund and if a shareholder uses the 413 See rule 2a–7(g)(2). paid out to shareholders as an ordinary income simplified aggregate method discussed below in 414 See Proposing Release, supra note 25, at 207. distribution). section III.B.6.a, then the shareholder would be able Funds that strive to maintain a stable NAV per 417 See, e.g., BlackRock II Comment Letter; ICI to report the gain or loss without having to track share currently are not subject to these transaction Comment Letter; Wells Fargo Comment Letter. the basis of individual shares.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47773

subject to liquidity fees would cause the Current U.S. GAAP defines cash investments continued to meet the funds to make returns of capital equivalents as ‘‘short-term, highly liquid definition of a cash equivalent. distributions to the remaining investments that are readily convertible shareholders (although, as noted above, to known amounts of cash and that are B. Floating Net Asset Value we believe such returns of capital so near their maturity that they present 1. Introduction distributions are unlikely). Commenters insignificant risk of changes in value did not provide any such estimates. because of changes in interest rates.’’ 425 As discussed earlier in this Release, U.S. GAAP includes an investment in a absent an exemption specifically 7. Accounting Implications money market fund as an example of a provided by the Commission from A number of commenters questioned cash equivalent.426 The Commission’s various provisions of the Investment whether an investment in a money position continues to be that, under Company Act, all registered mutual market fund subject to a possible fee or normal circumstances, an investment in funds must price and transact in their gate, or in a money market fund that in a money market fund that has the ability shares at the current NAV, calculated by fact imposes a fee or gate, would to impose a fee or gate under rule 2a– valuing portfolio instruments at market continue to qualify as a ‘‘cash 7(c)(2) qualifies as a ‘‘cash equivalent’’ value, in the case of securities for which equivalent’’ for purposes of U.S. for purposes of U.S. GAAP.427 However, market quotations are readily available, Generally Accepted Accounting as is currently the case, events may or, at fair value, as determined in good Principles (‘‘U.S. GAAP’’).421 We occur that give rise to credit and faith by the fund’s board of directors, in understand that classifying money liquidity issues for money market funds. the case of other securities and assets market fund investments as cash If such events occur, including the (i.e., use a floating NAV).430 Under rule equivalents is important because, among imposition of a fee or gate by a money 2a–7, the Commission has exempted other things, investors may have debt market fund under rule 2a–7(c)(2), covenants that mandate certain levels of money market funds from this floating shareholders would need to reassess if NAV requirement, allowing them to cash and cash equivalents.422 To remove their investments in that money market price and transact at a stable NAV per any uncertainty, several commenters fund continue to meet the definition of share (using the amortized cost and requested that the Commission, the a cash equivalent. A more formal penny rounding methods), provided Financial Accounting Standards Board pronouncement (as requested by some (‘‘FASB’’) and/or Government that they follow certain risk-limiting commenters) to confirm this position is 431 Accounting Standards Board (‘‘GASB’’) not required because the federal conditions. In doing so, the issue guidance to clarify whether securities laws provide the Commission Commission was statutorily required to investments in money market funds will with plenary authority to set accounting find that such an exemption was in the continue to qualify as cash equivalents standards, and we are doing so here.428 public interest and consistent with the under U.S. GAAP.423 Various If events occur that cause protection of investors and the purposes commenters on our proposal, including shareholders to determine that their fairly intended by the policy and the American Institute of Certified money market fund shares are not cash provisions of the Investment Company Public Accountants (‘‘AICPA’’) and each equivalents, the shares would need to be Act.432 Accordingly, when providing of the ‘‘Big Four’’ accounting firms, classified as investments, and this exemption in 1983, the Commission stated that a money market fund’s shareholders would have to treat them considered the benefits of a stable value ability to impose fees and gates should either as trading securities or available- product as a cash management vehicle not preclude an investment in the fund for-sale securities.429 For example, for investors, but also imposed a from being classified as a ‘‘cash during the financial crisis, certain number of conditions designed to equivalent’’ under U.S. GAAP.424 money market funds experienced minimize the risk inherent in a stable unexpected declines in the fair value of value fund that some shareholders may 421 See, e.g., Invesco Comment Letter; BlackRock their investments due to deterioration in redeem and receive more than their II Comment Letter; Wells Fargo Comment Letter; see the creditworthiness of their assets and, shares are actually worth, thus diluting also Proposing Release, supra note 25, at 246 (stated that ‘‘we expect the value of floating NAV funds as a result, portfolios of money market the holdings of remaining with liquidity fees and gates would be substantially funds became less liquid. Investors in shareholders.433 At the time, the stable and should continue to be treated as a cash these money market funds would have Commission was persuaded that equivalent under GAAP.’’); ICI Comment Letter needed to determine whether their (suggesting that any such Commission guidance deviations in value that could cause should also ‘‘discuss whether a money market fund material dilution to investors generally that imposes a liquidity fee and/or gate would Comment Letter of KPMG LLP (Sept. 17, 2013) would not occur, given the risk-limiting continue to be considered a cash equivalent (‘‘KPMG Comment Letter’’); Comment Letter of investment and whether the amount of the fee or PricewaterhouseCoopers LLP (Sept. 16, 2013) the length of the gate would affect the analysis.’’) (‘‘PWC Comment Letter’’). 430 See supra section I. 422 In addition, some corporate investors may 425 See FASB Accounting Standards Codification 431 Id. perceive cash and cash equivalents on a company’s (‘‘FASB ASC’’) paragraph 305–10–20. 432 Section 6(c) of the Investment Company Act balance sheet as a measure of financial strength. 426 Id. provides the Commission with broad authority to 423 See, e.g., ICI Comment Letter; Fidelity 427 We are also amending the Codification of exempt persons, securities or transactions from any Comment Letter; Fin. Svcs. Roundtable Comment Financial Reporting Policies to reflect our provision of the Investment Company Act, or the Letter; see also Proposing Release, supra note 25, interpretation under U.S. GAAP, as discussed regulations thereunder, if and to the extent that at 246 (suggesting that funds with the ability to below. See infra section VI. such exemption is in the public interest and impose fees and gates should still be considered 428 The federal securities laws provide the consistent with the protection of investors and the cash equivalents). As discussed in section III.C.4 Commission with authority to set accounting and purposes fairly intended by the policy and herein, we do not have authority over the actions reporting standards for public companies and other provisions of the Investment Company Act. See that GASB may or may not take with respect to entities that file financial statements with the Commission Policy and Guidelines for Filing of LGIPs. Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) Applications for Exemption, SEC Release No. IC– 424 See Comment Letter of American Institute of and (26); 15 U.S.C. 78c(b), 78l(b) and 78m(b); 14492 (Apr. 30, 1985). Certified Public Accountants, Financial Reporting section 8, section 30(e), section 31, and section 433 See Proposing Release, supra note 25, at n.9. Executive Committee (Sept. 16, 2013) (‘‘AICPA 38(a) of the Investment Company Act. The Commission was similarly concerned with the Comment Letter); Comment Letter of Ernst & Young 429 See FASB ASC paragraph 320–10–25–1. This risk that redeeming shareholders may receive less LLP (Sept. 12, 2013) (‘‘Ernst & Young Comment accounting treatment would not apply to entities to than their shares were worth and that purchasing Letter’’); Comment Letter of Deloitte & Touche LLP which the guidance in FASB ASC Topic 320 does shareholders may pay too little for their shares, (Sept. 17, 2013) (‘‘Deloitte Comment Letter’’); not apply. See FASB ASC paragraph 320–10–15–3. diluting remaining shareholders.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47774 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

conditions of the rule.434 Experience, funds).436 We further believe history concerned about when we first provided however, has shown that deviations in shows that, to date, institutional the exemptions in rule 2a–7 permitting value do occur, and at times, can be investors have been significantly more funds to use different valuation and significant. likely than retail investors to act on this pricing methods than other mutual 437 As discussed above, money market incentive. Thus, given the tradeoffs funds to facilitate maintaining a stable involved in requiring that any money value.442 funds’ sponsors on a number of market fund transact at a floating NAV, As discussed in the previous section, occasions have voluntarily chosen to we are limiting this reform (and thus the our fee and gate reform is designed to provide financial support for their repeal of the special exemptive relief address some of the risks associated money market funds for various reasons, allowing these funds to price other than with money market funds that we have including to keep a fund from re-pricing as required under the Investment identified in this Release, but does not below its stable value, suggesting that Company Act) to institutional prime address them all. In particular, fees and material deviations in the value in funds. gates are intended to enhance money money market funds have not been a As discussed previously, the first market funds’ ability to manage and rare occurrence.435 This historical investors to redeem from a stable value mitigate potential contagion from high experience, combined with the events of money market fund that is experiencing levels of redemptions and make the financial crisis, has caused us to a decline in its NAV benefit from a ‘‘first redeeming investors pay their share of reconsider the exemption from the mover advantage’’ as a result of rule 2a– the costs of the liquidity that they statutory floating NAV requirement for 7’s current valuation and pricing receive. But those reforms do not money market funds in light of our methods, which allows them to receive address the incremental incentive to responsibilities under the Act in the full stable value of their shares even redeem from a fund with a shadow price providing this exemption. In doing so, if the fund’s portfolio value is less.438 below $1.00 that is at risk of breaking we again took into account the benefits One possible reason that institutional the buck. As a result of their of money market funds as a stable value prime funds may be more susceptible to sophistication, risk tolerance, and large cash management product for investors, rapid heavy redemptions than retail investments, institutional investors are but also considered all of the historical funds is that their investors are often more likely to redeem at least in part 443 and empirical information discussed in more sophisticated, have more due to this first mover advantage. This has led to us re-evaluate our section I above, the Investment significant money at stake, and may decision to provide an exemption Company Act’s general obligation for have a lower risk tolerance due to legal or other restrictions on their investment allowing amortized cost valuation and funds to price and transact in their practices.439 Institutional investors may penny rounding pricing for money shares at the current NAV, and also have more resources to carefully market funds with these specific kinds developments since 1983. monitor their investments in money of investors.444 As discussed above, this We considered the many reasons market funds. Accordingly, when they exemption was originally premised on shareholders may engage in heavy become aware of potential problems our expectation that funds that followed redemptions from money market with a fund, institutional investors may the requirements of rule 2a–7 would be funds—potentially resulting in the quickly redeem their shares among unlikely to experience material dilution of share value that the other reasons, to benefit from the first deviations from their stable value. With Investment Company Act’s provisions mover advantage.440 When many respect to prime funds in particular, this are designed to avoid—and have investors try to redeem quickly, whether expectation has proven inaccurate with tailored today’s final rules accordingly. to benefit from the first mover advantage enough regularity to cause concern, In particular, while many investors may or otherwise, money market funds may especially given the potentially serious redeem because of concerns about experience significant stress. As consequences to investors and the liquidity, quality, or lack of discussed above, even a few high-dollar markets that can and has resulted at transparency—and our fees and gates, redemptions by institutional investors times. Accordingly, for the reasons disclosure, and reporting reforms are (because of their greater capital at stake) discussed above and in other sections of primarily intended to address those may have a significant adverse effect on this Release,445 we no longer believe incentives—an incremental incentive to a fund as compared with retail investors that exempting institutional prime redeem is created by money market whose investments are typically smaller 442 funds’ current valuation and pricing and would therefore require a greater See infra section III.B.3.b; see, e.g., Schwab number of redemptions to have a similar Comment Letter. methods. As discussed below, this 443 effect.441 This can lead to the very See, e.g. Comment Letter of United Services incremental incentive to redeem dilution of fund shares that we were Automobile Association (Feb. 15, 2013) (available exacerbates shareholder dilution in a in File No. FSOC–2012 0003) (‘‘USAA FSOC stable NAV product because non- Comment Letter’’); see, e.g., Systemic Risk Council 436 See infra section III.C.1; see also, e.g., Fidelity Comment Letter; but see, e.g., HSBC Comment redeeming shareholders are forced to Comment Letter; ICI Comment Letter; Comm. Cap. Letter (arguing that first mover advantage that absorb losses equal to the difference Mkt. Reg. Comment Letter. results from the valuation and pricing methods in between the market-based value of the 437 See infra section III.C.2 and DERA Study, rule 2a–7 is overstated in light of the real world supra note 24; see also, e.g., Schwab Comment issues with information and time to act, and that fund’s shares and the price at which Letter; Fin. Svcs. Roundtable Comment Letter; other motivations are the primary driver of redeeming shareholders transact. For Vanguard Comment Letter. redemptions); Dreyfus Comment Letter. the reasons discussed below, we believe 438 See supra section II.B.3. This first mover 444 A number of commenters agreed with our that this incentive exists largely in advantage does not have the same degree of value proposed approach of only targeting the funds most in other mutual funds that do not have a stable susceptible to runs (institutional prime) with the prime money market funds because value because investors receive the market value of floating NAV requirement. See, e.g., Fin. Svcs. these funds exhibit higher credit risk their shares when redeeming from a floating NAV Roundtable Comment Letter (‘‘. . . a floating NAV that make declines in value more likely fund. confined to institutional prime funds represents a (compared to government money market 439 See, e.g., Systemic Risk Council Comment reasonable targeting of reform efforts at the segment Letter. of the market that has shown the most proclivity to 440 Id.; see, e.g. TIAA–CREF Comment Letter; runs.’’); Vanguard Comment Letter. 434 Id. Systemic Risk Council Comment Letter. 445 See supra section II; infra sections III.B.3.a 435 See supra section II.B.4 441 See supra text following note 66. and III.B.3.b.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47775

money market funds under section 6(c) may make it more transparent to certain market funds with a different share of the Act is appropriate—i.e., we find of the impacted investors that they, not price (e.g., a money market fund with a that such an exemption is no longer in the fund sponsors or the federal $10 target share price could price its the public interest and consistent with government, bear the risk of loss. Many shares at $10.000). Institutional prime the protection of investors and the commenters suggested that, among the money market funds will still be subject purposes fairly intended by the policy reform alternatives proposed, the to the risk-limiting conditions of rule and provisions of the Investment floating NAV reform is the most 2a–7.454 Accordingly, they will continue Company Act.446 As discussed in detail meaningful.450 to be limited to investing in short-term, in the sections that follow, we are now 2. Summary of the Floating NAV Reform high-quality, dollar-denominated rescinding the exemption that allows instruments, but will not be able to use institutional prime funds to maintain a The liquidity fees and gates the amortized cost or penny rounding stable NAV and are requiring them to amendments apply to all money market methods to maintain a stable value. price and transact in their shares at funds (with the exception of Finally, funds subject to the floating market-based value, like all other government money market funds). NAV reform will be subject to the other mutual funds.447 Today we are also adopting a targeted reforms discussed in this Release. This reform is intended to work in reform designed to address the specific As discussed in section III.B.9 below, concert with the liquidity fees and gates risks associated with institutional prime institutional prime money market funds reforms discussed above (as well as money market funds.451 We are doing so will have two years to comply with the other reforms discussed in section by amending rule 2a–7 to rescind floating NAV reform. Although some III.K.3). The floating NAV requirement, certain exemptions that have permitted commenters, including some sponsors applicable only to institutional prime these funds to maintain a stable price by of money market funds, expressed funds, balances concerns about the risks use of amortized cost valuation and/or general support for the floating NAV of heavy redemptions from these funds penny-rounding pricing—as a result, reform as it was proposed,455 the in times of stress and the resulting institutional prime money market funds majority of commenters generally negative impacts on short-term funding will transact at a floating NAV.452 opposed requiring institutional prime markets and potential dilution of Under our reform, institutional prime money market funds to implement a investor shares, with the desire to money market funds will value their floating NAV.456 Below, we address the preserve, as much as possible, the portfolio securities using market-based principal considerations and benefits of money market funds for factors and will sell and redeem shares 453 requirements of the floating NAV investors.448 Consistent with a core based on a floating NAV. Under the reform, discuss comments received, and objective of the Investment Company final rules, and as we proposed, how if applicable, the amendments have Act, the floating NAV reform may also institutional prime funds will round been revised to address commenter lessen the risk of unfairness and prices and transact in fund shares to concerns. potential wealth transfers between four decimal places in the case of a fund holding and redeeming shareholders by with a $1.00 target share price (i.e., 3. Certain Considerations Relating to the mutualizing any potential losses among $1.0000) or an equivalent or more Floating NAV Reform precise level of accuracy for money all investors, including redeeming a. A Reduction in the Incentive To shareholders. We do not intend, and the 450 See, e.g., Boston Federal Reserve Comment Redeem Shares floating NAV reform does not seek, to Letter; Systemic Risk Council Comment Letter; deter redemptions that constitute Thrivent Comment Letter. When a money market fund’s shadow rational risk management by 451 The floating NAV reform will not apply to price is less than the fund’s $1.00 share shareholders or that reflect a general government and retail money market funds. See price, shareholders have an economic incentive to avoid loss.449 Instead, as rule 2a–7(a)(16) (defining ‘‘government money market fund’’); rule 2a–7(a)(25) (defining ‘‘retail incentive to redeem shares ahead of discussed below, the requirement is money market fund’’). Government and retail other investors. In the Proposing designed to achieve two independent money market funds are discussed infra in sections Release, we noted that the size of objectives: (1) To reduce the first mover III.C.1 and III.C.2. institutional investors’ holdings and advantage inherent in a stable NAV 452 Rule 2a–7(c)(1) (Share price calculation). As their resources for monitoring funds discussed below, an institutional prime money fund due to rule 2a–7’s current market fund may continue to call itself a ‘‘money provide the motivation and means to act valuation and pricing methods by dis- market fund’’ provided that it follows the other on this incentive, and observed that incentivizing redemption activity that conditions in rule 2a–7. But it may not use the institutional investors redeemed shares can result from investors attempting to amortized cost and penny rounding methods to at a much higher rate than retail maintain a stable NAV. See rule 2a–7(b); infra note exploit the possibility of redeeming 629 and accompanying text (discussing rule 35d– investors from prime money market shares at the stable share price even if 1, the ‘‘names rule’’). funds in both September 2008 and June the portfolio has suffered a loss; and (2) 453 See rule 2a–7(c)(1). We discuss floating NAV 2011.457 We also noted, as some market to reduce the chance of unfair investor money market fund share pricing in section III.B.4. A money market fund that currently chooses to use dilution, which would be inconsistent 454 amortized cost valuation typically also uses a See rule 2a–7(d) (risk-limiting conditions). with a core principle of the Investment penny-rounding convention to price fund shares. 455 See, e.g., Goldman Sachs Comment Letter; Company Act. An additional motivation See 1983 Adopting Release, supra note 3. Although Schwab Comment Letter; T. Rowe Price Comment for this reform is that the floating NAV not generally used, a money market fund may also Letter; Vanguard Comment Letter; Comment Letter currently choose to maintain a stable NAV solely of CFA Institute (Sept. 19, 2013) (‘‘CFA Institute by using penny-rounding pricing. As discussed Comment Letter’’). 446 See supra note 432. below, these money market funds would be able to 456 See, e.g., Federated II Comment Letter; 447 See, e.g., Systemic Risk Council Comment use amortized cost valuation only to the same Comment Letter of Arnold & Porter LLP on behalf Letter (‘‘A floating NAV (for all funds) is the same extent other mutual funds are able to do so—where of Federated Investors (Floating NAV) (Sept. 13, simple regulatory framework that applies to all the fund’s board of directors determines, in good 2013) (‘‘Federated IV Comment Letter’’); Federated other mutual funds . . .’’). faith, that the fair value of debt securities with X Comment Letter; J.P. Morgan Comment Letter; 448 See infra section III.B.3 (discussing the remaining maturities of 60 days or less is their Comment Letter of U.S. Chamber of Commerce, benefits of a floating NAV requirement). amortized cost, unless the particular circumstances Center for Capital Markets Competitiveness (Aug. 1, 449 A number of commenters agreed with this warrant otherwise. See ASR 219, supra note 5; we 2013) (‘‘Chamber I Comment Letter’’); Chamber II goal. See, e.g., Schwab Comment Letter; Systemic discuss the use of amortized cost below. See infra Comment Letter. Risk Council Comment Letter. section III.B.5. 457 But see supra note 68.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47776 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

observers had suggested, that the illiquid secondary markets at shadow price departures from $1.00.467 valuation and pricing techniques discounted or even fire-sale prices.464 The authors of the paper concluded currently permitted by rule 2a–7 may The floating NAV reform may not fully further that the ability of a variable NAV underlie this incentive to redeem ahead address the incentive to redeem because to mitigate this first mover advantage is of other shareholders and to obtain market-based pricing may not capture overstated when viewed in light of the $1.00 per share when investors become the likely increasing illiquidity of a real-world costs of moving between aware (or expect) that the actual value fund’s portfolio as it sells its more investments that investors will face and, of the fund’s shares is below (or will fall liquid assets first during a period of in a significant stress event, such effect below) $1.00.458 As discussed below, to market stress to defer liquidity pressures is a minor determinant of behavior.468 address this incentive, the floating NAV as long as possible.465 We acknowledge this view and agree, as reform mandates that institutional We acknowledge that a floating NAV discussed above, that a floating NAV prime funds transact at share prices that does not eliminate the incentive to cannot stop redemptions when (as reflect current market-based factors (not redeem in pursuit of higher quality or assumed in the paper) investors are amortized cost or penny rounding, as greater liquidity—indeed, we intend to redeeming in a flight to quality due to currently permitted) and therefore address the risks associated with these a continuing deterioration of the credit remove investors’ incentives to redeem incentives primarily through our fees risk in a fund’s portfolio. However, the early to take advantage of transacting at and gates reform. However, we continue floating NAV reform reduces the benefit a stable value. to believe that a floating NAV should from redeeming ahead of others to at Some commenters agreed that a mitigate the incentive to redeem due to most one half of a hundredth of a cent floating NAV mitigates the first mover the mismatch between the stable NAV per share 469—100 times less than it is incentive to redeem ahead of other price and the actual value of fund shares currently—which investors would shareholders that results from current because shareholders will receive a weigh against the cost of switching to an rule 2a–7’s valuation and pricing market value for their shares rather than .470 As we discuss methods.459 Two commenters also a fixed price when they redeem. above, the floating NAV reform is noted that requiring institutional prime Importantly, the complementary designed to supplement the fees and funds to adopt a floating NAV would liquidity fees and gates aspect of our gates reform only for those funds that force investors who cannot tolerate any money market reforms would also apply are more vulnerable to credit events share price movement into other to institutional prime funds that are (compared to government funds) and products that better match their risk subject to a floating NAV. As discussed that have an investor base more likely tolerances.460 According to these previously, while not intended to stem to engage in heavy redemptions commenters, investors who remain in investors’ desire to move to more liquid (compared to retail investors) because floating NAV funds may have a greater or higher quality investments, liquidity of, among other reasons, the first mover tolerance for loss and may be less likely fees are specifically designed to ensure advantage created by the funds’ current to redeem quickly in times of market that redeeming investors pay the costs valuation and pricing practices. stress.461 of the liquidity they receive, and Specifically, compared to the current Several commenters generally redemption gates are designed as a tool stable NAV environment, a variable objected to our reasoning that our to allow funds to manage heavy NAV will significantly limit the value of floating NAV reform (by addressing the redemptions in times of stress and thus the first mover advantage. Although this economic incentive inherent in rule 2a– reduce the chance of harm to the fund first mover advantage may not be the 7) would reduce the incentive for and investors. In this way, we believe main driver of investor decisions to shareholders to redeem ahead of other that the totality of our money market redeem, it strengthens the incentive to investors in times of market stress, fund reforms addresses redeem for those investors with the observing that a floating NAV may not comprehensively many features of most at stake from a decline in a fund’s eliminate investors’ incentive to redeem money market funds, including the value, which increases the chance of to the extent that it results from the characteristics of their investor base that unfair investor dilution in contravention desire to move to investments of higher can make them susceptible to heavy of a core principle of the Investment quality or greater liquidity.462 Both the redemptions, and gives fund boards new Company Act. We continue to believe DERA Study and Proposing Release tools for addressing a loss of liquidity that a floating NAV will, for discussed this concern.463 As the DERA that may develop in funds.466 institutional prime funds, reduce the Study noted, the incentive for investors One commenter submitted a white impact of the first mover advantage to redeem ahead of other investors may paper concluding that (i) liquidity fees associated with money market funds’ be heightened by liquidity concerns— and gates, if implemented effectively, current valuation and pricing practices when cash levels are insufficient to could stop and prevent runs; and (ii) and thus is consistent with our meet redemption requests, funds may be although a variable NAV would not stop forced to sell portfolio securities into a run, it could mitigate the first mover 467 See Treasury Strategies III Comment Letter advantage associated with the (submitting a white paper: Carfang, et al., Proposed Money Market Mutual Fund Regulations: A Game 458 See Proposing Release, supra note 25, at n.139. motivation to run that results from small Theory Assessment (using ‘‘game theory’’ analysis 459 See, e.g., Thrivent Comment Letter; TIAA– to evaluate whether a variable NAV and/or a CREF Comment Letter; Fin. Svcs. Roundtable 464 See DERA Study, supra note 24, at 4 (noting constant NAV, with or without the ability to impose Comment Letter; SIFMA Comment Letter; Systemic that most money market fund portfolio securities a liquidity fee or gate, can prevent or stop a run on Risk Council Comment Letter. are held to maturity, and secondary markets in money market fund assets). 460 See Thrivent Comment Letter; Vanguard these securities are not deeply liquid). 468 Id. Comment Letter; see infra section III.B.3.c. 465 Id. 469 For example, the floating NAV at 4 decimals 461 See Vanguard Comment Letter. 466 Some commenters agreed that a floating NAV will adjust from $1.0000 to $0.9999 as soon as the 462 See, e.g., Dreyfus Comment Letter; Federated alone is not enough to address these incentives. value reaches $0.99995. Hence, the most an investor IV Comment Letter; Chamber II Comment Letter; See, e.g., Americans for Fin. Reform Comment can benefit from redeeming ahead of others and Comment Letter of The Squam Lake Group (Sept. Letter (‘‘[w]hile the floating NAV has clear benefits switching to an alternative investment is 17, 2013) (‘‘Squam Lake Comment Letter’’); Ropes in making clear that investor assets are at risk of $1.0000¥$0.99995 = $0.00005. & Gray Comment Letter. loss, we are concerned that a floating NAV alone 470 We discuss the costs associated with 463 See Proposing Release, supra note 25, at will not create a sufficient disincentive for investors institutional investors transferring between section III.A.1.c. to engage in ‘runs’ on MMFs.’’). investment alternatives in section III.K.3.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47777

obligation to seek to prevent investor incentivize heavy redemptions in times discussed above, the floating NAV dilution of fund shares (as discussed in of market stress (and the resulting reform is not intended to wholly more detail in the section below). shareholder inequities) before a prevent heightened redemptions or A few commenters also suggested that significant credit event occurs or the deter redemptions that constitute shareholders in a floating NAV fund fund re-prices its shares using market- rational risk management by would have the same incentive to based values (i.e., breaks the buck). shareholders or that reflect a general redeem if a floating NAV fund deviates Under current rule 2a–7, there remains incentive to avoid loss. Instead, our far enough from the typical historical a first mover advantage until the fund floating NAV reform is intended to range for market-based pricing, breaks the buck and re-prices its shares address the incremental incentive to particularly if they believe the fund may using market-based valuations. One redeem created by money market funds’ continue to drop in value.471 We note, commenter also noted that any current valuation and pricing methods however, that the floating NAV reform, reduction in the incentive to redeem (and not incentives to redeem that relate one part of our broader reforms to early from the fund’s stable pricing to flights to quality and liquidity) and money market funds, is designed to would be marginal and contingent upon that exacerbates shareholder dilution. address a particular structural incentive the type of stress experienced.475 We b. Risks of Investor Dilution that exists as a result of existing note that the floating NAV reform is valuation and pricing methodologies targeted towards the funds that have As discussed earlier, one of the under rule 2a–7. As we stated in our been most susceptible to heavy Commission’s most significant concerns proposal and in this Release, the redemptions in the past. We believe that when originally providing the floating NAV reform is not intended to the risks associated with these funds exemption permitting the use of deter redemptions that constitute have shown that the first mover amortized cost valuation and penny rational risk management by advantage that results from current rule rounding pricing for money market shareholders or that reflect a general 2a–7’s valuation and pricing methods funds was to minimize the risks of incentive to avoid loss. needs to be addressed. This is investor dilution.479 A primary Several commenters argued that particularly true in light of the principle underlying the Investment shareholders may choose not to redeem Investment Company Act mandate to Company Act is that sales and from a stable NAV money market fund ensure that investors are treated fairly redemptions of redeemable securities during times of stress to avoid and the impact that the first mover should be effected at prices that are fair contributing to the likelihood that their advantage has on investor dilution. and do not result in dilution of fund breaks the buck.472 Although this Finally, a number of commenters shareholder interests or other harm to may be the case for some shareholders, suggested that the evidence of heavy shareholders.480 Absent an exemption, a as shown during the financial crisis, redemptions in European floating NAV mutual fund must sell and redeem its other shareholders do redeem from money market funds and U.S. ultra- redeemable securities only at a price stable value money market funds, short bond funds during 2008, taken based on its current net asset value, regardless of the impact on the fund.473 together, may be the best means which equals the value of the fund’s It is the actions of those shareholders available to predict whether a floating total assets minus the amount of the that have led to our re-evaluation of the NAV will reduce shareholder incentives fund’s total liabilities.481 A mutual fund appropriateness of exempting all money to redeem shares in times of stress.476 generally must value its assets at their market funds from the valuation and These commenters suggest, therefore, market value, in the case of securities pricing provisions that apply to all other that a floating NAV alone likely would for which market quotations are readily mutual funds. not stop investors from redeeming available, or at fair value, as determined One commenter also argued that rule shares.477 We recognize that many in good faith by the fund’s board of 2a–7 already places a number of European floating NAV money market detailed remedial obligations on the funds and U.S. ultra short bond funds investors in floating NAV money market funds (as board of a money market fund, in the experienced heavy redemptions during adopted today) also would redeem heavily in a financial crisis. event a credit event occurs, that are the financial crisis.478 We note that, as designed to prevent any first mover 479 See Proposing Release, supra note 25. 480 See Investment Trusts and Investment advantage related to money market 475 See ABA Business Law Section Comment Companies: Hearings on S. 3580 before a funds’ current valuation and pricing Letter. Subcommittee of the Senate Committee on Banking methods.474 This commenter discussed, 476 See, e.g., Federated IV Comment Letter; HSBC and Currency, 76th Cong., 3d Sess. 136–38 (1940) for example, the existing requirement Comment Letter. (hearings that preceded the enactment of the 477 that fund boards periodically calculate See supra note 475 and accompanying text. Company Act). In addition, all funds must 478 As we discussed in the Proposing Release, we accurately calculate their net asset values to ensure the fund’s shadow price and take action understand that many European floating NAV the accuracy of their payment of asset-based fees, in the event it deviates from the market- money market funds are priced and managed such as investment advisory fees, as well as the based NAV per share by more than 50 differently than floating NAV funds (as we accuracy of their reported performance. Statement basis points. We note, however, that the proposed, and as adopted today). We also noted Regarding ‘‘Restricted Securities,’’ Investment that Europe has several different types of money Company Act Release No. 5847 (Oct. 21, 1969). floating NAV reform is designed to market funds, all of which can take on more risk 481 Rule 22c–1. When calculating its net asset proactively address a structural feature than U.S. money market funds as they are not value for purposes of rule 22c–1: (i) An open-end of money market funds that may currently subject to regulatory restrictions on their fund adds up the current values of all of its assets credit quality, liquidity, maturity, and (using their market values or fair values, as diversification as stringent as those imposed under appropriate), which reflect any unrealized gains; 471 See, e.g., Federated IV Comment Letter rule 2a–7. Finally, we noted in the Proposing and (ii) subtracts all of its liabilities, which include (arguing that, unlike a stable NAV fund, Release that empirical analysis yields different any federal income tax liability on any unrealized shareholders may have a greater incentive to opinions on whether floating NAV funds, as gains. If the open-end fund understates a liability, redeem from a declining floating NAV fund because compared with stable NAV funds, are less among other consequences, the price at which the shareholders would ‘‘realize’’ the small declines in susceptible to run-like behavior. See Proposing fund’s redeemable securities are redeemed will be value); Chamber II Comment Letter. Release, supra note 25, at section III.A.1.d. higher, so that redeeming shareholders will receive 472 See, e.g., Wells Fargo Comment Letter; Ropes Accordingly, we note that the fact that some ultra- too much for their shares while the net asset value & Gray Comment Letter; ICI Comment Letter. short bond funds and European floating NAV funds of shares held by the remaining shareholders may 473 See supra section II. experienced heavy redemptions during the be reduced correspondingly when the full amount 474 See Federated IV Comment Letter. financial crisis does not necessarily suggest that of the liability must be paid.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47778 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

directors, in the case of other securities historical differences between these redemptions. A floating NAV requires and assets.482 types of investors, and cordons off some redeeming investors to receive only A fund that prices and transacts in of the risks, reducing the chance that their fair share of the fund when there fund shares valued at amortized cost heavy redemptions by institutions will are embedded losses in the portfolio value and rounded to the nearest penny result in disruption or material dilution (avoiding dilution of remaining poses a risk of dilution of investor of retail investors’ shares.485 We also shareholders), even in cases where the shares because investors may redeem for recognize that institutional investors are fund has sufficient liquidity such that the stable value of their shares even not always similarly situated, with some fees or gates would not be permitted. where the underlying market value of institutions having more or less We believe that the risks associated with the fund’s portfolio may be less. If such investment at risk, resources to monitor institutional prime money market a redemption occurs, the value of the their investments, tolerance for losses, funds—including the incentives remaining shareholders’ shares can be or proclivity to redeem, which makes associated with the first mover diluted, as remaining shareholders certain institutional investors less likely advantage that results from current rule effectively end up paying redeeming to be among the first movers.486 A 2a–7’s valuation and pricing methods, shareholders the difference between the floating NAV should also help reduce and associated heavy redemptions that stable value and the underlying market the risks of material dilution to this can worsen a decline in a fund’s stable value of the fund’s assets.483 This result subset of institutional investors, as it NAV—are significant enough that they is illustrated in the example provided in will reduce the first mover advantage need to be addressed through the the Proposing Release, where we associated with current rule 2a–7’s targeted reform of a floating NAV. discussed how redeeming shareholders valuation and pricing methods, which can concentrate losses in a money can prompt heavy redemptions and can c. Enhanced Allocation of Principal market fund.484 have the effect of diluting the shares of Volatility Risk This risk of dilution is magnified by slower-to-redeem institutional Today, the risks associated with the the ‘‘cliff effect’’ that can occur if a 487 investors. principal volatility of a money market stable value fund is required to re-price A floating NAV might also prompt fund’s portfolio securities can be its shares. If, due to heavy redemptions, investors who are the least tolerant of obscured by the pricing and valuation losses embedded in a fund’s portfolio losses, and thus the most likely to methods that allow these funds to cause it to re-price its shares from its redeem early to avoid a decline in a maintain a stable NAV. In non-money stable value, remaining money market fund’s NAV per share, to shift into other fund investors will receive at most 99 investment products, such as market funds, investors may look to cents for every share remaining, while government money market funds or historical principal volatility as an redeeming investors received the full other stable value products that may indicator of fund risk because changes $1.00, even if the market value of the in the principal may be the dominant more appropriately match their risk 488 fund’s portfolio had not changed. In a profile. Such a shift would further source of the total return. Historical mutual fund that transacts using a reduce the risks of dilution for the principal volatility in money market floating NAV, this cliff effect is remaining investors, mitigating the funds may not have been as fully minimized because (assuming pricing to chances that rapid heavy redemptions appreciated by investors, because they four decimal places) the ‘‘cliff’’ is a will result in negative outcomes for do not experience any principal 1/100th the size compared to when a these funds and their investors. volatility unless the fund breaks the money market fund is priced using We recognize that our liquidity fees buck (even if such volatility has in fact penny rounding. In other words, in a and gates reforms also address the risks occurred).489 floating NAV fund the risk of investor of dilution to some extent. However, Some commenters suggested, and we dilution is far less, in part, because the fees and gates may not address the agree, that transacting at prices based on cliff occurs earlier and is significantly incentives that cause rapid heavy current market values means that smaller (at $0.9999 cents, or one redemptions to occur in certain money institutional investors who invest in hundred times sooner and smaller than market funds in the first place (although floating NAV funds will be more aware a stable value fund that drops from they should help manage the results). of, and willing to tolerate, occasional $1.00 to 99 cents). Thus, the ‘‘cliff They also are not primarily designed to fluctuations in fund share prices (largely effect’’ is significantly mitigated in a address the risks associated with resulting from volatility in principal floating NAV fund that prices and deviations in a fund’s NAV caused by that had been previously obscured).490 rounds share prices to four decimal portfolio losses or other credit events; This may result in more efficient places. rather, they are designed to ensure that allocation of risk through a ‘‘sorting As we discuss in more detail below, investors pay the costs of their liquidity effect’’ whereby institutional investors applying a floating NAV only to and allow funds time to manage heavy in prime funds either remain in a institutional investors investing in floating NAV money market fund and prime funds and allowing retail 485 See infra section III.C.2; see also Schwab accept the risks of regular principal investors to continue to invest in a Comment Letter (agreeing that segregating institutional investors from retail investors would stable value product recognizes the ‘‘reduce the chance that retail investors, who tend 488 Mutual funds earn money through dividend to be slower to react to market events, will absorb payments, capital gains distributions (increases in 482 Rule 2a–4; see also section 2(a)(41) defining a disproportionate share of the losses if a fund the price of the fund’s portfolio securities), and the term ‘‘value.’’ breaks the buck.’’). increased NAV. See SEC Office of Investor 483 See TIAA–CREF Comment Letter (‘‘Allowing 486 See, e.g., ABA Business Law Comment Letter Education and Advocacy, Mutual Funds, A Guide investors to transact at daily using amortized (‘‘It is more likely, however, that larger institutions for Investors (Aug. 2007), available at http:// pricing in times of stress could lead to dilution of have greater analytical resources than other www.sec.gov/investor/pubs/sec-guide-to-mutual- the remaining investors’ shares as the first institutional investors, such as small pension plans funds.pdf. Money market fund investors may be redeemers in a run on a money market fund would and companies.’’). more likely to focus on the other components of get a higher valuation for their shares based on 487 Several commenters supported our belief that total return in a fund, such as interest or dividends. amortized cost than would subsequent a floating NAV treats shareholders more equitably 489 Such principal volatility may be even less redeemers.’’). than under current rule 2a–7. See, e.g., Deutsche apparent if the fund’s sponsor provides support for 484 See Proposing Release, supra note 25, at Comment Letter; TIAA–CREF Comment Letter; the fund. See supra section II.B.4. section II.B.1. Systemic Risk Council Comment Letter. 490 See, e.g. Vanguard Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47779

volatility 491 or move their assets into experience any gains or losses in $10.000).498 Accordingly, the final alternative investment products better principal when they transact in money amendments change the rounding suited to their actual risk tolerance.492 market fund shares, will more fully convention for money market funds that Accordingly, the shareholders who reveal the risk from changes in the are required to adopt a floating NAV— remain in institutional prime money fund’s principal value to shareholders. from penny rounding (i.e., to the nearest market funds must be prepared to Finally, some commenters also one percent) to ‘‘basis point’’ rounding experience gains and losses in principal suggested that enhanced disclosure (i.e., to the nearest 1/100th of one on a regular basis, which may result in (including daily Web site reporting of percent), which is a more precise those remaining investors being less shadow NAVs), rather than a floating standard than other mutual funds use likely to redeem at the first sign that a NAV, would be a more efficient and less today. money market fund may experience costly way to achieve the same goal.496 We proposed to require that such principal volatility. We agree that daily disclosure of funds’ institutional prime funds use basis point Some commenters recognized that shadow NAVs does improve visibility of rounding and we noted that basis point making principal gains and losses more risk to some degree, by making the rounding appeared to be the level of apparent to investors could recalibrate information about NAV fluctuations sensitivity that would be required if investors’ perceptions of the risks available to investors should they gains and losses were to be regularly inherent in money market funds.493 A choose to seek it out. But the mere reflected in the share price of money number of commenters argued, availability of this information cannot market funds in all market however, that institutional investors provide the same effect that is provided environments, including relatively who invest in money market funds that by institutions experiencing actual stable market conditions. We also noted will be subject to a floating NAV are fluctuations in the value of their that this level of precision may help well aware of the risks of money market investments (or acknowledging, through more effectively inform investor funds and that money market fund their investment in a fully disclosed expectations regarding the floating shares may fluctuate in value.494 But nature of their shares.499 In money contrary to institutional investors’ floating NAV investment product, their willingness to accept daily fluctuations market funds today, there is no purported existing knowledge of those principal volatility unless the fund risks, when the reality of potential in share price value), which will be provided by a floating NAV. breaks the buck, and thus this indicator principal losses became more apparent of risk may not have always been during the financial crisis, many of 4. Money Market Fund Pricing readily apparent.500 them redeemed heavily from money As discussed in the Proposing market funds.495 Our floating NAV Having determined to adopt the Release, we considered, as an reform, by requiring that investors floating NAV reform for institutional alternative to the basis point rounding prime funds, there is a separate (albeit requirement that we are adopting today 491 We acknowledge, however, that although we related) issue of how to price the shares (which is a condition for relying on rule expect money market fund shares priced to four for transactions. Today, for the reasons decimal places likely will fluctuate on a somewhat 2a–7 for institutional prime money discussed previously in this section, we market funds), requiring institutional regular basis, they are not likely to fluctuate daily are amending rule 2a–7 to eliminate the primarily due to the high quality and short duration prime funds to price and transact in of the fund’s underlying portfolio securities. A few exemption that currently permits fund shares at a precision of 1/10th of commenters argued that a floating NAV will not institutional prime funds to maintain a one percent (which is typically the necessarily inform investors because NAVs may not stable NAV through amortized cost fluctuate much. See, e.g., Federated IV Comment equivalent of three decimal places at Letter; HSBC Comment Letter; ICI Comment Letter. valuation and/or penny rounding 497 $10.00 share price) (‘‘10 basis point Our staff estimates, based on a historical analysis pricing. We are also adopting, as rounding’’), like other mutual funds. But of money market fund shadow prices, that money proposed, an additional requirement in the Proposing Release, we noted our market funds would have floated just over 50% of that these money market funds value the time if priced to four decimal places. See infra concern that 10 basis point rounding note 502 and accompanying text. their portfolio assets and price fund may not be sufficient to ensure that 492 See, e.g. Vanguard Comment Letter (‘‘The shares by rounding the fund’s current investors can regularly observe the reason the floating NAV would mitigate the risk of NAV to four decimal places in the case investment risks that are present in disruptive shareholder redemptions in institutional of a fund with a $1.0000 share price or prime MMFs is that the process of moving from a money market funds, particularly if stable NAV to a floating NAV will force the an equivalent or more precise level of funds manage themselves in such a way shareholders of those funds, which tend to be accuracy for money market funds with that their NAVs remain constant or concentrated with professional investors who a different share price (e.g., a money nearly constant.501 cannot withstand any share price movement, into market fund with a $10 target share different investment vehicles. The shareholders In considering whether to require who remain will have a greater tolerance for loss, price could price its shares at basis point rounding or, instead, to making them less likely to flee at the first sign of allow 10 basis point rounding, we have stress.’’). 496 See, e.g., Federated IV Comment Letter; ICI looked to the potential for price 493 See, e.g., Schwab Comment Letter; Fin. Svcs. Comment Letter; J.P. Morgan Comment Letter; Roundtable Comment Letter; Boston Federal SIFMA Comment Letter; Chamber II Comment Reserve Comment Letter. Letter. A few commenters suggested that money 498 See rule 2a–7(c)(1)(ii). Mutual funds that are 494 See, e.g., Federated IV Comment Letter (citing market funds be required to transact in fund shares not relying on the exemptions provided by rule 2a– to comments submitted on the FSOC Proposed to the same level of precision as disclosed on fund 7 today are required to price and transact in fund Recommendations); Hanson et al. Comment Letter. Web sites, which is the approach that we are shares rounded to a minimum of 1/10th of 1 Commenters also noted that investors already adopting today. See, e.g., Fidelity Comment Letter percent, or three decimal places. See ASR 219, understand that money market funds can ‘‘break the (stating that money market funds should disclose supra note 5. buck.’’ See, e.g., Comment Letter of OFI Global (on fund Web sites) the NAV to the same precision 499 See Proposing Release, supra note 25, at Asset Management, Inc. (Sept. 17, 2013) as it prices its shares for transactions in order to section III.A.2. (‘‘Oppenheimer Comment Letter’’); Dreyfus avoid opportunities based on asymmetry 500 Some commenters recognized that making Comment Letter; UBS Comment Letter; Wells Fargo of information). gains and losses more apparent to investors could Comment Letter; Comment Letter of Key Bank, NA 497 As discussed further below, under our final help recalibrate investors’ perceptions of the risks (Sept. 16, 2013) (‘‘Key Bank Comment Letter’’). rule amendments, government and retail money inherent in money market funds. See, e.g., Schwab 495 Some commenters agreed with this view. See, market funds will be permitted to use the amortized Comment Letter; Fin Svcs. Roundtable Comment e.g., American Bankers Ass’n Comment Letter; cost method and/or penny-rounding method to Letter; Boston Federal Reserve Comment Letter. Angel Comment Letter. maintain a stable price per share as they do today. 501 See supra note 491.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47780 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

fluctuations under the two approaches. believe this may, in turn, have two consistency in pricing among all Based on our staff analysis of Form N– potential effects that are consistent with floating NAV mutual funds and this MFP data between November 2010 and our overall goal of addressing features in could reduce investors’ incentives to November 2013, 53% of money market money market funds that can make reallocate assets into other potentially funds have fluctuated in price over a them susceptible to heavy redemption. riskier floating NAV mutual funds (e.g., twelve-month period with a NAV priced First, to the extent that some of these ultra-short bond funds) that some using basis point rounding, compared investors become more aware of the commenters suggested may appear to with less than 5% of money market risks, they may develop an increased present less volatility. A number of funds that would have fluctuated in risk tolerance that could help make commenters argued for this alternative, price using 10 basis point rounding.502 them less prone to run.507 Second, by suggesting that money market funds We recognize that, either way, this helping make the risk more apparent should not be required to use a more limited fluctuation in prices is the result through periodic price fluctuations, precise rounding convention than what of the nature of money market fund basis point rounding may help signal to is required of other mutual funds.510 portfolios, whose short duration and/or those investors who cannot tolerate the Notwithstanding these potential high quality generally results in risk associated with the fluctuating NAV benefits, as discussed above we believe fluctuations in value primarily when that they should migrate to other there are sufficient countervailing there is a credit deterioration or other investment options, such as government considerations that make it appropriate significant market event.503 Because of funds.508 Because basis point rounding to require basis point rounding for the nature of money market fund is, as the staff’s study demonstrated, institutional prime money market funds. portfolios, pricing with the accuracy of more likely to produce price Further, we are requiring this additional basis point rounding should better fluctuations than 10 basis point level of precision because institutional reflect the nature of money market rounding, we believe it is more likely to prime money market funds are distinct funds as an investment product by have these desired effects.509 from other mutual funds in their regularly showing market gains and regulatory structure, purpose, and a. Other Considerations losses in an institutional prime money investor risk tolerance, as well as the market fund’s portfolio.504 We recognize that 10 basis point risks they pose of investor dilution and After considering the results of the rounding would provide certain to well-functioning markets. staff’s analysis, we are persuaded to benefits. For example, it could provide Accordingly, we believe on balance that require basis point rounding. We believe it is appropriate to require these money that some of the institutional investors temporary changes in the value of their shares.’’); market funds to use a more precise in these funds may not appreciate the Comment Letter of Federated Investors, Inc. (May pricing and rounding convention than 19, 2011) (available in File No. 4–619) (‘‘Federated risk associated with money market May 2011 Comment Letter’’) (stating that ‘‘managers used by other mutual funds. funds.505 As for this subset of would employ all manners of techniques to Some commenters also argued that institutional investors, we believe that minimize the fluctuations in their funds’ NAVs’’ enhanced disclosure (including daily the basis point rounding requirement and, therefore, ‘‘[i]nvestors would then expect the Web site reporting of shadow NAVs), funds to exhibit very low volatility, and would may accentuate the visibility of the risks redeem their shares if the volatility exceeded their would be a more efficient and less 511 in money market funds by causing these expectations’’). As discussed above, we believe that costly way to achieve the same goal. shareholders to experience gains and our floating NAV reform improves the allocation of We agree that daily disclosure of funds’ losses when the funds’ value fluctuates risk and should result in better-informed investors shadow NAVs does improve visibility of 506 that, by choosing to invest in a floating NAV, risk to some degree, by making the by 1 basis point or more. We further appreciate and are willing to tolerate the risks of principal volatility, even if those fluctuations do information about NAV fluctuations 502 Our staff has updated its analysis from the not occur on a daily basis. See supra section available to investors should they discussion in the Proposing Release. See Proposing III.B.3.c. choose to seek it out. But we are Release, supra note 25, at section III.A.2 and n.164. 507 Several commenters agreed with this position. skeptical that, as to the subset of 503 See, e.g., Comment Letter of Arnold & Porter See, e.g., Comment Letter of Eric S. Rosengren, LLP on behalf of Federated Investors (Elimination President, Federal Reserve Bank of Boston, et al. institutional investors who are less of the Use of Amortized Cost Method of Valuation (Sept. 12, 2013) (‘‘Fed Bank President Comment aware of the risks, the mere availability by Stable Value Money Market Funds) (Sept. 16, Letter’’) (‘‘We agree with the SEC’s position that a of this information can provide the same 2013) (‘‘Federated VI Comment Letter’’). floating NAV requirement, if properly level of impact than is provided by 504 See HSBC Comment Letter. implemented, could recalibrate investors’ actually experiencing fluctuations in the 505 To be sure, this may not generally include the perception of the risks inherent in a fund by more sophisticated institutional investors who have ‘making gains and losses a more regularly investment value (or acknowledging, professional financial experts advising them and observable occurrence’.’’); HSBC Comment Letter. through these investors’ investment in a carefully monitoring their investments. See, e.g., 508 See, e.g., Fed Bank President Comment Letter fully disclosed floating NAV investment Federated IV Comment Letter (citing to comments (‘‘Because a constant NAV MMMF generally draws product, their willingness to accept submitted on the FSOC Proposed risk-averse investors, it is likely that given an Recommendations; Hanson et al. Comment Letters). appropriate transition period, the investor base daily fluctuations in share price value), But within the class of institutional investors, we would either change or become more tolerant of which will be provided by a floating understand that there are many less sophisticated NAV fluctuations, lowering the chance of NAV priced using basis rounding. In a investors—e.g., smaller, closely held corporations— destabilizing runs.’’). similar vein, one commenter suggested who rely on money market funds to manage their 509 We are concerned that, were we to adopt 10 that, as an alternative to a floating NAV, cash flow but who are not fully aware of the risks basis point rounding, institutional prime money and the potential for loss. market funds would not regularly float during we consider a modified penny-rounding 506 See, e.g., Report of the President’s Working normal market times, in which case certain pricing method whereby a money Group on Financial Markets, Money Market Fund institutional investors may not fully appreciate that market fund would be permitted to Reform Options (Oct. 2010) (‘‘PWG Report’’), the investment has risks and they might thus invest calculate an unrounded NAV once each available at http://www.treasury.gov/press-center/ in the product despite their lower risk tolerance. press-releases/Documents/ See, e.g., PWG Report, supra note 506, at 10 10.21%20PWG%20Report%20Final.pdf, at 22 (‘‘Investors have come to view MMF shares as 510 See, e.g., BlackRock II Comment Letter; Legg (‘‘Investors’ perceptions that MMFs are virtually extremely safe, in part because of the funds’ stable Mason & Western Asset Comment Letter; Fidelity riskless may change slowly and unpredictably if NAVs and sponsors’ record of supporting funds that Comment Letter. NAV fluctuations remain small and rare. MMFs might otherwise lose value. MMFs’ history of 511 See, e.g., Federated IV Comment Letter; ICI with floating NAVs, at least temporarily, might even maintaining stable value has attracted highly risk- Comment Letter; J.P. Morgan Comment Letter; be more prone to runs if investors who continue to averse investors who are prone to withdraw assets SIFMA Comment Letter; Chamber II Comment see shares as essentially risk-free react to small or rapidly when losses appear possible.’’). Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47781

day and therefore, absent a significant relevant in our risk monitoring efforts. disclosure requirements we are adopting market event, use the previous day’s For example, reporting of shadow prices today, are designed to help investors portfolio valuation for any intraday to four decimal places provides a level understand these differences and the NAV calculations.512 Under this of precision (as compared with three associated risks. approach, money market funds would decimal place rounding) needed for our b. Implementation of Basis Point disclose their basis-point rounded price, staff to fully evaluate and monitor the Rounding but only transact at the penny-rounded impact of credit events on money price.513 Although we recognize that market fund share prices.518 One commenter noted that basis point such an approach would likely retain Some commenters also stated that rounding ‘‘should be relatively the efficiencies associated with ultra-short bond funds priced using 10 straightforward for the industry to amortized cost valuation, this basis point rounding might appear less accommodate.’’ 523 A number of alternative is not without other risks, volatile than money market funds commenters, however, objected to our including the use of potentially stale priced using basis point rounding.519 As proposed amendment to require that valuation data. More significantly, a result, these commenters noted what floating NAV money market funds price unlike our floating NAV reform, this they viewed as the undesirable effect and transact their shares at the fourth alternative does not address the first- that investors might be incentivized to decimal place. Commenters stated that mover advantage or risks of investor move their assets into ultra-short bond pricing and transacting at four decimal dilution discussed above.514 funds that have similar investment places (as opposed to reporting only Several commenters argued that basis parameters to money market funds but their shadow price at four decimal point rounding is an artificial means to are not required to adhere to the risk- places) would be operationally increase the volatility of floating NAV limiting conditions of rule 2a–7.520 expensive and overly burdensome funds and would mislead investors by Based on our staff analysis of because money market fund systems are exaggerating the risks of investing in Morningstar data between November typically designed for processing all money market funds compared to ultra- 2010 and November 2013, 100% of mutual funds,524 which generally short bond funds, and suggested that ultra-short bond funds have fluctuated process and record transactions rounded instead we should adopt 10 basis point in price over a twelve-month period to the nearest penny (which is typically rounding.515 For example, one with a NAV priced using 10 basis point the equivalent of three decimal places at commenter noted that basis point rounding, compared with 53% of money a $10.00 share price).525 We rounding is so sensitive that it might market funds that would have acknowledge that money market funds, produce price distinctions among funds fluctuated in price using basis point intermediaries, and shareholders will that result merely from the valuation rounding.521 Accordingly, we do not likely incur significant costs in order to model used by a pricing service, rather believe that it is likely investors will modify their systems to accommodate than from a difference in the intrinsic view ultra-short bond funds as less pricing and transacting in fund shares value of the securities (‘‘model volatile than money market funds rounded to four decimals. We discuss noise’’).516 We do not believe that basis priced using basis point rounding. We these costs in section III.B.8.a below. We point rounding will mislead investors, also note, however, that because floating understand, however, that because nor do we believe that price changes at NAV money market funds and ultra- virtually all mutual funds (including the fourth decimal place will generally short bond funds invest in different money market funds), regardless of be a result of ‘‘model noise’’ rather than securities and are subject to different price, round their NAV to the nearest reflecting changes in the market value of regulatory requirements (including risk- penny, these system change costs will 517 the fund’s portfolio. We note that limiting conditions), investors may be incurred if we require money market today many money market funds are consider these factors when evaluating funds to float their NAV, regardless of voluntarily disclosing their shadow the risk profile of these different whether we require the use of basis price with basis point rounding, and 522 point rounding (unless funds were to re- investment products. Existing 526 they are prohibited from doing so if the disclosure requirements, along with the price to $10.00 per share). shadow price was misleading to amendments to money market fund investors. Funds have also been 523 Comment Letter of Interactive Data required to report their shadow NAVs to Corporation (Sept. 17, 2013) (‘‘Interactive Data 518 Basis point precision will also enable our staff Comment Letter’’). us on Form N–MFP priced to the fourth to monitor the effect of shifts in interest rates on 524 See supra note 500. decimal place since the inception of the money market fund share prices (particularly in 525 See, e.g., BlackRock II Comment Letter; form, and we have found the shadow more regular market conditions). Invesco Comment Letter; Schwab Comment Letter; NAVs priced at this level useful and 519 See, e.g., BlackRock II Comment Letter; Legg Mason & Western Asset Comment Letter; ICI Stradley Ronon Comment Letter; SIFMA Comment Comment Letter. Letter; Fidelity Comment Letter. 526 512 We understand that virtually all systems See Comment Letter of Federated Investors, 520 We note that other features of ultra-short bond round to the nearest penny when processing fund Inc. (Nov. 6, 2013); see also Comment Letter of funds may counter this incentive, including that share transactions. See ICI Comment Letter. Arnold & Porter LLP on behalf of Federated they are generally not a cash equivalent for Investors (July 16, 2014). We note that this Accordingly, if a money market fund continued to accounting purposes and their less favorable tax be priced at a dollar, even if rounded to the third alternative, if combined with fees and gates, is very treatment than what the Treasury Department and similar to the fees and gates alternative we decimal place, we understand that similar IRS have proposed and issued today. See infra significant systems changes would be necessary to proposed (which included a requirement for penny- section III.B.6. rounded pricing). We discuss why we have chosen transact and report in fund shares priced at $1.000. 521 Using Morningstar data, our staff analyzed the not to adopt that alternative in section III.L.1. We note that money market funds would be able monthly NAV fluctuations of 54 active ultra-short to avoid these costs and move floating NAV money 513 Id. bond fund share classes during November 2010 and market funds to existing mutual fund systems by re- 514 See supra section III.B.3. November 2013. The money market fund data was pricing fund shares to $100.00 per share, under a 515 See, e.g., Schwab Comment Letter; Stradley obtained using Form N–MFP data. See supra note basis point rounding requirement. See id. We Ronon Comment Letter; SIFMA Comment Letter; 502 and accompanying text. recognize that such a transition might create other Legg Mason & Western Asset Comment Letter; 522 As discussed in infra section III.B.6, the costs, such as proxy solicitation if the fund’s charter Fidelity Comment Letter. Treasury Department and the IRS will issue today prohibits such a re-pricing and potential investor 516 See Goldman Sachs Comment Letter. a revenue procedure that exempts from the wash resistance to using a cash management product that 517 See, e.g., HSBC Comment Letter (noting that sale rule dispositions of shares in any floating NAV prices based on a $100.00 initial share price. See basis point rounding would ‘‘better reflect gains and money market fund. This exemption does not apply id. (noting that basis point rounding would be losses’’ than 3 decimal place rounding). to ultra-short bond funds. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47782 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

A few commenters also noted that be treated more equitably as they absorb stable NAV funds.531 Most significantly, although basis point rounding may their proportionate share of gains, commenters argued that prohibiting the convey the risk of a floating NAV to losses, and costs. In addition, rounding use of amortized cost valuation would investors more clearly by reflecting very prices and transacting in fund shares at hinder money market funds’ ability to small fluctuations in value, it does so at four decimal places may help to further provide for intraday purchases and a significant cost—increasing the tax reduce the incentive for shareholders to redemptions and same-day settlement and accounting burdens associated with redeem shares ahead of other investors because of the increased time required the realized gains and losses that would by helping less informed investors to strike a market-based price.532 One result from more frequent changes in a better understand the inherent risks in commenter noted, for example, that if a money market fund’s NAV per share.527 money market funds. As such, the risk money market fund prices at the close As discussed in section III.B.6.a below, of heavy share redemptions may of the New York Stock Exchange, the however, the Treasury Department and decrease as investors experience greater fund may not be able to complete the IRS are today proposing a new information efficiency and allocative penny rounding process, wire regulation that would permit investors efficiency by better understanding the redemption proceeds, and settle fund to elect to use a ‘‘simplified aggregate risks more closely and directing their mark-to-market method’’ to determine trades before the close of the investments accordingly. Reducing the 533 annual realized gains or losses and risk of heavy share redemptions by Fedwire. Commenters also argued therefore eliminate the need to track removing the first-mover advantage that substituting penny rounding purchase and sale transactions. should promote capital formation by pricing for amortized cost valuation Therefore, it is unlikely that there will making money market funds a more would increase costs and operational be increased operational burdens that stable source of financing for issuers of complexity without providing result from tax or accounting costs short-term credit instruments. We corresponding benefits.534 A few associated with more frequent realized recognize, however, that as discussed commenters also suggested that, in gains or losses.528 below in section II.K, to the extent that assessing whether to eliminate c. Economic Analysis money flows out of institutional prime amortized cost valuation for securities floating NAV funds and into alternative that mature in more than 60 days, we Under our final amendments, and as investment vehicles, capital formation should consider the broader systemic we proposed, institutional prime funds may be adversely affected. implications of a potential shift in will round prices and transact in fund money market fund portfolio holdings shares to four decimal places in the case 5. Amortized Cost and Penny Rounding towards securities that mature within 60 of a fund with a $1.00 target share price for Stable NAV Funds (i.e., $1.0000) or an equivalent or more As discussed above, all money market 531 precise level of accuracy for money See generally BlackRock II Comment Letter; funds that are not subject to our targeted Dreyfus Comment Letter; Federated VI Comment market funds with a different share floating NAV reform may continue to Letter; Wells Fargo Comment Letter; SIFMA price. During normal market conditions, Comment Letter. A number of commenters price fund shares as they do today and rounding prices and transacting in fund suggested that amortized cost is an appropriate use the amortized cost method to value shares at four decimal places will valuation method for money market funds because portfolio securities.529 This approach the characteristics of typical portfolio holdings (i.e., provide investors an opportunity to differs from our 2013 proposal, in which high quality, short duration, and typically held-to- better understand the risks of we proposed to eliminate the use of the maturity) result in minimal differences between a institutional prime funds as an money market fund’s NAV calculated using amortized cost method of valuation for investment option and will provide amortized cost and a fund’s market-based NAV. all money market funds. At that time, See, e.g., Legg Mason & Western Asset Comment investors with improved transparency we stated that amortized cost valuation Letter; UBS Comment Letter; Chamber II Comment in pricing. This should positively affect or penny rounding pricing alone Letter. Commenters also suggested that amortized competition. During times of stress, it cost valuation may increase objectivity and effectively provides the same 50 basis will reduce much of the economic consistency across the fund industry because points of deviation from a fund’s incentive for shareholders to redeem money market instruments do not often trade in the shadow price before the fund must secondary markets and therefore the market-based shares ahead of other investors at a ‘‘break the buck’’ and re-price its shares. prices may be less reliable. See, e.g., Federated VI stable net asset value when the market Comment Letter; Goldman Sachs Comment Letter; Accordingly, and in light of the fact value of portfolio holdings fall and will Legg Mason & Western Asset Comment Letter. that, under our proposal, all money 532 reduce shareholder dilution. As such, See, e.g., Federated VI Comment Letter market funds (including stable NAV (suggesting that it would take a minimum of three the risk of heavy share redemptions funds) would be required to disclose on to four hours to strike a market-based NAV should decrease, and shareholders will a daily basis their fund share prices (assuming there are no technology problems), compared with as little as one hour for a fund using with their portfolios valued using workable (without significant costs) if money penny-rounded pricing and amortized cost market funds moved to a $100.00 price per share, market-based factors (rather than valuation). See also, e.g., Legg Mason & Western but suggesting that investors would be unlikely to amortized cost), we proposed to Asset Comment Letter; SunGard Comment Letter; use a cash management product priced at this eliminate the use of amortized cost for UBS Comment Letter; ICI Comment Letter; level). We agree with this commenter that it is stable NAV funds (but to continue to BlackRock II Comment Letter. unlikely that investors would invest in a money 533 See Federated VI Comment Letter. 530 market fund that implements an initial $100.00 permit penny rounding pricing). 534 See, e.g., Federated VI Comment Letter (noting share price in a floating NAV money market fund. A number of commenters objected to that June 2012 survey data from Form N–MFP If a money market fund chose to do so, we estimate eliminating amortized cost valuation for filings shows that approximately 72% of prime that each fund would incur one-time proxy money market fund assets had maturities of less solicitation costs of $100,000. See infra note 735 than 60 days). As a result, this commenter suggests and accompanying text. 529 Stable NAV money market funds may also that substituting penny rounding for amortized cost 527 See, e.g., BlackRock II Comment Letter; UBS choose to use the penny rounding method of imposes disproportionately high costs without Comment Letter. pricing fund shares. Under our amendments, incremental benefits because a large portion of fund 528 As discussed in section III.B.6.a.i, however, government and retail money market funds will be portfolios will continue to use amortized cost under investors are likely to incur additional, although permitted to maintain a stable NAV. See infra current Commission guidance. See also, e.g., Legg small, realized gains and/or losses as a result of sections III.C.1 and III.C.2. Mason & Western Asset Comment Letter; SunGard more frequent fluctuations in the share price under 530 See Proposing Release, supra note 25, at Comment Letter; UBS Comment Letter; ICI a floating NAV priced to four decimal places. section III.A.3. Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47783

days (in order to avoid the need to use importance of amortized cost valuation money market funds, any changes in tax market-based values).535 under our final rules, we are providing burdens likely would be minimal. We no longer believe that, as we expanded valuation guidance related to In the Proposing Release, we also stated in the Proposing Release, there the use of amortized cost and other noted that tax rules generally require would be little additional cost to funds related valuation matters in section mutual funds or intermediaries to report if we eliminated amortized cost III.D. to the IRS and shareholders certain valuation (and permitted only penny information about sales of shares, rounding) for all money market funds 6. Tax and Accounting Implications of including sale dates and gross proceeds. (including stable NAV money market Floating NAV Money Market Funds If the shares sold were acquired after funds). Our belief was, in part, based on a. Tax Implications January 1, 2012, the fund or the fact that, as proposed (and as we are intermediary would also have to report In the Proposing Release, we adopting today), all money market funds basis and whether any gain or loss is discussed two principal tax would be required to post on their Web long or short term.536 At the time of the consequences of requiring certain sites daily shadow prices (determined Proposing Release, Treasury regulations money market funds to implement a using market-based values) rounded to excluded sales of stable value money floating NAV, potentially causing four decimal places. Because, under our market funds from this transaction shareholders to experience taxable gains proposal money market funds would be reporting obligation.537 We noted that or losses. First, under tax rules required to obtain daily market-based mutual funds and intermediaries (and, applicable at the time of the Proposing valuations in order to post daily shadow we anticipated, floating NAV money prices to fund Web sites, we believed Release, floating NAV money market market funds) are not required to make that funds would have this information funds (or their shareholders) would be reports to certain shareholders, readily available (and therefore not required to track the timing and price of including most institutional investors. require the use of amortized cost). purchase and sale transactions in order The regulations call these shareholders Notwithstanding this, commenters to determine and report capital gains or ‘‘exempt recipients.’’ 538 noted, however, the ability to use losses. Second, floating NAV funds We have been informed that the amortized cost valuation provides a would be subject to the ‘‘wash sale’’ Treasury Department and the IRS today significant benefit to money market rule, which postpones the tax benefit of will propose new regulations to make funds when compared to penny losses when shareholders sell securities all money market funds exempt from rounding pricing—the ability to provide at a loss and, within 30 days before or this transaction reporting requirement, intraday liquidity to shareholders in a after the sale, buy substantially identical and the exemption is to be formally cost-effective and efficient manner. We securities. These tax consequences applicable for calendar years beginning agree with commenters that eliminating generally do not exist today, because on or after the date of publication in the amortized cost valuation would likely purchases and sales of money market Federal Register of a Treasury Decision hinder the ability of funds to provide fund shares at a stable $1.00 share price adopting those proposed regulations as frequent intraday liquidity to do not generate gains or losses. Because final regulations. Importantly, the shareholders and may impose we are today adopting the floating NAV Treasury Department and the IRS have unnecessary costs and operational requirement for certain money market informed us that the text of the burdens on stable NAV money market funds as part of our reforms, we have proposed regulations will state that funds. This is particularly true in light continued to analyze the related tax persons subject to transaction reporting of the fact that under existing regulatory effects. As discussed below, the may rely on the proposed exemption for restrictions and guidance, a material Treasury Department and IRS will all calendar years prior to the final intraday fluctuation would still have to address these tax concerns to remove regulations’ formal date of applicability. be recognized in fair valuing the almost all tax-related burdens associated Therefore, the Treasury and IRS relief security. We therefore believe that with our floating NAV requirement. described above is available eliminating amortized cost valuation in i. Accounting for Net Gains and Losses immediately. the context of stable NAV funds would We noted in the Proposing Release be contrary to a primary goal of our As we discussed in the Proposing our understanding that the Treasury rulemaking—to preserve to the extent Release, we expected taxable investors Department and the IRS were feasible, while protecting investors and in floating NAV money market funds, considering alternatives for modifying the markets, the benefits of money like taxable investors in other types of forms and guidance: (1) To include net market funds for investors and the mutual funds, to experience gains and transaction reporting by the funds of short-term funding markets by retaining losses. Accordingly, we expected realized gains and losses for sales of all a stable NAV alternative. shareholders in floating NAV money mutual fund shares; and (2) to allow Accordingly, we are not adopting the market funds to owe tax on any realized summary income tax reporting by proposed amendments that would gains, to receive tax benefits from any shareholders. Many commenters argued prohibit stable NAV money market realized losses, and to be required to that this potential relief does not go far funds from using amortized cost to determine those amounts. However, enough and noted that, because value portfolio securities. Rather, under because it is not possible to predict the institutions are exempt recipients, these the final amendments, stable NAV funds timing of shareholders’ future may continue to price fund shares as transactions and the amount of NAV 536 The new reporting requirements (often they do today, using the amortized cost fluctuations, we were not able to referred to as ‘‘basis reporting’’) were instituted by section 403 of the Energy Improvement and method to value portfolio securities estimate with any specificity the Extension Act of 2008 (Division B of Pub. L. 110– and/or the penny rounding method of amount of any increase or decrease in 343) (26 U.S.C. 6045(g), 6045A, and 6045B); see pricing. Given the continued shareholders’ tax burdens. Because we also 26 CFR 1.6045–1; Internal Revenue Service expect that investors in floating NAV Form 1099–B. These new basis reporting 535 See, e.g., Stradley Ronon Comment Letter; requirements and the pre-2012 reporting money market funds will experience requirements are collectively referred to as SIFMA Comment Letter. As discussed in this relatively small fluctuations in value, section, we are not eliminating, as proposed, the ‘‘transaction reporting.’’ use of amortized cost valuation for stable NAV and because many money market funds 537 See 26 CFR 1.6045–1(c)(3)(vi). money market funds under our final amendments. may qualify as retail and government 538 See 26 CFR 1.6045–1(c)(3)(i).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47784 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

investors would still incur costs to build using their existing shareholder account would be required to establish systems systems to track and report their own statements, rather than tracking the capable of identifying wash sale basis information and calculate gains basis for each share. We have also transactions, determining if they meet and losses.539 We recognized in the considered the effect of this relief on the the de minimis criterion, and adjusting Proposing Release the limitations of this tax-related burdens associated with shareholder basis when they do not.545 potential tax relief. accounting for net gains and losses in We understand that these concerns We have been informed that the our discussion of operational will not be applicable to floating NAV Treasury Department and the IRS today implications below.541 money market funds. First, under the will propose new regulations that will The Treasury Department and IRS simplified aggregate method of provide more comprehensive and have informed us of their intention to accounting described above, taxpayers effective relief than the approaches proceed as expeditiously as possible will compute aggregate gain or loss for described in the Proposing Release. with the process of considering a period, and gain or loss will not be These regulations will, as suggested by comments and issuing final regulations associated with any particular one commenter,540 make a simplified regarding the simplified aggregate disposition of shares. Thus, the wash aggregate method of accounting method of accounting for floating NAV sale rule will not affect any shareholder available to investors in floating NAV money market funds. We note that that chooses to use the simplified money market funds and are proposed money market funds and their aggregate method. Second, for any to be formally applicable for taxable shareholders may begin using the shareholder that does not use the years ending after the publication in the simplified method of accounting as simplified aggregate method, the Federal Register of a Treasury Decision needed before the regulations are Treasury Department and the IRS today adopting the proposed regulations as finalized. Were the Treasury will release a revenue procedure that final regulations. Importantly, the Department and IRS to withdraw or exempts from the wash sale rule Treasury Department and the IRS have materially limit the relief in the dispositions of shares in any floating informed us that the text of the proposed regulations, the Commission NAV money market fund. This wash- proposed regulations will state that would expect to consider whether any sale tax relief will be available taxpayers may rely on the proposed modifications to the reforms we are beginning on the effective date of our rules for taxable years ending on or after adopting today may be appropriate. floating NAV reforms (60 days after the date that the proposed regulations publication in the Federal Register). We ii. Wash Sales are published in the Federal Register. have also considered the effect of this That is, because investors may use this As discussed in the Proposing relief from the tax-related burdens method of accounting before final Release, the ‘‘wash sale’’ rule applies associated with the wash sale rule in regulations are published, the Treasury when shareholders sell securities at a our discussion of operational Department and IRS relief is available as loss and, within 30 days before or after implications below.546 needed before then. the sale, buy substantially identical The simplified aggregate method will securities.542 Generally, if a shareholder b. Accounting Implications allow money market fund investors to incurs a loss from a wash sale, the loss In the Proposing Release, we noted compute net capital gain or loss for a cannot be recognized currently and that some money market fund year by netting their annual instead must be added to the basis of the shareholders may question whether they redemptions and purchases with their new, substantially identical securities, can treat investments in floating NAV annual starting and ending balances. which postpones the loss recognition money market funds as ‘‘cash Importantly, for shares in floating NAV until the shareholder recognizes gain or equivalents’’ on their balance sheets. As money market funds, the simplified loss on the new securities.543 Because we stated in the Proposing Release, and aggregate method will enable investors many money market fund investors as we discuss below, it is the to determine their annual net taxable automatically reinvest their dividends Commission’s position that, under gains or losses using information that is (which are often paid monthly), normal circumstances, an investment in currently provided on shareholder virtually all redemptions by these a money market fund with a floating account statements and—most investors would be within 30 days of a NAV under our final rules meets the important—will eliminate any dividend reinvestment (i.e., purchase) definition of a ‘‘cash equivalent.’’ 547 requirement to track individually each and subject to the wash sale rule. Many commenters agreed with our share purchase, each redemption, and Subsequent to our proposal, the position regarding the treatment of the basis of each share redeemed. We Treasury Department issued for investments in floating NAV money expect that the simplified aggregate comment a proposed revenue procedure market funds as cash equivalents.548 method will significantly reduce the under which redemptions of floating Most of these commenters, however, burdens associated with tax NAV money market fund shares that suggested that the Commission issue a consequences of the floating NAV generate losses below 0.5% of the more formal pronouncement and/or requirement because funds will not taxpayer’s basis in those shares would requested that FASB and GASB codify have to build new tracking and not be subject to the wash sale rule (de our position.549 A few commenters reporting systems and shareholders will minimis exception).544 Many be able to calculate their tax liability commenters noted, however, that the de 545 See, e.g., ICI Comment Letter; BlackRock II minimis exception to the wash sale rule Comment Letter; Schwab Comment Letter. 546 539 See, e.g., BlackRock II Comment Letter; does not mitigate the tax compliance See infra section III.B.8. Schwab Comment Letter; ICI Comment Letter. burdens and operational costs that 547 See supra section III.A.7 for a discussion of 540 See Comment Letter of George C. Howell, III, accounting implications related to the liquidity fees Hunton & Williams LLP, on behalf of Federated and gates aspect of our final rules. 541 See infra section III.B.8. 548 Investors (Tax Compliance Issues Created by See, e.g., BlackRock II Comment Letter; 542 Floating NAV) (May 1, 2014) (‘‘Federated XII See 26 U.S.C. 1091. Fidelity Comment Letter; Deloitte Comment Letter; Comment Letter’’) (suggesting that a ‘‘mark to 543 Id. Ernst & Young Comment Letter. market’’ tax accounting method would 544 See IRS Notice 2013–48, Application of Wash 549 See, e.g., ICI Comment Letter; BlackRock II meaningfully resolve the more significant tax issue Sale Rules to Money Market Fund Shares (proposed Comment Letter; Fidelity Comment Letter. We do (as compared with ‘‘wash sale’’ provisions) July 3, 2013), available at http://www.irs.gov/pub/ not have authority over the actions that GASB may resulting from the floating NAV reform). irs-drop/n-13-48.pdf. or may not take with respect to local government

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47785

suggested that our floating NAV transactions.554 Under Rule 10b–10(a), a requirement, arguing that there would requirement raises uncertainty about broker-dealer generally must provide be significant costs associated with whether floating NAV money market customers with information relating to broker-dealers providing immediate fund shares could continue to be their investment decisions at or before confirmations.559 Commenters noted classified as cash equivalents,550 and the completion of a securities that there would be costs of one commenter disagreed and suggested transaction.555 Rule 10b–10(b), however, implementing new systems to generate that it is likely that under present provides an exception for certain confirmations and ongoing costs related accounting standards investors would transactions in money market funds that to creating and sending trade-by-trade have to classify investments in shares of attempt to maintain a stable NAV and confirmations.560 We estimate below the floating NAV money market funds as where no sales load or redemption fee costs to broker-dealers associated with trading securities or available-for-sale is charged. The exception permits providing securities transaction securities (rather than as a cash broker-dealers to provide transaction confirmations for floating NAV money equivalent).551 We have carefully information to money market fund market funds.561 considered commenters’ views and, for shareholders on a monthly basis (subject We believe that the initial one-time the reasons discussed below, our to certain conditions) in lieu of cost to implement, modify, or reprogram position continues to be that an immediate confirmations for all existing systems to generate immediate investment in a floating NAV money purchases and redemptions of shares of confirmations (rather than monthly market fund under our final rules, under such funds.556 statements) will be approximately normal circumstances, meets the Because share prices of institutional $96,650 on average per affected broker- definition of a ‘‘cash equivalent.’’ A prime money market funds likely will dealer, based on the costs that the more formal pronouncement (as fluctuate, absent exemptive relief, Commission has estimated in a similar requested by some commenters) is not broker-dealers will not be able to context of developing internal order and required because the federal securities continue to rely on the current trade management systems so that a laws provide the Commission with exception under Rule 10b–10(b) for registered security-based entity plenary authority to set accounting transactions in floating NAV money could electronically process 557 standards, and we are doing so here.552 market funds. Instead, broker-dealers transactions and send trade We reiterate our position below.553 will be required to provide immediate acknowledgments.562 In addition, we The adoption of a floating NAV alone confirmations for all such transactions. estimate that 320 broker-dealers that are for certain rule 2a–7 funds will not We note, however, that customer transactions or preclude shareholders from classifying contemporaneous with this Release, the carrying customer funds and securities their investments in money market Commission is providing notice and would be affected by this requirement funds as cash equivalents, under normal requesting comment on a proposed because they would likely be the broker- circumstances, because fluctuations in order that, subject to certain conditions, dealers responsible for providing trade the amount of cash received upon would grant exemptive relief from the confirmations.563 As a result, the redemption would likely be small and immediate confirmation delivery would be consistent with the concept of requirements of Rule 10b–10 for 559 See ICI Comment Letter; SIFMA Comment a ‘known’ amount of cash. As already transactions effected in shares of any Letter at Appendices 1 and 2; Dreyfus Comment open-end management investment Letter; Federated X Comment Letter. exists today with stable share price 560 company registered under the See, e.g., Federated X Comment Letter. money market funds, events may occur 561 Investment Company Act that holds Broker-dealers may not incur all of these costs that give rise to credit and liquidity if the exemptive relief we propose today is adopted. itself out as a money market fund issues for money market funds so that 562 This estimate is based on the following: [(Sr. operating in accordance with rule 2a– shareholders would need to reassess if Programmer (160 hours) at $285 per hour) + (Sr. 7(c)(1)(ii).558 Systems Analyst (160 hours) at $251 per hour) + their investments continue to meet the In the Proposing Release, we (Compliance Manager (10 hours) at $294 per hour) definition of a cash equivalent. requested comment on whether, if the + (Director of Compliance (5 hours) at $426 per hour) + (Compliance Attorney (20 hours) at $291 7. Rule 10b–10 Confirmations Commission adopted the floating NAV per hour)] = $96,650 per broker-dealer. See Trade requirement, broker-dealers should be Acknowledgement and Verification of Security- Rule 10b–10 under the Securities Based Swap Transactions, Exchange Act Release Exchange Act of 1934 (‘‘Exchange Act’’) required to provide immediate confirmations to all institutional prime No. 63727, 76 FR 3859, 3871 n.81 (Jan. 21, 2011). addresses broker-dealers’ obligations to (We note that the original estimate in the Trade confirm their customers’ securities money market fund investors. Acknowledgment release contained a technical Commenters generally urged the error in the calculation stating a cost of $66,650 Commission not to impose such a instead of $96,650 for a security-based swap entity.) investment pools (‘‘LGIPs’’). See infra section A SIFMA survey also indicates that the costs are III.C.4. likely to be below $500,000 per firm. See SIFMA 554 550 See, e.g., J.P. Morgan Comment Letter; 17 CFR 240.10b–10. Comment Letter, at Appendices 1 and 2. According Northern Trust Comment Letter; Boeing Comment 555 17 CFR 240.10b–10(a). to this commenter, after surveying its members, it Letter. 556 17 CFR 240.10b–10(b). found that the vast majority of respondents 551 See, Federated X Comment Letter (citing to 557 See generally Money Market Fund Reform; estimated that initial costs associated with Statement on Financial Accounting Standards No. Amendments to Form PF, Securities Act Release providing confirmation statements would fall below 115); see also infra note 429 and accompanying No. 9408, Investment Advisers Act Release No. $500,000. However, based on the data provided, it text. 3616, Investment Company Act Release No. 30551 was unclear at what level below $500,000 its 552 The federal securities laws provide the (June 5, 2013), 78 FR 36834, 36934 (June 19, 2013); members considered to be the actual cost and Commission with authority to set accounting and see also Exchange Act rule 10b–10(b)(1), (limiting whether the firms were a representative sample reporting standards for public companies and other alternative monthly reporting to money market (e.g., in terms of size and sophistication) of the type entities that file financial statements with the funds that attempt[] to maintain a stable net asset of firms that would be affected. Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) value) (emphasis added). 563 Based on FOCUS Report data as of December and (26); 15 U.S.C. 78c(b), 78l(b) and 78m(b); 558 See Notice of Proposed Exemptive Order 31, 2013, the Commission estimates that there are section 8, section 29(e), section 30, and section Granting Permanent Exemptions Under the approximately 320 broker-dealers that are clearing 37(a) of the Investment Company Act. Securities Exchange Act of 1934 from the or carrying broker-dealers that do not claim 553 We are also amending the Codification of Confirmation Requirements of Exchange Act Rule exemptions pursuant to paragraph (k) of Exchange Financial Reporting Policies to reflect our 10b–10 for Certain Money Market Funds, Exchange Act rule 15c3–3. Because not all of these clearing interpretation under U.S. GAAP, as discussed Act Release No. 34–72658 (July 23, 2014) (‘‘Notice or carrying broker-dealers would necessarily below. See infra section VI. of Proposed Exemptive Order’’). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47786 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Commission estimates initial costs of 8. Operational Implications of Floating Accordingly, consistent with our views $30,928,000 for providing immediate NAV Money Market Funds reflected in the Proposing Release and confirmations for shareholders in a. Operational Implications to Money as discussed below, we continue to institutional prime money market Market Funds and Others in the expect that sub-transfer agents, fund funds.564 Distribution Chain accounting departments, custodians, intermediaries, and others in the To estimate ongoing costs of In the Proposing Release, we stated distribution chain would need to providing immediate confirmations, one that we expect that money market funds develop and overlay additional controls commenter stated that, based on the and transfer agents already have laid the and procedures on top of existing data it had gathered, the median foundation required to use floating systems in order to implement a floating estimated ongoing annual cost NAVs because they are required under NAV on a continual basis.572 In each associated with confirmation statements rule 2a–7 to have the capacity to redeem case, the procedures and controls that would constitute between 10% and 15% and sell fund shares at prices based on support the accounting systems at these of the initial costs.565 To be the funds’ current NAV pursuant to rule entities would have to be modified to conservative, we have estimated that the 22c–1 rather than $1.00, i.e., to transact permit those systems to calculate a ongoing annual costs would constitute at the fund’s floating NAV.568 money market fund’s floating NAV 15% of the initial costs. Applying that Intermediaries, although not subject to periodically each business day and to figure to the initial costs, the rule 2a–7, typically have separate communicate that value to others in the Commission estimates ongoing annual obligations to investors with regard to distribution chain on a permanent basis. the distribution of proceeds received in costs of $4,639,200 for providing Some commenters noted that our connection with investments made or immediate confirmations for floating NAV requirement would assets held on behalf of investors.569 We adversely affect cash sweep programs, shareholders in institutional prime also noted that before the Commission money market funds.566 in which customer cash balances are adopted the 2010 amendments to rule automatically ‘‘swept’’ into investments The Commission notes that benefits 2a–7, the ICI submitted a comment letter in shares of money market funds related to the immediate trade detailing the modifications that would (usually through a broker-dealer or other confirmation requirements under Rule be required to permit funds to transact intermediary). For example, one 10b–10 with respect to institutional at the fund’s floating NAV.570 commenter suggested that sweep prime money market funds are difficult Commenters noted, as we recognized programs cannot accommodate a to quantify as they relate to the in the Proposing Release, however, that floating NAV because such programs are additional value to investors provided some funds, transfer agents, predicated on the return of principal.573 by having more timely confirmations intermediaries, and others in the Another commenter suggested that the with respect to funds that we expect distribution chain may not currently substantial cost and complexity have the capacity to process constantly will experience relatively small associated with intraday pricing makes transactions at floating NAVs, as would fluctuations in value. While the it likely that many intermediaries will be required under our proposal.571 Commission did not receive any discontinue offering floating NAV comments regarding these potential institutional prime money market funds 568 See current rule 2a–7(c)(13). See also 2010 as sweep options, and instead turn to benefits, given that institutional prime Adopting Release, supra note 17, at nn.362–363. alternative investment products, money market funds likely will 569 See, e.g., 2010 Adopting Release, supra note fluctuate in price, some investors may 17, at nn.362–363. Examples of intermediaries that including stable NAV government offer money market funds to their customers funds.574 Although we do not know to find value in receiving information include broker-dealers, portals, bank trust relating to their investment decisions at departments, insurance companies, and retirement plan administrators. See Investment Company Davis Comment Letter’’); Federated IV Comment or before the completion of a securities Letter. 567 Institute, Operational Impacts of Proposed transaction. Redemption Restrictions on Money Market Funds, 572 Even though a fund complex’s transfer agent at 13 (2012), available at http://www.ici.org/pdf/ system is the primary recordkeeping system, there _ _ _ are a number of additional subsystems and ancillary provide rule 10b–10 confirmations to customers of ppr 12 operational mmf.pdf (‘‘ICI Operational Impacts Study’’). systems that overlay, integrate with, or feed to or institutional prime money market funds, the from a fund’s primary transfer agent system, Commission anticipates that this is a conservative 570 See, e.g., Comment Letter of the Investment Company Institute (Sept. 8, 2009) (available in File incorporate custom development, and may be estimate of the number of clearing or carrying proprietary or vendor dependent (e.g., print vendors broker-dealers that would provide trade No. S7–11–09) (‘‘ICI 2009 Comment Letter’’) (describing the modifications that would be to produce trade confirmations). See ICI confirmations to customers in money market funds Operational Impacts Study, supra note 569, at 20. subject to the floating NAV requirement. necessary if the Commission adopted the requirement, currently reflected in rule 2a–7(c)(13), The systems of sub-transfer agents and other parties 564 This estimate is based on the following: that money market funds (or their transfer agents) may also require modifications related to the $96,650 × 320 firms = $30,928,000. have the capacity to transact at a floating NAV, to: floating NAV requirement. We have included these 565 See SIFMA Comment Letter, at Appendices 1 (i) Fund transfer agent recordkeeping systems (e.g., anticipated modifications in our cost estimates and 2. special same-day settlement processes and systems, below. 566 This estimate is based on the following: customized transmissions, and reporting 573 See, e.g., ICI Comment Letter. Another $30,928,000 × 15% = $4,639,200. mechanisms associated with same-day settlement commenter noted that the sweep investment 567 The Commission acknowledges that systems and proprietary systems used for next day product is only feasible in the current stable-NAV shareholders that invest in institutional prime settlement); (ii) a number of essential ancillary environment because the client knows at the time money market funds will continue to have systems and related processes (e.g., systems changes of submitting the purchase order how many shares extensive investor protections separate and apart for reconciliation and control functions, it has purchased, and how many shares it will from the protections provided under rule 10b–10, transactions accepted via the Internet and by phone, receive the next day upon redemption, absent a including that (1) funds subject to the floating NAV modifying related shareholder disclosures and break-the-buck event. See State Street Comment requirement will continue to be subject to the ‘‘risk- phone scripts, education and training for transfer Letter. limiting’’ conditions of rule 2a–7, and (2) agent employees and changes to the systems used 574 See, e.g., Wells Fargo Comment Letter information on prices will be available through by fund accountants that transmit net asset value (acknowledging that, as we stated in the Proposing other means (for example, under the new fund data to fund transfer agents); and (iii) sub-transfer Release, sweep products may continue to be viable disclosure requirements of Investment Company agent/recordkeeping arrangements (explaining that for floating NAV money market funds because fund Act Rule 2a–7(h)(10), investors will be able to similar modifications likely would be needed at sponsors and other intermediaries will make access a fund’s daily market-based NAV per share various intermediaries). modifications to price fund shares periodically on a money market fund’s Web site). See Notice of 571 See, e.g., ICI Comment Letter; Comment Letter during the day, but suggesting that the costs for Proposed Exemptive Order, at 6–7. of Chapin Davis, Inc. (Aug. 28, 2013) (‘‘Chapin broker-dealers to reprogram their systems would be

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47787

what extent, if at all, intermediaries will likely be more costly to change. Because that the total range of one-time continue to offer sweep accounts for each system’s capabilities and functions implementation costs to money market floating NAV money market funds, we are different, an entity will likely have funds and others in the distribution acknowledge that there are significant to perform an in-depth analysis of the chain would be approximately operational costs involved in order to new rules to calculate the costs of $1,430,000 to $2,790,000 per entity, modify sweep platforms to modifications required for its own with ongoing costs that range between accommodate a floating NAV product. system. While we do not have the 5% to 15% of these one-time costs.581 Accordingly, we anticipate that sweep information necessary to provide a point Commenters did not generally account assets currently invested in estimate 577 of the potential costs of disagree with the type and nature of institutional prime money market funds modifying procedures and controls, we costs that we estimated will be imposed will likely shift into government funds expect that each entity will bear one- by our floating NAV reform. One that will maintain a stable NAV under time costs to modify existing procedures commenter noted that the costs required our final rules. We discuss in the and controls in the functional areas that to make the necessary systems changes Macroeconomic Effects section below are likely to be impacted by the floating would not be prohibitive and could be potential costs related to a migration of NAV reform. completed within two to three years.582 assets away from floating NAV funds In the Proposing Release, we A number of commenters, however, into alternative investments, including estimated that the one-time costs of provided a wide range of estimated stable NAV money market funds such as implementation for an affected entity operational costs to money market government funds. Because the amount would range from $1.2 million (for funds, intermediaries, and others in the of sweep account assets currently entities requiring less extensive distribution chain. These commenters invested in institutional prime money modifications) to $2.3 million (for suggested that estimated one-time market funds is not reported to us, nor entities requiring more extensive implementation costs would be between are we aware of such information in the modifications) and that the annual costs $350,000 to $3,000,000, depending on public domain, we are not able to to keep procedures and controls current the affected entity.583 One commenter provide a reasonable estimate of the and to provide continuing training estimated that it could cost up to amount of sweep account assets that would range from 5% to 15% of the $2,300,000 per fund, transfer agent, or 578 may shift into alternative investment one-time costs. In addition, we noted intermediary, to modify systems products. that we expect money market funds procedures and controls to implement a In the Proposing Release, we also (and their intermediaries) would incur floating NAV.584 Another commenter estimated additional costs under our additional costs associated with estimated that it would cost each back floating NAV reform that would be programs and systems modifications office processing service provider imposed on money market funds and necessary to provide shareholders with $1,725,000 in one-time costs to other recordkeepers to track portfolio access to information about the floating implement a floating NAV.585 We also security gains and losses, provide ‘‘basis NAV per share online, through received from commenters some cost reporting,’’ and monitor for potential automated phone systems, and on estimates provided on a fund complex wash-sale transactions. As discussed shareholder statements and to explain to level. Two fund complexes estimated above, we have been informed that, shareholders that the value of their their total one-time costs to implement today, the Treasury Department and the money market funds shares will 579 a floating NAV to be between IRS will propose new regulations that fluctuate. We estimated that the costs $10,000,000 to $11,000,000, and one of will eliminate the need for money for a fund (or its transfer agent) or the largest money market fund sponsors market funds and others to track intermediary that may be required to approximated its one-time costs to be portfolio gains and losses and basis perform these activities would range $28,000,000. Averaged across the information, as well as issue today a from $230,000 to $490,000 and that the number of money market funds offered, revenue procedure that exempts money ongoing costs to maintain automated these one-time implementation costs market funds from the wash-sale rules. phone systems and systems for Accordingly, our cost estimates for the processing shareholder statements floating NAV reform have been revised the following activities: (i) Project assessment and would range from 5% to 15% of the development; (ii) project implementation and 575 from our proposal to reflect this fact. one-time costs.580 In sum, we estimated testing; and (iii) written and telephone We understand that the costs to communication. See also supra note 578. modify a particular entity’s existing 577 We are using the term ‘‘point estimate’’ to 581 This estimate is calculated as follows: less controls and procedures will vary indicate a specific single estimate as opposed to a extensive modifications ($1,200,000 + $230,000 = depending on the capacity, function and range of estimates. $1,430,000); more extensive modifications 578 ($2,300,000 + $490,000 = $2,790,000). level of automation of the accounting See Proposing Release, supra note 25, nn.285– 86 and accompanying text. We estimated that these 582 See HSBC Comment Letter. systems to which the controls and costs would be attributable to the following 583 See Chamber II Comment Letter (citing procedures relate and the complexity of activities: (i) Drafting, integrating, and Treasury Strategies, Operational Implications of a those systems’ operating implementing procedures and controls; (ii) Floating NAV across Money Market Fund Industry environments.576 Procedures and preparation of training materials; and (iii) training. Key Stakeholders (Summer 2013) (‘‘TSI Report’’)). As noted throughout this Release, we recognize that This commenter estimated costs for various controls that support systems that adding new capabilities or capacity to a system intermediaries in order to implement a floating operate in highly automated operating (including modifications to related procedures and NAV: Corporate system environments will likely be less costly controls) will entail ongoing annual maintenance vendors ($350,000¥$400,000); fund accounting to modify while those that support costs and understand that those costs generally are service providers ($400,000¥$425,000); broker- estimated as a percentage of initial costs of building dealers and portals ($500,000¥$600,000); transfer complex operations with multiple fund or expanding a system. agent systems ($2,000,000¥$2,500,000); and sweep types or limited automation or both will 579 See id. at n.287 and accompanying text. We account software providers expect these costs would include software ($2,000,000¥$3,000,000). Another commenter significant and the operational complexity could be programming modifications, as well as personnel estimated that it would cost approximately made worse to the extent that fund sponsors do not costs that would include training and scripts for $2,000,000 in one-time costs for a large trust group standardize the times of day at which they price telephone representatives to enable them to respond to implement a floating NAV. See Treasury shares). to investor inquiries. Strategies Comment Letter. 575 See supra section III.B.8.a. 580 See id. at n.288 and accompanying text. We 584 See Federated II Comment Letter. 576 See, e.g., Chamber I Comment Letter. estimate that these costs would be attributable to 585 See Fin. Info. Forum Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47788 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

range from $306,000 to $718,000.586 NAV as they do today and to use operating costs of approximately 5% to Another commenter provided survey amortized cost valuation and/or penny- 15% of initial costs. Accordingly, we data stating that 40% of respondents rounding pricing. A number of estimate that funds and other (asset managers and intermediaries) commenters noted that eliminating the intermediaries will incur annual estimated that it would cost $2,000,000 ability of stable NAV funds to use operating costs as a result of the floating to $5,000,000 in one-time costs to amortized cost valuation, as we NAV reform that range from $57,200 to implement a floating NAV.587 Finally, a proposed, would impose significant $334,800.594 Most commenters that few commenters estimated the one-time operational costs on these funds.591 addressed this issue directly did not costs to the entire fund industry related Accordingly, based on staff analysis and disagree with our estimate of ongoing to implementing our floating NAV experience, we are also revising the costs, although we note that a few reform.588 estimated operational costs downward commenters estimated the new annual We estimated in the Proposing by 5% to reflect the ability of stable operating costs to the entire fund Release that it would cost each money NAV funds to continue to use amortized industry related to implementing our market fund, intermediary, and other cost valuation as they do today. We floating NAV reform.595 One commenter participant in the distribution chain therefore estimate that it will cost each provided survey data showing that 66% approximately $1,430,000 (for less money market fund, intermediary, and of respondents (asset managers and extensive modifications) to $2,790,000 other participant in the distribution intermediaries) estimated that annual (for more extensive modifications) in chain approximately $1,144,000 (for less costs would approximate 10% to 15% of one-time costs to implement a floating extensive modifications) to $2,232,000 initial costs.596 Another commenter, NAV.589 Based on staff analysis and (for more extensive modifications) in however, disagreed with our estimate of experience, we are revising the one-time costs to implement the floating annual operating costs of approximately estimated operational costs for our NAV reform.592 5% to 15% of initial costs and suggested floating NAV reform downward by 15% We believe that this range of that the annual costs to fund sponsors to reflect the tax relief discussed estimated costs generally fits within the will actually be close to the costs of above.590 In addition, as discussed range of costs suggested by commenters initial implementation. We disagree. above (and, in a change from our as described above (after accounting for This commenter noted that most of the proposal), our final rules will permit estimated costs savings related to tax ongoing cost would result from the retail and government money market relief and the increased availability of elimination of amortized cost funds to continue to maintain a stable amortized cost valuation, not accounting (generally) and more contemplated by commenters in their frequent price calculations using 586 See Federated X Comment Letter (estimating estimates). We note, however, that many market-based factors.597 Because stable its one-time costs to implement a floating NAV to money market funds, transfer agents, NAV money market funds may continue be $11,200,000); Schwab Comment Letter (estimating its one-time costs to implement a custodians, and intermediaries in the to use amortized cost valuation under floating NAV to be $10,000,000); Fidelity Comment distribution chain may not bear the our final rules (unlike our proposal), we Letter (estimating its one-time costs of implement estimated costs on an individual basis believe this commenter has overstated a floating NAV to be $28,000,000). Based on Form and therefore will likely experience the ongoing costs under our final N–MFP data as of February 28, 2014, the per fund 598 costs are: Federated $311,000 ($11,200,000 ÷ 36 economies of scale. Accordingly, we rules. Therefore, we believe money market funds); Schwab $588,000 expect that the cost for many individual consistent with the comments received, ($10,000,000 ÷ 17 money market funds); and entities that would have to process that it is more appropriate to continue ÷ Fidelity $718,000 ($28,000,000 39 money market transactions at a floating NAV will to estimate the ongoing operational funds). likely be less than these estimated 587 See SIFMA Comment Letter (stating that 593 another 20% of survey respondents estimated that costs. 594 This estimate is calculated as follows: less × one-time implementation costs for a floating NAV In addition to the estimated one-time extensive modifications = $57,200 ($1,144,000 would be between $5,000,000 to $15,000,000). 5%); more extensive modifications = $334,800 implementation costs, we estimate that × Because we do not have access to the names of the funds, intermediaries, and others in the ($2,232,000 15%). survey respondents or their specific cost estimates, 595 See, e.g., Chamber II Comment Letter we are unable to approximate these costs on a per distribution chain will incur annual (estimating $2.0 to $2.5 billion in new annual fund basis. operating costs relating to the FNAV reform). As 588 See, e.g., TSI Report (estimating $1.8 to $2.0 591 See supra note 534. discussed above, most commenters did not billion in total upfront costs for U.S. institutional 592 This estimate is calculated as follows: specifically object to our estimated range of ongoing money market fund investors to modify operations $1,430,000 × 80% = $1,144,000 (less extensive costs on a per-fund basis. We do not, however, have in order to comply with a floating NAV modifications); $2,790,000 × 80% = $2,232,000 information available to us to evaluate the accuracy requirement); Angel Comment Letter (estimating (more extensive modifications). A few commenters of cost estimates to the entire fund industry or make $13.7 to $91.5 billion in initial upfront costs related also noted that our floating NAV requirement a meaningful comparison of such estimates with to implementing a floating NAV reform). As would also result in significant lost management our per-fund cost ongoing cost estimates. discussed above, we have analyzed a variety of fees. See, e.g., Federated X Comment Letter 596 See SIFMA Comment Letter. commenter estimates and provided cost estimates (suggesting that a shift of one-third of assets away 597 See Federated X Comment Letter (noting, on a per-fund basis. We are unable, however, to from institutional prime funds would result in however, that it estimates annual operating costs of verify the accuracy or make a relevant comparison annual lost management fees of approximately $578 approximately $231,000 per fund ($5.7 million for between our per-fund cost estimates and the broad million for money market fund advisers pricing services + $1.5 million for transfer agent range of costs provided by these commenters that nationwide). We acknowledge that, to the extent services + $2.5 million for technology, training, and apply to all U.S. institutional money market fund there is a significant outflow of assets from the other monitoring costs = $9.7 million ÷ 42 money investors and/or the entire fund industry. institutional prime funds into non-money market market funds managed by Federated = 589 See supra note 581. funds as a result of the floating NAV requirement, approximately $231,000 per fund). This estimate is 590 See supra section III.B.6.a. We note that many money market fund managers may experience consistent with our estimated range of ongoing commenters suggested that a primary drawback declines in management fee income. We discuss the costs. See supra note 594. (and cost) of our floating NAV reform is the possibility of such shifts in money market fund 598 We recognize, however, that under our final substantial operational costs associated with assets in our discussion of macroeconomic effects rules, floating NAV money market funds will incur complying with tax tracking requirements in a below. increased costs as a result of the elimination of floating NAV fund. See, e.g., Fin. Svcs. Roundtable 593 For example, the costs will likely be allocated amortized cost valuation. These costs, discussed Comment Letter; Federated IV Comment Letter; among the multiple users of affected systems, such above, are significantly lower than those that funds Fidelity Comment Letter. Although we attribute a as money market funds that are members of a fund would incur under our proposal (that would have 15% reduction in estimated operational costs to tax- group, money market funds that use the same eliminated amortized cost valuation for all money related costs, the cost savings could be higher or transfer agent or custodian, and intermediaries that market funds, including those funds not subject to lower than our estimate. use systems purchased from the same third party. our floating NAV reform).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47789

costs as approximately 5% to 15% of institutional investors in money market changes in our final rules from those the initial implementation costs and are funds will require some systems that we proposed.605 We also recognize not revising the ongoing cost estimates development to be able to invest in a that these estimates are more consistent from our proposal. floating NAV money market fund. This with the range of cost estimates commenter also noted that having provided by this commenter. We b. Operational Implications to Money sufficient time to implement the Market Fund Shareholders estimate that the annual maintenance changes is a more important factor than costs to these systems and procedures In addition to money market funds cost in determining the extent to which and controls, and the costs to provide and other entities in the distribution corporate treasurers, for example, would continuing training, will range from 5% chain, each money market fund use a floating NAV fund product.600 to 15% of the one-time implementation shareholder will also likely be required Another commenter acknowledged our costs.606 to analyze our floating NAV proposal range of estimated costs and suggested and its own existing systems, that while these estimates may not c. Intraday Liquidity and Same-Day procedures, and controls to estimate the appear substantial at first glance, when Settlement systems modifications it would be viewed in the context of current money As discussed below, we believe that required to undertake. Because of this, market fund returns, such costs floating NAV money market funds and the variation in systems currently represent a significant disincentive to should be able to continue to provide used by institutional money market continued investment in institutional shareholders with intraday liquidity and fund shareholders, we do not have the prime funds.601 Although we same-day settlement by pricing fund information necessary to provide a point acknowledge that the costs to money shares periodically during the day (e.g., estimate of the potential costs of market fund shareholders may make at 11 a.m. and 4 p.m.). In the Proposing systems modifications. We describe investing in floating NAV money market Release, we noted that money market below the types of activities typically funds uneconomical given the current funds’ ability to maintain a stable value involved in making systems rates of return, we note that we are also facilitates the funds’ role as a cash modifications and estimate a range of adopting a two-year compliance period management vehicle and provides other hours and costs that we anticipate will that may, to the extent that interest rates operational efficiencies for their be required to perform these activities. return to more typical levels, counter shareholders. Shareholders generally are We sought comment in the Proposing any disincentive that may exist able to transact in fund shares at a stable Release regarding the potential costs of currently.602 value known in advance, which permits system modifications for money market The TSI Report 603 provided ranges of money market fund transactions to fund shareholders, and the comments costs that it expects would be imposed settle on the same day that an investor we received, along with the differences on floating NAV money market fund places a purchase or sell order and between our proposal and the final shareholders. These costs ranged from determine the exact value of his or her rules, have informed our estimates. $250,000 for a U.S. business that invests money market fund shares (absent a In the Proposing Release, we prepared in floating NAV money market funds liquidation event) at any time. These ranges of estimated costs, taking into and makes the fewest changes possible, features have made money market funds account variations in the functionality, to $550,000 for a government-sponsored an important component of systems for sophistication, and level of automation entity money market fund processing and settling various types of of money market fund shareholders’ shareholder.604 We have carefully transactions. existing systems and related procedures considered this range of costs to Some commenters have expressed and controls, and the complexity of the shareholders provided by the concern that intraday liquidity and/or operating environment in which these commenter and the changes from the same-day settlement would not be systems operate. In deriving our proposal to the rule that we are adopting available to investors in floating NAV estimates, we considered the need to today, and we now believe that it is money market funds. These commenters modify systems and related procedures appropriate to decrease our cost point to, for example, operational and controls related to recordkeeping, estimates from the proposal. challenges such as striking the NAV accounting, trading, and cash Accordingly, we estimate that a multiple times during the day while management, and to provide training shareholder whose systems (including needing to value each portfolio security concerning these modifications. We related procedures and controls) would using market-based values.607 A few estimated that a shareholder whose require less extensive modifications commenters also noted that pricing systems (including related procedures would incur one-time costs ranging services may not be able to provide and controls) would require less from $212,500 to $340,000, while a periodic pricing throughout the day.608 extensive modifications would incur shareholder whose systems (including Some commenters also raised concerns one-time costs ranging from $123,000 to related procedures and controls) would about the additional costs involved with $253,000, while a shareholder whose require more extensive modifications striking the NAV multiple times per systems (including related procedures would incur one-time costs ranging and controls) would require more from $467,500 to $850,000. We believe 605 Consistent with our cost estimates discussed extensive modifications would incur that these estimates better reflect the above for funds, intermediaries, and others in the one-time costs ranging from $1.4 million distribution chain, we have considered in these to $2.9 million.599 600 See HSBC Comment Letter. estimates cost savings related to the tax relief Most commenters did not disagree 601 See Wells Fargo Comment Letter. discussed above. See supra section III.B.8.a. 606 with our cost estimates. One commenter 602 See infra section III.N.2. for a discussion of the See supra note 578. Commenters did not floating NAV compliance date. address specifically our estimate of ongoing costs to stated that it expects at least 50% of 603 See supra note 583. money market fund shareholders in floating NAV 604 See id., TSI Report (estimating that the one- funds. Accordingly, we are not amending our 599 We estimate that these costs would be time implementation costs would range from estimate from the proposal. attributable to the following activities: (i) Planning, $350,000 to $370,000 for a corporate investor; 607 See, e.g., BlackRock II Comment Letter; ICI coding, testing, and installing system modifications; $275,000 to $300,000 for a public university Comment Letter; Chamber II Comment Letter. (ii) drafting, integrating, implementing procedures investor; $325,000 to $350,000 for a municipality 608 See, e.g., Federated IV Comment Letter; and controls; (iii) preparation of training materials; investor; and $400,000 to $425,000 for a fiduciary Interactive Data Comment Letter; Chamber II and (iv) training. investor). Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47790 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

day, including, for example, costs for have included estimates of the costs to providing same-day settlement and for pricing services to provide multiple make such modifications below. pricing services to provide prices quotes per day and for accounting We understand that many money multiple times each day. One agents to calculate multiple NAVs.609 market funds currently permit same-day commenter provided survey data that On the other hand, one commenter who trading up until 5 p.m. Eastern Time. estimated the range of costs for floating provides pricing services noted that, These funds do so because amortized NAV funds to offer same-day settlement. while providing intraday liquidity and cost valuation allows funds to calculate Seventy-five percent of respondents same-day settlement for floating NAV their NAVs before they receive market- estimated the one-time costs to be funds would require some investment, based prices (typically provided at the approximately $500,000 to $1 million, they believe that calculating NAVs end of the day after the close of the and 25% of respondents estimated the multiple times per day is feasible within Federal Reserve Cash Wire). We one times costs to be approximately $1 616 our proposed two-year compliance recognize that, under the floating NAV million to $2 million. Sixty-six period.610 A few commenters further reform, closing times for same-day percent of respondents approximated settlement will likely need to be moved noted that transfer agents will need to ongoing costs that would range between earlier in the day to allow sufficient 617 enhance their systems to account for 10–15% of initial costs. We did not time to calculate the NAV prior to the floating NAV money market funds and receive other quantitative estimates close of the Federal Reserve Cash Wire. specifically on the costs associated with condense their reconciliation and audit One commenter suggested that it will modifying systems to allow for same- processes (which may, for example, take a minimum of three to four hours day settlement by floating NAV increase the risk of errors).611 to strike a market-based NAV price.613 funds.618 We have carefully considered A few commenters also asserted that As a result, investors in floating NAV this survey data with respect to same- if floating NAV funds are unable to money market funds may not have the day settlement issues in arriving at our provide same-day settlement, this could ability to redeem shares late in the day, aggregate operational cost estimates affect features that are particularly as they can today. We also recognize discussed above in section III.B.8.a.619 appealing to retail investors, such as that floating NAV money market funds 9. Transition ATM access, check writing, and may price only once a day, at least until electronic check payment processing such time as pricing vendors are able to We are providing a two-year services and products.612 First, as provide continuous pricing throughout compliance date (as proposed) for discussed below, we believe that many the day.614 We considered these money market funds to implement the floating NAV money market funds will potential costs as well as the benefits of floating NAV reform. A long compliance continue to be able to provide same-day our floating NAV reform and believe period will give more time for funds to settlement. Second, we note that under that, as discussed above, it is implement any needed changes to their the revised retail money market fund appropriate to address, through the investment policies and train staff, and definition adopted today, retail floating NAV reform, the incremental also will provide more time for investors should have ample incentive that exists for shareholders to investors to analyze their cash opportunity to invest in a fund that redeem in times of stress from management strategies. This compliance qualifies as a retail money market fund institutional prime money market funds. period will also give time for retail and thus is able to maintain a stable We note, however, that because stable money market funds to reorganize their NAV. As a result, this should NAV money market funds may continue operations and establish new funds. Importantly, this compliance period significantly alleviate concerns about to use amortized cost as they do today will allow additional time for the the costs of altering these features and (as revised from our proposal), these Treasury Department and IRS to permit a number of funds to continue to same-day settlement concerns raised by consider finalizing rules addressing provide these features as they do today. commenters here would be limited to institutional prime funds—the only certain tax issues relating to a floating Nonetheless, we recognize that not all NAV described above and for the funds with these features may choose to money market funds subject to the qualify as retail money market funds, floating NAV reform.615 We sought comment in the Proposing 616 As discussed supra in note 587, we do not and therefore, some funds may need to have access to the names of the survey respondents make additional modifications to Release on the costs associated with or their specific cost estimates and are therefore continue offering these features. We unable to approximate these costs on a per fund 613 See Federated II Comment Letter. basis. Accordingly, the costs on a per fund basis 614 See SIFMA Comment Letter (noting that in its will likely be significantly lower than the figures 609 See, e.g., BlackRock II Comment Letter; survey of members, 60% of asset managers expect provided here. Dreyfus Comment Letter; State Street Comment to price their floating NAV money market funds 617 See SIFMA Comment Letter. Letter. only once per day, which is less frequent than 618 We note that some commenters may have 610 See Interactive Data Comment Letter. Another currently offered by most money market funds). See included costs associated with enabling floating commenter noted that money market funds would also Institutional Cash Distributors, ICD NAV funds to provide same-day settlement in their still be able to provide same-day settlement in Commentary: Operational and Accounting Issues cost estimates of operational implications generally. floating NAV funds. See State Street Comment with the Floating NAV and the Impact on Money These costs are discussed above. Letter. Market Funds (July 2013), available at http:// 619 We have based our cost estimates for same-day 611 See J.P. Morgan Comment Letter; Dreyfus www.sec.gov/comments/;s7-03-13/s70313-40.pdf. settlement principally on staff experience and Comment Letter; Comment Letter of DST Systems, One commenter noted that they are already expertise. In assessing the reasonableness of our Inc. (Sept. 18, 2013) (‘‘DST Systems Comment investing in new technology that includes real-time estimates, we considered as an outer bound the Letter’’). debt security evaluations. See Comment Letter of survey data provided by SIFMA (although as noted 612 See, e.g., Fidelity Comment Letter (‘‘[B]roker- Interactive Data. above, the survey respondents likely represent fund dealers offer clients a variety of features that are 615 See SIFMA Comment Letter (noting that, complexes and thus we are not able to determine available generally only to accounts with a stable under our proposal, the impediment to same-day these costs on a per fund basis). We estimate that NAV, including ATM access, check writing, and settlement exists for stable NAV money market money market funds will likely establish twice per ACH and Fedwire transfers. A floating NAV would funds as well as floating NAV money market funds day pricing as the appropriate balance between force MMFs that offer same-day settlement on because both types of funds would be prohibited current money market fund practice to provide shares redeemed through wire transfers to shift to from using amortized cost for securities with multiple settlements per business day and the next day settlement or require fund advisers to remaining maturities over 60 days). As noted above, additional costs and complexities involved in modify their systems to accommodate floating NAV we are no longer prohibiting stable NAV funds from pricing money market fund shares using market- MMFs.’’). using amortized cost. based values.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47791

Commission to consider final rules the compliance date, in practice, money government securities).627 In addition, removing NRSRO ratings from rule 2a– market funds may implement under today’s amendments, government 7,620 so that funds could make several amendments relating to floating NAV money market funds may invest a de compliance-related changes at one time. near the end of the transition period, minimis amount (up to 0.5%) in non- We acknowledge, as discussed in the which may further cause the potential government assets,628 unlike our Proposing Release and as noted by some for widespread redemptions prior to the proposal and under current rule 2a–7, commenters, that a transition to a new transition. Although a few commenters which permits government money regulatory regime could itself cause the suggested as much,624 we did not market funds to invest up to 20% of type of heavy redemptions that the receive any survey data and we are not total assets in non-government assets.629 amendments, including the floating able to reasonably estimate the extent to Additionally, as proposed, a NAV reform, are designed to prevent.621 which money market funds may or may government money market fund will not In the proposal, we noted that our not stagger their transition to a floating be required to, but may, impose a fee or proposed two-year compliance period NAV. gate if the ability to do so is disclosed would benefit money market funds and We note, however, that in order to in a fund’s prospectus and the fund their shareholders by allowing money complies with the fees and gates mitigate this risk, money market fund market funds to make the transition to requirements in the amended rule.630 managers could take steps to ensure that a floating NAV at the optimal time and With respect to the floating NAV the fund’s market-based NAV is $1.00 or potentially not at the same time as all reform, most commenters supported a higher at the time of conversion and other money market funds. In addition, reform that does not apply to communicate to shareholders the steps we stated our belief that money market government money market funds.631 that the fund plans to take ahead of time fund sponsors would use the relatively in order to mitigate the risk of heavy long compliance period to select an 627 See rule 2a–7(a)(5) (defining ‘‘collateralized pre-emptive redemptions, though funds appropriate conversion date that would fully’’ by reference to rule 5b–3(c)(1), which would be under no obligation to do so. requires that collateral be comprised of cash or minimize the risk that shareholders may Even if funds took such steps, investors government securities). pre-emptively redeem shares at or near 628 may pre-emptively withdraw their Non-government assets would include all the time of conversion if they believe ‘‘eligible securities’’ permitted under rule 2a–7 that the market value of their shares will assets from money market funds that other than cash, government securities (as defined be less than $1.00. Several commenters will transact at a floating NAV to avoid in section 2(a)(16), or repurchase agreements that this risk. We note, however, that while are ‘‘collateralized fully’’ (as defined in rule 5b–3). reiterated this concern, with one 629 a two-year compliance period does not Under current rule 2a–7 (and as proposed), a commenter noting that shareholders in government money market fund is defined based on floating NAV money market funds may eliminate such concerns, we expect, as the portfolio holdings test used today for be incentivized to redeem in order to discussed above, that providing a two- determining the accuracy of a fund’s name (‘‘names rule’’). See Proposing Release, supra note 25, n.169 avoid losses or realize gains, depending year compliance period will allow money market funds time to prepare and accompanying text (rule 35d–1 states that a on the expected NAV at the time of materially deceptive and misleading name of a fund conversion.622 A few commenters and address investor concerns relating (for purposes of section 35(d) of the Investment suggested that money market funds will to the transition to a floating NAV, and Company Act (Unlawful representations and therefore possibly mitigate the risk that names)) includes a name suggesting that the fund likely be unwilling or unable to stagger focuses its investments in a particular type of their transitions over our proposed two- the transition to a floating NAV, itself, investment or in investments in a particular year transition period, but did not could prompt significant redemptions. industry or group of industries, unless, among other provide any survey data or other In addition, the liquidity fees and gates requirements, the fund has adopted a policy to 623 reforms will be effective and therefore invest, under normal circumstances, at least 80% of support for their beliefs. the value of its assets in the particular type of We continue to believe that an available to fund boards as a tool to investments or industry suggested by the fund’s extended compliance period (as address any heightened redemptions name). While in the Proposing Release we adopted, two years) should help that may result from the transition to a discussed the definition of government money floating NAV.625 market fund in the context of the proposed floating mitigate potential pre-emptive NAV reform, this definition also was applicable to redemptions by providing money C. Effect on Certain Types of Money the proposed fees and gates reform. We understand market fund shareholders with Market Funds and Other Entities that government money market funds today invest sufficient time to consider the reforms in other government money market funds (‘‘fund of and decide, if they determine that a 1. Government Money Market Funds funds’’) and look through those funds to the underlying securities when determining floating NAV investment product is not The fees and gates and floating NAV compliance with rule 35d–1, or the ‘‘names rule.’’ appropriate or desirable, to invest a Accordingly, we expect that money market funds stable NAV retail or government money reforms included in today’s Release will will continue to evaluate compliance with what market fund or an alternative not apply to government money market investments qualify under our definition of government money market fund in the same way, investment product. We recognize that, funds, which are defined as a money market fund that invests at least 99.5% and therefore categorize, as appropriate, although money market funds may investments in other government money market of its total assets in cash, government funds as within the 99.5% government-asset basket. comply with the rule amendments at 626 any time between the effective date and securities, and/or repurchase 630 See rule 2a–7(c)(2)(iii). Any government agreements that are ‘‘collateralized money market fund that chooses not to rely on rule fully’’ (i.e., collateralized by cash or 2a–7(c)(2)(iii) may wish to consider providing 620 See Removal of Certain References to Credit notice to shareholders. We believe at least sixty Ratings and Amendment to the Issuer days written notice of the fund’s ability to impose Diversification Requirement in the Money Market 624 Id. fees and gates would be appropriate. Fund Rule, Investment Company Act Release No. 625 We will monitor fund redemption activity 631 See, e.g., J.P. Morgan Comment Letter; T. Rowe IC–31184 (July 23, 2014). during the transition period and consider Price Comment Letter; Vanguard Comment Letter; 621 See, e.g., Dreyfus Comment Letter; Goldman appropriate action if it appears necessary. For ICI Comment Letter; IDC Comment Letter. But see Sachs Comment Letter. The PWG Report suggests example, such action could include SEC Staff Comment Letter of J. Huston McCulloch (Sept. 13, that a transition to a floating NAV could itself result contacting fund groups to determine the nature of 2013) (‘‘McCulloch Comment Letter’’) (suggesting in significant redemptions. See PWG Report, supra any stress from redemption activity and the that the floating NAV reform also apply to note 506, at 22. potential need for any exemptive or other relief. government money market funds and noting that 622 See Stradley Ronon Comment Letter. 626 A ‘‘government security’’ is backed by the full even short-term treasury bills fluctuate in present 623 See, e.g., Stradley Ronon Comment Letter; faith and credit of the U.S. government. See rule value). As discussed below, we continue to believe SIFMA Comment Letter. 2a–7(a)(17); section 2(a)(16). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47792 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Commenters noted that government of government money market funds, government funds, but to permit them to funds pose significantly less risk of however, is generally mitigated because implement the fees and gates reforms if heavy investor redemptions than prime these funds typically hold assets that they choose.643 funds, have low default risk and are have short maturities and hold those We also sought comment on the highly liquid even during market stress, assets to maturity.638 appropriate size of the non-government and experienced net inflows during the As discussed in the DERA Study and basket. Notwithstanding the relative financial crisis.632 Also, few below, government money market funds safety and stability of government commenters explicitly supported or historically have experienced inflows, money market funds, we noted our opposed excluding government funds rather than outflows, in times of concern that a credit event in this 20% from the fees and gates reforms. Of these stress.639 In addition, the assets of basket or a shift in interest rates could commenters, a few supported a government money market funds tend to trigger a decline in a fund’s shadow narrowly tailored fees and gates reform appreciate in value in times of stress price and therefore create an incentive that does not apply to government rather than depreciate.640 Most for shareholders to redeem shares ahead money market funds,633 and a few government money market funds always of other investors (similar to that commenters argued that all types of have at least 30% weekly liquid assets described for institutional prime funds money market funds—including because of the nature of their portfolio subject to the floating NAV reform). We government money market funds— (i.e., the securities they generally hold, stated in the Proposing Release our should have the ability to apply a fee or by definition, are weekly liquid assets). preliminary belief that the benefits of gate.634 Accordingly, with respect to fees and retaining a stable share price money We continue to believe that gates, the portfolio composition of market fund option and the relative government money market funds should government money market funds means safety in a government money market not be subject to the fees and gates and that these funds are less likely to need fund’s 80% basket appropriately floating NAV reforms. As discussed in to use these tools. counterbalances the risks associated the Proposing Release, government We have also determined not to with the 20% portion of a government money market funds face different impose the fees and gates and floating money market fund’s portfolio that may redemption pressures and have different NAV reforms on government money be invested in non-government risk characteristics than other money market funds in an effort to facilitate securities.644 market funds because of their unique investor choice by providing a money A number of commenters, however, portfolio composition.635 The securities market fund investment option that raised concerns that the proposed primarily held by government money maintains a stable NAV and that does definition of government money market market funds typically have a lower not require investors to consider the fund would permit these funds to invest credit default risk than commercial imposition of fees and gates. As noted up to 20% of their portfolio in non- paper and other securities held by prime above, we expect that some money government assets, and, contrary to the money market funds and are highly market fund investors may be unwilling goals of our money market fund reforms, liquid in even the most stressful market or unable to invest in a money market potentially increase risk as stable NAV conditions.636 As noted in our proposal, fund that floats its NAV and/or can government funds may use this 20% government funds’ primary risk is impose a fee or gate.641 By not basket to reach for yield.645 One interest rate risk; that is, the risk that subjecting government money market changes in the interest rates result in a funds to the fees and gates and floating 643 Although government money market funds change in the market value of portfolio NAV reforms, fund sponsors will have may opt-in to fees and gates, we expect these funds 637 will rarely impose fees and gates because their securities. Even the interest rate risk the ability to offer money market fund portfolio assets present little credit risk. investment products that meet 644 The Proposing Release also would have that our floating NAV reform should not apply to investors’ differing investment and required unaffected stable NAV funds, including government funds. Our belief is based, in part, on liquidity needs.642 We also believe that government money market funds, to maintain a the strong commenter support in favor of a more this approach preserves some of the stable NAV through penny-rounding pricing (and targeted floating NAV reform that addresses the generally eliminate amortized cost valuation except incremental incentive for institutional investors to current benefits of money market funds for securities with remaining maturities of 60 days redeem from prime funds, and our stated goal of for investors. Based on our evaluation of or less). As discussed in section III.B.5, however, preserving as much as possible the benefits of these considerations and tradeoffs, and we have revised our approach and will permit money market funds for most investors, while the more limited risk of heavy stable NAV funds to continue to value portfolio appropriately balancing concerns about the risks of securities using amortized cost and price fund heavy redemptions in prime funds during times of redemptions in government money shares using penny-rounding, as they do today. We stress and the harm this can cause to short-term market funds, we believe it is preferable are also providing expanded guidance on the use funding markets. to tailor today’s reforms and not apply of amortized cost. See infra section III.D. 632 See, e.g., J.P Morgan Comment Letter; ICI the floating NAV requirement to 645 See, e.g., Goldman Sachs Comment Letter Comment Letter; IDC Comment Letter; T. Rowe (suggesting that a new class of money market funds Price Comment Letter. could emerge that would invest 19.9% of its assets 638 633 See, e.g., BlackRock II Comment Letter, See Proposing Release, supra note 25, n.173. in higher yield commercial paper and other (‘‘Government MMFs . . . should not be required 639 See DERA Study, supra note 24, at 6–13. privately issued debt while maintaining a stable to implement liquidity fees and gates.’’); J.P. 640 See Proposing Release, supra note 25, n.412. NAV, and under Commission rules, holding itself Morgan Comment Letter. 641 For example, there could be some types of out as a government money market fund); HSBC 634 See, e.g., U.S. Bancorp Comment Letter, (‘‘If investors, such as sweep accounts, that may be Comment Letter; CFA Institute Comment Letter; ultimately adopted, gating should be available to all unwilling to invest in a money market fund that Systemic Risk Council Comment Letter; Invesco classes of funds . . .’’); HSBC Comment Letter, could impose a gate because such an investor DERA Comment Letter. One commenter suggested (‘‘[W]e believe all MMFs should be required to have generally requires the ability to immediately reducing further the percentage of portfolio assets the power to apply a liquidity fee or gate so that redeem at any point in time, regardless of whether required to be invested in government securities the MMF provider can manage a low probability but the fund or the markets are distressed. and potentially including state and local high impact event.’’). 642 To the extent a number of government funds government securities in the permissible 635 Proposing Release, supra note 25, at section opt in to the fees and gates requirements, and there investment basket. See Comment Letter of The III.A.3. See also DERA Study, supra note 24, at 8– exists investor demand to invest in government Independent Trustees of the North Carolina Capital 9. funds that are not subject to the fees and gates Management Trust (‘‘Sept. 17, 2013) (‘‘NC Cap. 636 Proposing Release, supra note 25, at section reforms, we believe market forces and competitive Mgmt. Trust Comment Letter’’). We believe that the III.A.3.; see also J.P. Morgan Comment Letter; pressures may lead to the creation of new definition of a government money market fund Vanguard FSOC Comment Letter. government funds that do not implement fees and should not include state and local government 637 See Proposing Release, supra note 25, at 66. gates. securities as suggested by this commenter. We

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47793

commenter noted that, notwithstanding As stated above, the reason for not and, more recently closer to 0.5% in the current 20% non-government applying our fees and gates and floating non-government securities from security basket, its government money NAV reforms to government money November 2012 to November 2013.653 market funds invest 100% of fund assets market funds is, in part, a recognition of For example, the 90th percentile of in government securities because doing the relative stability of this type of reporting government money market so meets the expectations of government money market fund, through its lack of funds demonstrates that investments in money market fund investors.646 credit risk. It would limit the non-government securities declined We agree with commenters who effectiveness of our floating NAV from 12.7% (representing 11 funds) in suggested that permitting government reform, for example, to allow a hybrid November 2010 to nearly zero in funds to invest potentially up to 20% of government fund to develop and November 2013.654 fund assets in riskier non-government potentially present credit risk to A few commenters suggested that this securities may promote a type of hybrid institutional investors seeking greater analysis is flawed because it money market fund that presents new yield, while keeping the benefit of a inappropriately focuses on the historical risks that are not consistent with the stable NAV. use of the non-government securities purposes of the money market reforms As noted above, many commenters basket to predict future use of the 20% adopted today.647 One commenter suggested completely eliminating the basket, when we cannot accurately suggested that without a 20% basket, 20% basket.649 One commenter predict how investors will react there may be an oversupply of suggested a smaller de minimis basket, following the adoption of proposed commercial paper that disrupts for example 5%.650 Our approach regulatory changes, such as a floating corporate funding (presumably a result includes a 0.5% de minimis basket in NAV.655 One commenter further of a shift of assets out of institutional which government funds may invest in suggested that the analysis instead prime funds required to adopt our non-government securities. In order to should address the potential systemic floating NAV reform).648 As a result, evaluate an appropriate de minimis risk posed by a hybrid fund.656 As other this commenter suggested that the amount of non-government securities, commenters noted, however, we Commission wait until after final rules Commission staff, using Form N–MFP recognize the potential for increased are adopted to evaluate the use of the data, analyzed the exposure of investor interest in hybrid government 20% basket, including the effects on government money market funds to money market funds, and as discussed commercial paper supply, and then non-government securities between above, we are concerned that continuing 651 consider phasing the 20% basket out November 2010 and November 2013. to permit government money market over time, if appropriate. We disagree. This analysis showed, among other funds to invest potentially up to 20% of things, that as of November 2013, fund assets in non-government discuss the risks present in these types of securities approximately 17% of all money market securities presents risks that are and municipal money market funds in general, infra funds were government funds and that contrary to goals of this rulemaking. In section III.C.3. See also infra note 773 and average total net assets of government accompanying text. In addition, as discussed above, fact, the concern raised by these funds remained fairly constant at near reducing further the percentage of assets that must commenters, suggesting that the be invested in government securities undercuts the $500 billion since March of 2012.652 An historical use of the 20% basket is goals of this rulemaking. A few commenters also analysis of the data also showed that, irrelevant in the context of a future raised concerns about the economic effects of not between November 2010 and November applying our floating NAV reform to government regulatory regime that includes a 2013, government money market funds funds, including promoting the ability of the federal floating NAV reform, further supports government to borrow at the expense of state and generally invested between 0.5% and our concern that retaining the 20% non- local governments and private issuers. See, e.g., 2.5% of their total amortized cost dollar Comment Letter of Arnold & Porter LLP on behalf government securities basket is likely to holdings in non-government securities of Federated Investors [Alternative 1] (Sept. 13, result in increased risk taking by 2013) (‘‘Federated III Comment Letter’’); Mass. Governor Comment Letter; Systemic Risk Council 649 See, e.g., Goldman Sachs Comment Letter; 653 Comment Letter. We address the macroeconomic HSBC Comment Letter; see Fidelity DERA Id. effects of the floating NAV requirement and related Comment Letter. 654 Id. exemptions in section III.K. One commenter also 650 See CFA Institute Comment Letter. 655 See, e.g., Comment Letter of the Dreyfus noted that because stable NAV funds (including 651 See DERA Memorandum regarding Corporation (Apr. 23, 2014, DERA Study) (‘‘Dreyfus government money market funds) would no longer Government Money Market Fund Exposure to Non- DERA Comment Letter’’) (expecting that the staff’s be permitted to value securities using amortized Government Securities, dated March 17, 2014 analysis would not show significant industry cost, these funds would still incur many of the same (DERA Government MMF Exposure Memo’’) investment by government funds in non- operational burdens as floating NAV funds. See available at http://www.sec.gov/comments/s7-03- government securities, but suggesting that this is a Federated II Comment Letter; Federated III 13/s70313-322.pdf. This analysis categorized result of investor preference that must be viewed in Comment Letter. As discussed in section III.B.5, securities into two types: ‘‘government securities’’ the context of stable NAV money market funds and however, we have revised our approach from the and ‘‘other securities.’’ ‘‘Government securities’’ noting that investor interest in hybrid government Proposing Release and will permit both retail and includes Treasury Debt, Treasury Repurchase money market funds may increase in a floating government money market funds to continue to Agreements, Government Agency Debt, and NAV context); Comment Letter of Wells Fargo Fund value portfolio securities using amortized cost and Government Agency Repurchase Agreements. Management, LLC (Apr. 23, 2014, DERA Study) use the penny-rounding method of pricing. ‘‘Other securities’’ includes all remaining non- (‘‘Wells Fargo DERA Comment Letter’’) (suggesting 646 See Fidelity DERA Comment Letter. government securities (as referred to above), such that without the ability for government money 647 See, e.g., Comment Letter of BlackRock, Inc. as non-government tri-party repurchase agreements, market funds to diversify into prime and municipal (June 6, 2013) (‘‘Blackrock I Comment Letter’’); CFA financial company commercial paper, and variable securities, a significant inflow into government Institute Comment Letter (noting that ‘‘the 80 rate demand notes without a demand feature or funds could force already low yields on short-term percent requirement [. . .] would undermine the guarantee. Although this analysis sought, where government securities to turn negative). Although implied NAV stability of a [g]overnment fund[’]s possible, to identify ‘‘other securities’’ that may we recognize the potentially adverse effects of structure. Allowing fund managers to invest as actually qualify as ‘‘government securities,’’ it is negative yields (e.g., some funds might close to much as 20 percent of their assets in securities and possible that some assets classified as other further investment, affecting capital formation), we instruments with greater volatility in value than securities may still qualify as government believe that the potential risks associated with a government securities, while continuing to operate securities. Accordingly, the results of this analysis government fund investing up to 20% of its total as stable NAV funds creates potential problems.’’). should be viewed as upper bounds on the extent to assets in non-government assets outweighs 648 See Blackrock DERA Comment Letter. We which government money market funds invest in speculative concerns about future interest rates that discuss in section III.K below the macroeconomic ‘‘other securities’’ (i.e. non-government securities). may or may not remain at historic lows two years effects of a potential shift in assets out of 652 See id. (reporting based on Form N–MFP data, after the rules regarding our floating NAV reform institutional prime money market funds and into as of November 2013, 97 government money market become final. alternative investment products. funds out of 565 total money market funds). 656 See Dreyfus DERA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47794 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

institutional prime fund investors who levels of risk associated with non- lead to a loss of efficiency if government move to government money market government assets. We therefore are funds are unable to invest in securities funds in search of greater yield (but revising the definition of a government that government funds are currently with the continued benefit of a stable fund to require that such a fund invest permitted to purchase. Reducing the NAV). We also note that our staff’s at least 99.5% (up from 80% in the basket size could also restrict analysis of the historical use of the 20% proposal) of its assets in cash, competition among money market funds basket establishes the baseline (i.e., the government securities, and/or because government funds would not be extent to which government money repurchase agreements that are able to invest more than 0.5% in non- market funds have used the 20% basket) collateralized by cash or government government assets and thus will have a for our economic analysis discussed securities. A money market fund may reduced ability to compete with other below. not call itself or include in its name money market funds based on yield. One commenter stated its belief that ‘‘government money market fund’’ or Finally, capital formation in the allowing government money market similar names unless the fund complies commercial paper market could be funds to invest up to 20% in non- with this requirement.661 hindered by reducing the 20% basket government securities will not Because we believe that the de and reducing these funds’ ability to materially increase the risks of these minimis basket we are adopting is invest in commercial paper. We do not funds to investors or the financial consistent with current industry expect any such effect to be substantial, system and that such a fund would have practice, we do not believe that however, given the very small extent to adequate liquidity to satisfy any government funds will experience any which government funds have recently increased redemption pressure that material reduction in yield, based on used the non-government basket. results from a credit event in the 20% current interest rates, as a result of our We also recognize the potential for a basket.657 This commenter cites to our amendments. In addition, we do not significant inflow of money market fund statement in the Proposing Release, believe that government funds will be assets into government money market where we characterized as ‘‘minimal’’ required to make any systems funds from institutional prime investors the risk of government money market modifications as a result of changing to (seeking a stable NAV alternative) and funds that maintain at least 80% of their a 0.5% de minimis basket because funds investors that are unable or unwilling to total assets in cash, government are already required to monitor invest in a product that may restrict securities, or repurchase agreements compliance with the existing 20% non- liquidity (through our liquidity fees and that are collateralized by cash or government basket requirement. As gates reform). As we discuss in section government securities.658 We continue discussed below, however, we do expect III.K below, we do not anticipate that to believe, however, as we also stated in that money market funds may need to the impact from the final rule the Proposing Release, that ‘‘a credit amend their policies and procedures to amendments, including those related to event in [the] 20% portion of the reflect the changes we are adopting our floating NAV reform, will be large portfolio or a shift in interest rates could today, including the new 0.5% de enough to constrain government funds trigger a drop in the shadow price, minimis basket.662 We estimate that it and their potential investors. thereby creating incentives for will cost each money market fund 2. Retail Money Market Funds shareholders to redeem shares ahead of complex approximately $2,580 in one- other investors.’’ 659 Even if we assume time costs to amend their policies and As was proposed, our fees and gates that a government fund had sufficient procedures.663 reform will apply to retail money liquidity from its 80% basket of Because staff analysis shows that our market funds, but our floating NAV government securities to cover 0.5% non-conforming basket is reform will not. However, as discussed adequately increased redemptions that consistent with industry practice, we more below, we are revising the result from a credit event in the 20% believe that any effect on efficiency, definition of a retail money market fund basket, we note that the structural competition, or capital formation should from our proposal to address concerns incentives that exist in stable NAV be minimal. In addition, any raised by commenters. As amended, a money market funds, and the associated government money market funds that do retail money market fund means a first mover advantage and potential currently use the 20% basket could roll money market fund that has policies shareholder dilution concerns, still out of any excess exposure to non- and procedures reasonably designed to exist.660 And, indeed, after our floating government assets by the time that limit all beneficial owners of the fund NAV reform takes effect, the incentives funds are required to comply with the to natural persons.664 could be even more pronounced in amended rule, given rule 2a–7’s As discussed in the Proposing Release government funds if those institutional maturity limits on portfolio securities. and the DERA Study, retail investors investors who are the most sensitive to Nevertheless, reducing the size of the historically have behaved differently risk move to government funds. basket could affect efficiency, from institutional investors in a crisis, Based on the staff’s analysis, we competition, or capital formation in the being less likely to make large expect that the 0.5% non-conforming future because decreasing the size of the redemptions quickly in response to the basket is consistent with current basket reduces a government fund’s first sign of market stress. During the industry practices and strikes an flexibility to invest in non-government financial crisis, institutional prime appropriate balance between providing assets in the future. For example, money market funds had substantially government money market fund decreasing the size of the basket could larger redemptions than prime money managers with adequate flexibility to market funds that self-identify as manage such funds while preventing 661 Rule 2a–7(a)(16) defines a government money retail.665 As noted in the Proposing them from taking on potentially high market fund and requires that such funds invest at Release, for example, approximately 4– least 99.5% of fund assets in cash, government 5% of retail prime money market funds securities, and repurchase agreements that are 657 See Wells Fargo DERA Comment Letter. collateralized fully. had outflows of greater than 5% on each 658 See Proposing Release, supra note 25, at text 662 These costs are included as part of the accompanying n.176. Paperwork Reduction Act analysis. See infra section 664 See infra note 679 and accompanying text. 659 See id. at text following n.173. IV.A. 665 See Proposing Release, supra note 25, at n.185 660 See supra section III.B.3. 663 Id. and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47795

of September 17, 18, and 19, 2008, apply to retail money market funds, in prime money market funds in the compared to 22–30% of institutional the same way that our floating NAV future. prime money market funds.666 reform would not apply to retail As noted in the Proposing Release, we Similarly, in late June 2011, funds.670 More specifically, commenters also believe there is a difference in the institutional prime money market funds argued that retail investors behave anticipated shareholder behaviors we experienced heightened redemptions in differently than institutional investors are trying to address by the fees and response to concerns about their and, therefore, retail money market gates requirements and floating NAV potential exposure to the Eurozone debt funds are insulated from runs and requirement as applied to retail crisis, whereas retail prime money sudden losses of liquidity.671 funds.675 The floating NAV requirement market funds generally did not Although, as discussed above, the is specifically designed to address experience a similar increase.667 Studies evidence suggests that retail investors shareholders’ incentive to redeem to of money market fund redemption historically have exhibited much lower take advantage of pricing discrepancies patterns in times of market stress also levels of redemptions or a slower pace between a money market fund’s market- have observed this difference.668 As we of redemptions in times of stress,672 we based NAV per share and its stable noted in the Proposing Release and cannot predict future investor behavior share price. As discussed above, we discussed above, we believe that with certainty and, thus, we cannot rule believe this incentive likely is greatest institutional shareholders tend to out the potential for heavy redemptions among institutional investors because respond more quickly than retail in retail funds in the future. Empirical they are more likely to have significant shareholders to potential market stresses analyses of retail money market fund sized investments at stake and the because generally they have greater redemptions during the financial crisis sophistication and resources to monitor capital at risk and may be better show that at least some retail investors actively such discrepancies.676 While informed about the fund through more eventually began redeeming shares.673 retail investors are unlikely to be sophisticated tools to monitor and Similarly, we note that when the motivated to a substantial degree by the analyze the portfolio holdings of the Reserve Primary Fund, which was a first-mover advantage created by money funds in which they invest.669 We mixed retail and institutional money market funds’ stable pricing convention, discuss below our fees and gates and market fund, ‘‘broke the buck’’ as a they may be motivated to redeem floating NAV reforms and their result of the Lehman Brothers heavily in flights to quality, liquidity, application to retail money market bankruptcy, almost all of its investors and transparency (even if they may do funds, as defined by our amendments ran—retail and institutional alike. so somewhat slower than institutional adopted today. Additionally, we note that it is possible investors). Fees and gates are designed that the introduction of the Treasury to address these types of a. Fees and Gates Temporary Guarantee Program on redemptions.677 We also note that retail Largely for the reasons discussed September 19, 2008 (a few days after money market funds today operate with above, several commenters argued that institutional prime money market funds the potential for gates under rule 22e– our fees and gates reforms should not experienced heavy redemptions) 3, which allows a fund board to lessened the incentive for shareholders permanently gate and liquidate a money 666 See id. to redeem from retail money market market fund under certain 667 See Proposing Release, supra note 25, at n.187 funds. Moreover, as we recognized in circumstances. Today’s amendments and accompanying text. We noted that, based on the Proposing Release, retail prime include a number of disclosure reforms iMoneyNet data, retail money market funds that are designed to ensure that retail experienced net redemptions of less than 1% money market funds, unlike government between June 14, 2011 and July 5, 2011, and only money market funds, generally are investors will understand this new 27 retail money market funds had redemptions in subject to the same credit and liquidity additional fee and gate regime for excess of 5% during that period (and of these funds money market funds.678 only 7 had redemptions in excess of 10% during risks as institutional prime money market funds.674 As such, absent fees In addition, the floating NAV this period), far fewer redemptions than those requirement will affect a shareholder’s incurred by institutional funds. We have also and gates, there would be nothing to reviewed the redemption activity for institutional help manage or prevent a run on retail experience with an institutional prime prime funds during this same time period and note money market fund on a daily basis. It that institutional prime funds experienced net thus is a significant reform that is 670 See, e.g., Fin. Svcs. Roundtable Comment redemptions of approximately 9% between June 14, targeted only at those investors that we 2011 and July 5, 2011, and 46 institutional prime Letter; Comment Letter of United Services money market funds had redemptions in excess of Automobile Association (Sept. 17, 2013) (‘‘USAA consider most likely to be motivated to 5% during that period (and of these funds 35 had Comment Letter’’); MFDF Comment Letter; see also redeem at least in part on the basis of redemptions in excess of 10% during this period), Fidelity Comment Letter (arguing that the fees and pricing discrepancies in the fund. In gates requirements should be limited to far greater redemptions than those incurred by retail contrast, and as discussed above, the funds. institutional prime funds). 668 See, e.g., DERA Study, supra note 24, at 8; 671 See, e.g., USAA Comment Letter; MFDF fees and gates requirements will not Cross Section, supra note 35, at 9 (noting that Comment Letter (‘‘Because retail investors are affect a money market fund on a day-to- institutional prime money market funds demonstrably slower to redeem their shares, the day basis; its effect will be felt only if experienced net redemptions of $410 billion (or fund’s adviser will have greater ability to manage the fund’s weekly liquid assets fall 30% of ) in the four weeks the fund’s liquidity in a way necessary to meet beginning September 10, 2008, based on iMoneyNet redemptions, even in times of market stress, below 30% of its total assets—i.e., data, while retail prime money market funds without necessitating the cost of that liquidity being unless it comes under potential stress— experienced net redemptions of $40 billion (or 5% imposed on redeeming retail shareholders.’’); and even then, only if the board of assets under management) during this same time Comment Letter of Financial Services Institute determines that a fee and/or gate is in period); Marcin Kacperczyk & Philipp Schnabl, (Sept. 17, 2013) (‘‘Fin. Svcs. Inst. Comment Letter’’) How Safe are Money Market Funds?, 128 Q. J. Econ. (‘‘Retail investors pose a substantially lower risk of 1017 (April 5, 2013) (‘‘Kacperczyk & Schnabl’’); high redemption activities during periods of market 675 See Proposing Release, supra note 25, at 200. Wermers Study, supra note 35. stress . . . .’’). 676 See generally supra note 669 and 669 We also understand that retail money market 672 See Proposing Release, supra note 25, at n.199 accompanying text. funds’ shareholder base tends to be less and accompanying text. 677 See supra section III.B.1; see also Invesco concentrated and, thus, less likely to move large 673 See Proposing Release, supra note 25, at n.197 Comment Letter (suggesting that liquidity fees amounts of money at once. We believe this may be, and accompanying text; see also Wermers Study, would mitigate the ‘‘first-mover’’ advantage); UBS in part, why retail money market funds experienced supra note 35. Comment Letter. fewer redemptions during the financial crisis. 674 See Proposing Release, supra note 25, at 199. 678 See infra section III.E.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47796 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

the best interests of the fund. Further, Some commenters, however, objected required retail funds generally to value while we recognize that a retail money to, or expressed concerns about not portfolio securities using market-based market fund may be less likely to applying a floating NAV to retail funds. factors rather than amortized cost, experience strained liquidity (and thus These commenters noted, for example, money market funds that qualify as less likely to need to impose a fee or that (i) retail investors in the future may retail funds may continue to offer a gate), we believe there is still a not behave the way we observed in stable value as they do today—and sufficient risk of this occurring that we 2008; (ii) increases in sophistication of facilitate their stable price by use of should allow such funds to impose a fee retail investors (for example, through amortized cost valuation and/or penny- or gate to manage any related heavy technological advancements) may lead rounding pricing of their portfolios. As redemptions when the weekly liquid retail investors to act more like discussed below, our definition of a assets fall below 30% and doing so is in institutional investors over time; and retail fund reflects several modifications the fund’s best interests. For the same (iii) any differentiation between retail from our proposal (in which a retail reasons, we believe requiring a fund to and institutional funds provides fund was defined as a fund that limits impose a liquidity fee when weekly opportunities for gaming behavior by redemptions to $1 million in a single liquid assets fall below 10% is also institutional investors.681 business day) and reflects an approach appropriate, unless the board We recognize, as discussed above, suggested by a number of determines otherwise based on the that we cannot be certain how retail commenters.684 fund’s best interests. Accordingly, retail investors would have reacted during the We proposed to define a fund as money market funds will be subject to financial crisis had the Treasury retail, and thus not subject to the the fees and gates reform. Temporary Guarantee Program not been floating NAV reform, if it is a fund that restricts a shareholder of record from b. Floating NAV implemented. Similarly, we cannot predict whether retail investors, in light redeeming more than $1 million in any i. Definition of Retail Money Market of new tools to manage liquidity (e.g., one business day. We explained our Fund fees and gates) and enhanced disclosure belief that this approach should be As we proposed, however, we are not and transparency, will behave more like relatively simple to implement because imposing the floating NAV reform on institutional investors in the future. But it would only require a fund to establish retail money market funds. For purposes the evidence to date suggests that retail a one-time, across-the-board redemption of the floating NAV reform, we are investors do not present the same risks policy, unlike other approaches based defining a retail money market fund to associated with high levels of on shareholder characteristics that mean a money market fund that has redemptions posed by institutional would require ongoing monitoring by policies and procedures reasonably investors.682 We continue to believe that the fund. We also stated our belief that designed to limit all beneficial owners the significant benefits of providing an our proposed approach would reduce of the fund to natural persons (‘‘retail alternative stable NAV fund option the risk that a retail fund would funds’’).679 justify the risks associated with the experience heavier redemption requests Many commenters generally potential for a shift in retail investors’ than it could effectively manage in a supported not applying a floating NAV behavior in the future, particularly crisis because it would limit the total requirement to retail money market given that retail money market funds amount of redemptions a fund can funds, noting, for example, retail will be able to use fees and gates as tools experience in a single day and therefore investors’ moderate redemption activity to stem heavy redemptions should they provide the fund time to better predict during the financial crisis as compared occur. We also note that, as discussed and manage its liquidity. with institutional prime funds and the below, our revised approach to defining In the Proposing Release, we selected importance of retaining a stable NAV a retail fund based on shareholder a $1 million redemption limit because investment product for retail investors characteristics should minimize the we expected this amount would be high that facilitates cash management, potential for gaming behavior by enough to make money market funds a particularly where there are few institutional investors. viable cash management tool for retail alternatives offering diversification, As of February 28, 2014, funds that investors, but low enough that stability, liquidity, and a market-based self-report as retail money market funds institutional investors would likely self- rate of return for these investors.680 held nearly $998 billion in assets, which select out of these funds because it is approximately one-third of all assets would not satisfy their operational 679 See rule 2a–7(a)(25). ‘‘Beneficial ownership’’ held in money market funds.683 Unlike needs.685 Under the proposed retail typically means having voting and/or investment under our proposal, which would have fund definition, a fund would be able to power. See, e.g., Securities Exchange Act rules 13d– 3 and 16a–1(a)(2); Metropolitan Life Insurance permit an ‘‘omnibus account holder’’ to Company, SEC Staff No-Action Letter (Nov. 23, 681 See, e.g., Goldman Comment Letter; J.P. 1999) (‘‘Met Life No-Action Letter’’) at n.9 and Morgan Comment Letter; HSBC Comment Letter; 684 The definition of retail money market fund we accompanying text. We note that our definition of Hanson et al. Comment Letter. are adopting is informed by a joint comment letter retail money market fund is consistent with the way 682 See supra notes 666 and 667 and submitted by eight fund complexes that manage in which Congress defined a ‘‘retail customer’’ in accompanying text. approximately $1.2 trillion of U.S. money market section 913(a) of the Dodd-Frank Act (defining 683 Staff estimates were derived by using self- funds (representing approximately 45% of the total ‘‘retail customer,’’ among other things, as a natural reported data from iMoneyNet as of February 28, U.S. money market fund industry assets) as of person). 15 U.S.C. 80b–11(g)(2). A retail fund may 2014 to estimate percentages for retail and September 30, 2013. See Comment Letter dated disclose in its prospectus that it limits investments institutional segments by money market fund type. October 31, 2013 (submitted by BlackRock, Fidelity, to accounts beneficially owned by natural persons Staff then applied these percentages to the total Invesco, Legg Mason & Western Asset, Northern and describe in its policies and procedures how the market size segments based on Form N–MFP data Trust, T. Rowe, Vanguard, and Wells Fargo) (‘‘Retail fund complies with the retail fund limitation when as of February 28, 2014. Of these assets, Fund Joint Comment Letter’’). a shareholder of record is an omnibus account approximately $593 billion are held by prime 685 The Proposing Release also noted that a holder that does not provide transparency down to money market funds and another $209 billion are money market fund that sought to qualify as a retail the beneficial ownership level. We discuss omnibus in government funds. Because the final rules do not fund would need to effectively describe that it is account issues below. See infra section III.C.2.b.iii. subject government funds to the floating NAV intended for retail investors and include in the 680 See, e.g., Blackrock I Comment Letter; requirement, funds that qualify as retail money fund’s prospectus and advertising materials Blackrock II Comment Letter; Vanguard Comment market funds would be potentially relevant only to information about the fund’s daily redemption Letter; T. Rowe Price Comment Letter; ICI Comment the investors holding the $593 billion in retail limitations. See Proposing Release, supra note 25, Letter. prime funds. at section III.A.4.b.i.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47797

redeem more than $1 million in a single analyzing the comments received, we We believe, however, that defining a business day provided the fund has agree that defining a retail fund as a retail fund using the natural person test policies and procedures reasonably fund that has policies and procedures will, as a practical matter, significantly designed to allow the conclusion that reasonably designed to limit beneficial reduce opportunities for gaming the omnibus account holder does not ownership to natural persons (‘‘natural behavior because we believe that most permit any beneficial owner to directly person test’’) provides a simpler and funds will use social security numbers or indirectly redeem more than $1 more cost-effective way to accomplish as part of their compliance process to million in a single day.686 The our goal of targeting the floating NAV limit beneficial ownership to natural Proposing Release also considered and reform to the type of money market fund persons, and institutional investors are sought comment on other ways to that has exhibited greater tendencies to not issued social security numbers. distinguish a retail fund from an redeem first in times of market stress institutional fund, including applying and has the investors most likely to seek A money market fund that has limitations based on maximum account to take advantage of any pricing policies and procedures reasonably balance, shareholder concentration, or discrepancies and therefore dilute the designed to limit beneficial owners to shareholder characteristics (e.g., a social interests of remaining shareholders.691 natural persons will not be subject to security number that would identify the We discuss below the operation of the the floating NAV reform. We expect that shareholder as an individual person and natural person test and its economic a fund that intends to qualify as a retail not an institution).687 We discuss below effects. money market fund would disclose in comments received on these alternative its prospectus that it limits investments ii. Operation of the Natural Person Test means for distinguishing retail funds to accounts beneficially owned by from institutional funds. As discussed in the Proposing natural persons.692 Funds will have A number of commenters supported Release, it currently is difficult to flexibility in how they choose to comply (some with suggested scope distinguish precisely between retail and with the natural person test. As noted modifications) our proposed approach institutional money market funds, given by commenters, we expect that many to define a retail investor by means of that funds generally self-report this funds will rely on social security a daily redemption limit.688 Many designation, there are no clear or numbers to confirm beneficial commenters, however, raised concerns consistent criteria for classifying funds, ownership by a natural person. The with defining a retail fund as a fund that and there is no common regulatory or social security number is one well- imposes a daily redemption limit on its industry definition of a retail investor or established method of identification, investors, stating, for example, that the a retail money market fund. We noted issued to natural persons who qualify $1 million daily redemption limit that the operational challenges of under the Social Security would (i) unduly limit liquidity by defining a retail fund are numerous and Administration’s requirements. Because prohibiting transactions by shareholders complex. In addition, as discussed social security numbers are in nearly all whose behavior does not present run below, drawing a distinction between cases obtained as part of the account- retail and institutional investors is risk; (ii) restrict full liquidity not only opening process (for natural persons) complicated by the extent to which in times of market stress, but also when and are populated in transfer agent and shares of money market funds are held the markets are operating effectively; intermediary recordkeeping systems, and (iii) be costly and difficult to by investors through omnibus accounts this approach should reduce implement, monitor, and enforce.689 As and other financial intermediaries. We significantly the required enhancements noted above, however, a number of also recognize that any distinction to systems, processes, and procedures commenters have suggested defining a between retail and institutional funds retail money market fund as a fund that could result in ‘‘gaming behavior’’ that would be required under alternative seeks to limit beneficial ownership whereby investors having the general approaches, including our proposed 693 interest to natural persons.690 After attributes of an institution might daily redemption limit. In addition, attempt to fit within the confines of for intermediaries using omnibus 686 We proposed to define an ‘‘omnibus account whatever retail fund definition we craft. account registrations where the holder’’ as ‘‘a broker, dealer, bank, or other person beneficial owners are natural persons that holds securities issued by the fund in nominee fund by limiting beneficial ownership to natural (e.g., retail brokerage accounts, certain name.’’ See proposed (FNAV) rule 2a–7(c)(3)(ii). persons, a number of other commenters also 687 trust accounts, and defined contribution See infra note 701 and accompany text for a supported this definition. See, e.g., SunTrust plan accounts), a social security number discussion of social security numbers as a means for Comment Letter; ICI Comment Letter; SIFMA distinguishing retail from institutional funds in the Comment Letter. is a key component of customer Proposing Release. 691 A number of commenters supported alternate account-opening procedures and 688 See, e.g., CFA Institute Comment Letter; means of defining a retail investor. See, e.g., compliance and therefore should allow Northern Trust Comment Letter; Schwab Comment Schwab Comment Letter (supporting defining retail intermediaries to distinguish retail from Letter; USAA Comment Letter; Vanguard Comment investors based on concentration risk); Deutsche Letter. These commenters also offered suggested Comment Letter (supporting defining retail institutional investors (and therefore scope modifications, including increasing or investors based on a maximum account balance assist retail funds in satisfying the retail decreasing the daily redemption limit, creating an limit); SIFMA Comment Letter (supporting defining fund definition).694 In many cases, advance notice provision (pre-approved retail investors based on a minimum initial funds and intermediaries already collect redemptions over $1 million in a single business investment, but also supporting the ‘‘natural day), applying the daily redemption limit on a per- person’’ approach we are adopting today); Dreyfus this data to comply with ‘‘know your account basis rather than a per-shareholder basis, Comment Letter (supporting defining retail customer’’ practices and anti-money and exempting certain transactions from the daily investors based on settlement times); Fin. Svcs. laundering laws and should easily be redemption limit. Roundtable Comment Letter (supporting defining 689 See, e.g., Comment Letter of John D. Hawke, institutional investors, rather than retail investors, Jr., Arnold and Porter, LLP on behalf of Federated by, for example, reference to assets under 692 For example, a fund could disclose that it is Investors, Inc., Washington, District of Columbia management). We have carefully considered these a retail-only money market fund not subject to the (Nov. 21, 2013) (‘‘Federated XIII Comment Letter’’); alternative means of defining a retail investor, but floating NAV requirement, consistent with the Federated II Comment Letter; Fidelity Comment we believe, as discussed below, that the ‘‘natural requirements of Form N–1A. See, e.g., Item 6 and Letter; ICI Comment Letter; SIFMA Comment Letter. person’’ approach suggested by a number of other Item 11 of Form N–1A; see also infra note 940 and 690 See supra note 684 and accompanying text. In commenters is a simpler and more cost effective accompanying text. addition to the eight commenters who submitted a way to distinguish between institutional and retail 693 See, e.g., ICI Comment Letter. joint comment letter in support of defining a retail investors. 694 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47798 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

able to identify if a beneficial owner is 404(c) of ERISA.698 To the extent that a taxpayer identification number. We a natural person.695 there remains a risk that an institutional noted our concern, however, that social As commenters noted, defining a decision maker associated with a security numbers do not necessarily retail fund in this way encompasses a qualifying retail fund makes decisions correlate to an individual, and taxpayer large majority of individual investors inconsistent with how we understand identification numbers do not who use retail accounts today.696 For retail funds generally behave, we necessarily correlate to a business (for example, we understand that many tax- believe that our approach appropriately example, businesses operated as pass- advantaged savings accounts and balances this potential risk against the through entities).701 One commenter ordinary trusts are beneficially owned substantial benefits of providing a reiterated this concern.702 We note, by natural persons, and therefore would simple and cost-effective way to however, that the definition of a retail likely qualify under the natural person distinguish retail funds and provide a fund does not rely solely on each test.697 We understand that, often, in targeted floating NAV requirement. investor having a social security these types of accounts, natural persons As noted above, funds that intend to number. Rather, our approach are responsible for making the decision satisfy the retail fund definition will be recognizes that in most cases, a fund or to redeem from a fund during a time of required to adopt and implement intermediary may often satisfy the crisis (rather than an institutional policies and procedures reasonably natural person test by implementing decision maker). We acknowledge, designed to restrict beneficial policies and procedures that require however, that a fund may still qualify as ownership to natural persons.699 For verifying a social security number at the a retail money market fund example, funds could have policies and time of account opening. But, the fund notwithstanding having an institutional procedures that will help enable the or intermediary may, for example, decision maker (e.g., a plan sponsor in fund to ‘‘look through’’ these types of determine that a non-U.S. investor who certain retirement arrangements, or an accounts and reasonably conclude that does not have a social security number investment adviser managing the beneficial owners are natural is a natural person (e.g., using a discretionary investment accounts) that persons. A fund’s policies and passport). could eliminate or change an procedures could, for example, require Finally, we note that, currently, it is investment option, such as offering or that the fund reasonably conclude that not uncommon for a money market fund investing in a money market fund. We ownership is limited to natural persons to be owned by both retail and also recognize that there is a potential and do so (i) directly, such as when the institutional investors, typically through risk that an institutional decision maker investor provides a social security a retail and institutional share class, 703 may react differently in times of market number to the fund adviser, when respectively. In order to qualify as a stress than the individuals that we opening a taxable or tax-deferred retail money market fund, funds with expect will invest in retail money account through the adviser’s transfer separate share classes for different types market funds as defined under our agent or brokerage division; or (ii) of investors (as well as single-class amended rule. We believe that in many indirectly, such as when a social funds for both types of investors) will instances, however, this risk can be security number is provided to the fund need to reorganize into separate money mitigated. A number of commenters adviser in connection with market funds for retail and institutional noted, for example, that under section recordkeeping for a retirement plan, or investors, which may be separate series 704 3(34) of ERISA, the plan sponsor of a a trust account is opened with of the fund. In the case of a money defined contribution plan can eliminate information regarding the individual market fund with retail and institutional or change an investment option without beneficiaries. We note that our 701 providing notice of the change, but definition of a retail money market fund See Proposing Release, supra note 25, at provides a fund with the flexibility to section III.A.4.c.iii. stated that the plan sponsor would 702 See Schwab Comment Letter (suggesting that likely provide 30 days’ notice of any develop policies and procedures that any final rule identify accounts that are inherently change in order to obtain the benefit of best suit its investor base and does not retail and include them as part of the definition of the fiduciary safe harbor in section require that the fund use social security a retail fund so that, for example, estates and trusts numbers to reasonably conclude that would qualify to invest in a retail money market fund (despite having a tax identification number, 695 Id. investors are natural persons. For rather than a social security number). We note that 696 See Retail Fund Joint Comment Letter. example, a money market fund or the an estate or trust would be able to qualify for 697 Natural persons often invest in money market appropriate intermediary could investment in a retail fund under our definition, funds through a variety of tax-advantaged accounts determine the beneficial ownership of a provided the fund reasonably concludes that the beneficial owner(s) is a natural person. and trusts, including, for example: (i) participant- non-U.S. natural person by obtaining directed defined contribution plans (section 3(34) of 703 Rule 18f–3 under the Investment Company the Employee Retirement Income Security Act other government-issued identification, Act enables a money market fund to offer retail and (‘‘ERISA’’)); (ii) individual retirement accounts for example, a passport.700 institutional share classes by providing an (section 408 or 408A of the Internal Revenue Code In the Proposing Release, we exemption from sections 18(f)(1) and 18(i) of the (‘‘IRC’’)); (iii) simplified employee pension discussed as an alternative to the daily Investment Company Act. We are amending, as arrangements (section 408(k) of the IRC); (iv) simple proposed, rule 18f–3 (the multiple class rule) to retirement accounts (section 408(p) of the IRC); (v) redemption limit approach requiring replace the phrase ‘‘that determines net asset value custodial accounts (section 403(b)(7) of the IRC); that funds consider shareholder using the amortized cost method permitted by (vi) deferred compensation plans for government or characteristics, such as whether the § 270.2a–7’’ with ‘‘that operates in compliance with tax-exempt organization employees (section 457 of investor has a social security number or § 270.2a–7’’ because the money market funds that the IRC); (vii) Keogh plans (section 401(a) of the are subject the floating NAV requirement would not IRC); (viii) Archer medical savings accounts use the amortized cost method to a greater extent (section 220(d) of the IRC); (ix) college savings 698 See Retail Fund Joint Comment Letter. than mutual funds generally. plans (section 529 of the IRC); (x) health savings 699 See rule 2a–7(a)(25). 704 Each series of a series investment company is account plans (section 223 of the IRC); and (xi) 700 See, e.g., 31 CFR 1023.220(a)(2)(i)(A)(4)(ii) a separate investment company under the ordinary trusts (section 7701 of the IRC). Accounts (requiring a broker-dealer to obtain for non-U.S. Investment Company Act. See, e.g., Fair and that are not beneficially owned by natural persons persons [a] taxpayer identification number, a Equitable Treatment of Series Type Investment (for example, accounts not associated with social passport number and country of issuance, an alien Company Shareholders, Rel. No. IC–7276 (Aug. 8, security numbers), such as those opened by identification card number, or the number and 1972). See also J.R. Fleming, Regulation of Series businesses, including small businesses, defined country of issuance of any other government-issued Investment Companies under the Investment benefit plans, or endowments, would not qualify as document evidencing nationality or residence and Company Act of 1940, 44 Bus. Law. 1179 (Aug. retail money market funds. bearing a photograph or similar safeguard). 1989).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47799

share classes, two commenters of the fund, determines that the notified in advance).711 suggested that the Commission provide reorganization results in a fair and Notwithstanding the prohibitions in relief from section 18(f)(1) of the Act approximately pro rata allocation of the section 22(e) of the Act, in the context (designed, in part, to prohibit material fund’s assets between the class being of a one-time reorganization to differences among the rights of reorganized and the class remaining in distinguish between retail and shareholders in a fund) 705 to allow the the fund.708 As is the case with any institutional money market funds (either fund to reorganize the classes into board determination, the basis for the in separating classes into new funds or separate money market funds.706 fund board’s determination should be in ensuring that an existing fund only We recognize that a reorganization of documented fully in the fund’s has retail or institutional investors), the a share class of a money market fund corporate minutes.709 We believe that a Commission’s position is that a fund into a new series may implicate section reorganization accomplished in this may involuntarily redeem investors who 18 of the Investment Company Act, as manner would be consistent with the no longer meet the eligibility well as section 17(a) of the Investment investor protection concerns in sections requirements in a fund’s retail and/or Company Act (section 17(a) prohibits, institutional money market funds 17(a) and 18 of the Act in this context. among other things, certain transactions without separate exemptive relief, More specifically, we believe that this between a fund and an affiliated person provided that the fund notifies in board determination, in the context of a of the fund to prevent unfairness to the writing such investors who become fund or overreaching by the affiliated one-time reorganization related ineligible to invest in a particular fund person).707 Notwithstanding the specifically to effectuating a split of at least 60 days before the redemption prohibitions in sections 17(a) and separate share classes in order to qualify occurs. 18(f)(1) and 18(i) of the Act, in the as a retail money market fund, addresses Accordingly, the Commission is context of distinguishing between retail the primary concerns that sections 17 exercising its authority under section and institutional money market funds and 18 of the Act are intended, in part, 6(c) of the Act to provide exemptions when implementing the reforms we are to address—to ensure that shareholders from these provisions of the Act to adopting today, the Commission is of in a fund are treated fairly and prohibit permit a money market fund to the view that a reorganization of a class overreaching by affiliates. reorganize a class of a fund into a new of a fund into a new fund may take The Commission’s position is that, as fund in order to qualify as a retail place without separate exemptive relief, part of implementing a reorganization in money market fund and make certain provided that the fund’s board of response to the amendments we are involuntary redemptions as discussed 712 directors, including a majority of the adopting today, a money market fund above. As discussed above, we directors who are not interested persons may involuntarily redeem certain believe that such exemptions do not investors that will no longer be eligible implicate the concerns that Congress 705 See Exemption for Open-End Management intended to address in enacting these Investment Companies Issuing Multiple Classes of to invest in the newly established or existing money market fund. We provisions, and thus they are necessary Shares; Disclosure by Multiple Class and Master- and appropriate in the public interest Feeder Funds, Investment Company Act Release recognize that such an involuntary and consistent with the protection of No. 19955 (Dec. 15, 1993), at n.19 and redemption (or cancellation) of fund accompanying text. investors and the purposes fairly 706 shares may implicate section 22(e) of See Dechert Comment Letter; NYC Bar intended by the Act. We discuss the Committee Comment Letter. Section 18(f)(1) of the the Act, which, among other things, Act generally prohibits a fund from issuing any potential costs of reorganizing funds generally prohibits a fund from 713 ‘‘senior security’’ and section 18(i) of the Act below. generally requires that every share of stock issued suspending (or postponing) the right of by a fund ‘‘shall be a voting stock and have equal redemption for any redeemable security iii. Omnibus Account Issues voting rights with every other outstanding voting for more than seven days after tender of As we discussed in the Proposing stock.’’ Rule 18f–3 under the Act provides a such shares.710 conditional exemption from sections 18(f)(1) and Our staff has, in the past, Release, most money market funds do 18(i) of the Act, but Rule 18f–3 does not provide however, provided no-action relief an exemption to permit a fund with multiple under section 22(e) of the Act in similar 711 See, e.g., Scudder Group of Funds (pub. avail. classes of shares to separate a class from the other situations (e.g., where an investor’s Sept. 15, 1992) (no-action relief granted to a fund class(es) and reorganize it into a separate fund, and that proposed to, upon providing 30 days’ notice, such a reorganization may implicate the concerns account balance falls below a certain involuntarily redeem accounts whose shareholders underlying sections 18(f)(1) and 18(i) of the Act. value, provided shareholders are failed to provide taxpayer identification numbers); 707 See section 17(b) (setting forth, among other DFA U.S. Large Cap Portfolio Inc. (pub. avail. Sept. things, the standards for exempting a transaction 7, 1990) (no-action relief provided to a fund that 708 A pro rata allocation ensures, for example, that from the prohibition). Section 17(a) of the Act, may, upon providing 30 days’ notice, involuntarily portfolio securities with different liquidity and/or among other things, generally prohibits any redeem investors who failed to maintain at least $15 quality characteristics are distributed equally affiliated person of a fund, acting as principal, from million in a private advisory account with the among each fund class. The board’s determination knowingly selling to or buying from the fund, any investment adviser that produced annual advisory requires a finding that the reorganization results in security or other property, with certain limited fees of at least $100,000; Axe-Houghton Income a fair and approximately pro rata allocation of the exceptions. A fund whose class of shares is being Fund, Inc. (pub. avail. Mar. 19, 1981) (no-action fund’s assets in order to acknowledge that there reorganized into a new fund may be an affiliated relief provided to a fund that may, upon providing may be limited situations in which a 100% pro rata person of the new fund, due to, among other a number of notice and delayed effectiveness possibilities, sharing an investment adviser or board allocation may not be practical (e.g., an odd-lot provisions, involuntarily redeem investors whose of directors. Similarly, the new fund may be an portfolio security). account balances fall below a prescribed threshold). affiliated person of the fund. Accordingly, the sale 709 All registered investment companies, 712 See section 6(c). of the assets of the fund to the new fund, and the including money market funds, must maintain as 713 We expect that money market funds that new fund’s purchase of those assets from the fund, part of their records minute books for board of choose to rely on our exemptive relief above and in a reorganization of a class of the fund may be directors’ meetings and preserve such records make this determination in order to separate an prohibited under sections 17(a)(1) and (2) of the permanently, the first two years in an easily existing retail share class into a new fund would do Act. Rule 17a-8 under the Act provides an accessible place. See rules 31a–1(b)(4) and 31a– so only where the fund’s adviser believes it would exemption from sections 17(a)(1) and 17(a)(2) of the 2(a)(1). result in cost savings as compared with the costs Act for a transaction that is a ‘‘merger, 710 For example, if a shareholder may not redeem of establishing entirely new funds (these costs are consolidation, or purchase or sale of substantially a portion of his shares without causing an estimated below). We do not estimate any all of the assets’’ of a fund that meets the rule’s involuntary redemption of his or her entire account additional costs for funds to document the board’s conditions. A reorganization of a class of a fund balance, the shareholder may be deprived of the determination that the reorganization results in a into a new fund may not be covered by rule 17a– right to redeem that portion of his account balance, fair and approximately pro rata allocation of the 8. in contravention of section 22(e). fund’s assets. See supra note 709.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47800 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

not have the ability to look through information that would identify the seek to qualify as retail money market omnibus accounts to determine the individual. Regardless of the specific funds under the amended rules, there characteristics of their underlying policies and procedures followed by a may be negative effects on competition investors. An omnibus account may fund in reasonably concluding that the by benefitting fund groups with large consist of holdings of thousands of underlying beneficial owners of an percentages of retail investors relative to small investors in retirement plans or omnibus account are natural persons, other funds. The Commission estimates brokerage accounts, just one or a few we expect that a fund will periodically that, as of February 28, 2014, 39 fund institutional accounts, or a mix of the review the adequacy of such policies complexes (or 46% of all fund two. Omnibus accounts typically and procedures and the effectiveness of complexes) have 75% or more of their aggregate all the customer orders they their implementation.716 Accordingly, total assets self-reported as ‘‘retail.’’ 718 receive each day, net purchases, net such periodic reviews would likely There also could be a negative effect on redemptions, and they often present a assist funds in detecting and correcting competition to the extent that certain single buy and single sell order to the any gaps in funds’ policies and fund groups already offer separate retail fund. Accordingly, omnibus procedures, including a fund’s ability to and institutional money market funds accountholders may make it more reasonably conclude that the underlying and thus might not need to reorganize difficult for a money market fund to beneficial owners of an omnibus an existing money market fund into two assure itself that it is able to operate as account are natural persons. As separate funds (retail and institutional). a retail fund.714 discussed below in the economic The Commission estimates that, as of A money market fund that seeks to analysis, we have included in our February 28, 2014, there are qualify as a retail fund must have aggregate cost estimate costs for funds to approximately 76 fund complexes that policies and procedures that are establish policies and procedures with currently offer separately designated reasonably designed to limit the fund’s respect to omnibus accounts, but we retail and institutional money market beneficial owners to natural persons. expect that funds generally will rely on funds (or series).719 On the other hand, Because an omnibus accountholder is financial intermediaries to implement as discussed above, we believe that the the shareholder of record (and not the such policies (rather than, for example, majority of money market funds beneficial owner), retail funds will need entering into contractual arrangements). currently are owned by both retail and to determine that the underlying iv. Economic Analysis institutional investors (although many beneficial owners of the omnibus funds are separated into retail and account are natural persons. We are not In addition to the costs and benefits institutional classes), and therefore prescribing the ways in which a fund discussed above, implementing any relatively few funds would benefit from may seek to satisfy the retail fund reform that distinguishes between retail an existing structure that includes definition, including how the fund will and institutional money market funds separate retail and institutional funds. reasonably conclude that underlying will likely have similar effects on Two commenters also suggested that beneficial owners of an omnibus efficiency, competition, and capital a bifurcation of existing assets in money account are natural persons.715 There formation, regardless of how we define market funds into retail and are many ways for a fund to effectively a retail money market fund (or retail institutional funds might lead to a manage their relationships with their investor). We discussed these effects in significant reduction in scale and intermediaries, including contractual the Proposing Release and they are 717 therefore some funds may become arrangements or periodic certifications. described below. To the extent that uneconomical to operate, leading to Funds may manage these relations in retail investors prefer a stable NAV further consolidation in the industry the manner that best suits their money market fund, our floating NAV and a reduction in competition.720 As circumstances. We note that a fund’s reform (that does not apply to retail noted above, many fund complexes policies and procedures could include, funds) helps to maintain the utility of already operate under structures that for example, relying on periodic such a money market fund investment separate retail and institutional product. However, to the extent that representations of a third-party investors, either by established funds, funds seek to maintain a stable NAV by intermediary or other verification series, or classes, and therefore qualifying as a retail fund, there may be methods to confirm the individual’s demonstrate that doing so is not an adverse effect on capital formation if ownership interest, such as when a fund uneconomical. We recognize, however, the associated costs incurred by funds is providing investment only services to that to the extent there are money are passed on to shareholders. Funds a retirement plan or an omnibus market funds or fund groups that that choose to qualify as retail money provider is unable or unwilling to share determine that it would not be market funds will incur some economical to operate separate retail 714 operational costs (discussed below) and, As we noted in the Proposing Release, the and institutional individual money challenges of managing implementation of fund depending on their magnitude, these policies through omnibus accounts are not unique costs might affect capital formation and market funds, there may be a reduction to distinguishing between retail and institutional competition (depending on the varied in competition. We believe that such funds. For example, funds frequently rely on effects would be relatively small, as intermediaries to assess, collect, and remit ability of funds to absorb these costs). redemption fees charged pursuant to rule 22c–2 on To the extent that retail investors discussed in section III.K below. beneficial owners that invest through omnibus prefer a stable NAV product and funds Finally, we note that there may be an accounts. Funds and intermediaries face similar adverse effect on competition to the issues when managing compliance with other fund policies, such as account size limits, breakpoints, 716 See rule 38a-1(a)(3). extent that large money market funds rights of accumulation, and contingent deferred 717 Commenters did not specifically address our are able, based on information from sales charges. Service providers also offer services discussion in the Proposing Release of the effects broker-dealers and other intermediaries, designed to facilitate compliance and evaluation of on efficiency, competition, and capital formation. A to receive full transparency into intermediary activities. few commenters raised concerns about the costs 715 We note that although it is a fund’s obligation associated with reorganizing money market funds 718 to satisfy the retail fund definition, an intermediary into separate retail and institutional funds (or Based on iMoneyNet data (39 fund complexes ÷ could nonetheless be held liable for violations of series), but did not quantify those costs or object 84 total fund complexes reported = 46%). other federal securities laws, including the specifically to the costs we estimated in the 719 Based on data from iMoneyNet. antifraud provisions, where institutional investors Proposing Release. See, e.g., Goldman Sachs 720 See HSBC Comment Letter; M&T Bank are improperly funneled into retail funds. Comment Letter; UBS Comment Letter. Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47801

beneficial owners. In this way, larger significantly less costly than building a fund that seeks to qualify as a retail money market funds may find it easier new system for tracking and aggregating money market fund under our amended to comply with their policies and daily shareholder redemption activity rules will need to be structured to limit procedures (and, in particular, with (as would be required under our beneficial ownership to only natural regard to omnibus account holders) to proposal). Below, we quantify the persons, and thus any money market qualify as retail money market funds. estimated operational costs associated fund that currently has both retail and To the extent that money market with implementing the natural person institutional shareholders would need funds are not able to distinguish test.724 to be reorganized into separate retail effectively institutional from retail The Commission estimates that based and institutional money market funds. shareholders, it may have negative on those money market funds that self- One-time costs associated with this effects on efficiency by permitting report as ‘‘retail,’’ approximately 195 reorganization would include costs ‘‘gaming behavior’’ by shareholders with money market funds are likely to seek incurred by the fund’s counsel to draft institutional behavior patterns who to qualify as a retail money market fund appropriate organizational documents nonetheless invest in retail funds. As under our amended rules.725 We have and costs incurred by the fund’s board discussed above, however, we believe estimated the ranges of hours and costs of directors to approve such documents. the natural person test we are adopting associated with the natural person test One-time costs also would include the reduces significantly the opportunity for that may be required to perform costs to update the fund’s registration ‘‘gaming behavior’’ when compared activities typically involved in making statement and any relevant contracts or with our proposal. We also recognize systems modifications, implementing agreements to reflect the reorganization, that establishing qualifying retail money fund policies and procedures, and as well as costs to update prospectuses market funds may also negatively affect performing related activities.726 and to inform shareholders of the fund efficiency to the extent that a fund Although we do not have the reorganization. In addition, funds may that currently separates institutional information necessary to provide a point have one-time costs to obtain and retail investors through different estimate of the potential costs associated shareholder approval to the extent that classes instead would need to create with the natural person test, these a money market fund’s charter separate and distinct funds, which may estimates include one-time and ongoing documents and/or applicable state law be less efficient.721 The costs of such a costs to establish separate funds (or require shareholder approval to effect a re-organization are discussed below. series) if necessary, modify systems and reorganization into separate retail and The costs and benefits of the natural related procedures and controls, update institutional money market funds.727 person test are discussed above. In the disclosure in a fund’s prospectus, as Funds and intermediaries also may Proposing Release, we also quantified well as ongoing operational costs. All incur one-time costs in training staff to the operational costs that money market estimates are based on the staff’s understand the operation of the fund funds, intermediaries, and money experience, commenter estimates, and and effectively implement the natural market fund service providers might discussions with industry person test. incur in implementing and representatives. We expect that only In order to qualify as a retail money administering a $1 million daily funds that determine that the benefits of market fund, a fund will be required to 722 redemption limit. As commenters qualifying as a retail money market fund adopt and implement policies and noted, however, we expect that the justify the costs would seek to qualify procedures reasonably designed to approach we are adopting today, based and thus bear these costs. Otherwise, restrict beneficial owners to natural on limiting beneficial ownership to they would incur the costs of persons. Adopting such policies and natural persons, is a simpler and more implementing a floating NAV generally procedures and modifying systems to cost-effective way to achieve our goals. or decide to liquidate the fund. identify an investor as a natural person Commenters noted that the natural As discussed above, many money who is eligible for investment in the person approach provides a front-end market funds currently are owned by fund also would involve one-time costs qualifying test that effectively requires both retail and institutional investors, for funds and intermediaries. Regarding intermediaries and/or fund advisers to although they often are separated into omnibus accounts, the rule does not verify the nature of each investor only retail and institutional share classes. A prescribe the way in which funds once. As a result, the natural person test should determine that underlying reduces operational complexity and 724 Our cost estimates are informed by the beneficial owners of an omnibus eliminates some of the need for costly analysis in the Proposing Release, comments account are natural persons. We note programming and ongoing received, and adjusted to reflect the definition of a retail money market fund we are adopting today. that a fund may require (as a matter of monitoring.723 These commenters also See Proposing Release, supra note 25, at section doing business) that its intermediaries noted that, although this approach will III.A.4.d. 725 implement its policies, including those require some refinements to existing Based on iMoneyNet, as of February 28, 2014. 726 related to qualification as a retail fund. systems, these modifications will be The costs estimated in this section would be spread among money market funds, intermediaries, However, there are also other ways for and money market fund service providers (e.g., a fund to manage their relationships 721 We provide exemptive relief from certain transfer agents and custodians). For ease of provisions of the Act to facilitate the ability of reference, we refer only to money market funds and with their intermediaries, such as money market funds to convert an existing retail intermediaries in our discussion of these costs. As entering into a contractual arrangement fund share class into a separate retail fund series. with other costs we estimate in this Release, we or obtaining certifications from the See supra notes 706–709 and accompanying text. have estimated the costs that a single affected entity omnibus account holder. In preparing 722 We estimated that the initial costs would would incur. We anticipate, however, that many range from $1,000,000 to $1,500,000 for each fund money market funds and intermediaries may not that chooses to qualify as a retail money market bear the estimated costs on an individual basis. The 727 One commenter provided survey data fund and that money market funds and costs of systems modifications, for example, likely suggesting that the one-time range of costs of a intermediaries implementing policies and would be allocated among the multiple users of the shareholder vote to segregate retail from procedures to qualify as retail money market funds systems, such as money market fund members of a institutional investors could range from $2 likely would incur ongoing costs of 20%–30% of fund group, money market funds that use the same million—$5 million (57% of respondents) or $1 the one-time costs, or between $200,000 and transfer agent, and intermediaries that use systems million—$2 million (14% of respondents). See $450,000 per year. See Proposing Release, supra purchased from the same third party. Accordingly, SIFMA Comment Letter. No other commenters note 25, at nn.245 and 246 and accompanying text. we expect that the cost for many individual entities provided cost estimates regarding shareholder 723 See Retail Fund Joint Comment Letter. may be less than the estimated costs. votes.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47802 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

the following cost estimates, we Our estimates represent a decrease of is not clear whether these cost estimates assumed that funds will generally rely $170,000 on the low end, and a decrease represent costs to a fund complex or to on financial intermediaries to of $200,000 on the high end from our a single fund. Although the Commission implement their policies without proposed range of estimated operational does not have the information necessary undergoing the costs of entering into a costs.732 Our revised cost estimates to estimate the number of funds that contractual arrangement with the reflect, as noted by commenters, a more may seek shareholder approval to effect financial intermediaries because funds cost-effective way to define a retail a reorganization, we estimate that it will and intermediaries would typically take money market fund. Accordingly, our cost, on average, approximately the approach that is the least expensive. cost estimates take into account the fact $100,000 per fund in connection with a However, some funds may choose to that most money market funds will shareholder vote.735 Finally, money undertake voluntarily the costs of largely be able to satisfy the natural market funds that seek to qualify as obtaining an explicit contractual person test using information that funds retail funds will be required to adopt arrangement despite the expense.728 already collect and have readily policies and procedures that are In our proposal, we estimated that the available, and reduce the estimated reasonably designed to limit beneficial initial costs would range from amount of resources necessary, for owners of the fund to natural persons. $1,000,000 to $1,500,000 for each fund example, to program systems capable of As discussed in section IV.A.2 (Retail that seeks to satisfy the retail money tracking and aggregating daily Funds) below, we estimate that the market fund definition (as proposed, shareholder redemption activity (that initial time costs associated with using a daily redemption limit).729 One would have been required under our adopting policies and procedures will commenter provided specific cost proposal).733 be $492,800 for all fund complexes. estimates related to our proposal to In addition to these one-time costs, as Funds that intend to qualify as retail define a retail money market fund based discussed above, funds may have one- money market funds will also incur on a $1,000,000 daily redemption limit, time costs to obtain shareholder ongoing costs. These ongoing costs estimating that it would cost the fund approval to the extent that a money would include the costs of operating complex $11,200,000, or $311,000 per market fund’s charter documents and/or two separate funds (retail and fund.730 applicable state law require shareholder institutional) instead of separate classes Based on staff experience and review approval to effect a reorganization into of a single fund, such as additional of the comments received, as well as the separate retail and institutional money transfer agent, accounting, and other changes to the retail definition in the market funds. One commenter provided similar costs. Other ongoing costs may final amendments, we estimate that the survey data that estimated the one-time include systems maintenance, periodic one-time costs necessary to implement costs would be between $1,000,000 to review and updates of policies and policies and procedures and/or for a $5,000,000.734 We note, however, that procedures, and additional staff fund to qualify as a retail money market the survey respondents are asset training. Finally, our estimates include fund under our amended rules, managers, many of whom may be ongoing costs for funds to manage and including the various organizational, responsible for fund complexes, and it monitor intermediaries’ compliance operational, training, and other costs with fund policies regarding omnibus discussed above, will range from implementing related procedures and controls and accounts. Accordingly, we continue to 731 documents necessary to reorganize fund structures $830,000 to $1,300,000 per entity. into retail and institutional funds; and (iii) estimate, as we did in the proposal, that preparing training materials and administering money market funds and intermediaries 728 A fund might, as a general business practice, training sessions for staff in affected areas. Our likely will incur ongoing costs related to prefer to enter into a formal contractual estimates of these operational and related costs, and implementation of a retail money arrangement. those discussed throughout this Release, are based market fund definition of 20%–30% of 729 See supra note 722. on, among other things, staff experience 730 See Federated X Comment Letter (‘‘Federated implementing, or overseeing the implementation of, the one-time costs, or between $166,000 736 would have to create new funds and fund classes systems modifications and related work at mutual and $390,000 per year. We received in order to implement retail vs. institutional fund fund complexes, and included analyses of wage no comments on this aspect of our structures. This would cost approximately $1.7 information from SIFMA’s Management & proposal. million. In order to accomplish client outreach, Professional Earnings in the Securities Industry effect shareholder votes, print new regulatory 2013 at infra note 2214. See infra note 2228 for the 3. Municipal Money Market Funds documents, create new sales literature and engage various types of professionals we estimate would be with investors as to the new nature of their shares involved in performing the activities associated Both the fees and gates reform and and alternatives, we estimate that Federated will with our proposals. The actual costs associated with floating NAV reform will apply to expend another $4 million. Revisiting and revising each of these activities would depend on a number of factors, including variations in the functionality, municipal money market funds (or tax- contractual relationships with broker-dealers and 737 other intermediaries to provide for enforcement of sophistication, and level of automation of existing exempt funds ). We discuss below the the $1 million redemption limit would cost a systems and related procedures and controls, and further $1.3 million. Charges from independent the complexity of the operating environment in 735 Our estimate is based on the most recently pricing services, custodians, record-keepers, and which these systems operate. Our estimates approved Paperwork Reduction Act renewal for transfer agents are expected at nearly $3 million. generally are based on our assumption that funds rule 17a–8 under the Act (Mergers of Affiliated Upgrades to Federated’s internal systems and would use internal resources because we believe Companies), OMB Control No. 3235–0235, available systems that interface with customers and transfer that a money market fund (or other affected entity) at http://reginfo.gov/public/do/PRAViewICR?ref_ agents would cost another $1.2 million.’’). These would engage third-party service providers only if nbr=201304-3235-015. Our estimate includes legal, costs total $11,200,000. Averaged across the number the external costs were comparable, or less than, the mailing, printing, solicitation, and tabulation costs of money market funds offered, this commenter estimated internal costs. The total operational costs in connection with a shareholder vote. estimates the one-time implementation costs to be discussed here include the costs that are 736 We recognize that adding new capabilities or $311,000 per fund ($11,200,000 ÷ 36 money market ‘‘collections of information’’ that are discussed in capacity to a system (including modifications to funds). See supra note 586 (using Form N–MFP section IV.A.2 of this Release. related procedures and controls and related data, Federated manages 36 money market funds). 732 These amounts are calculated as follows: training) will entail ongoing annual maintenance 731 Estimates also include costs to intermediaries $1,000,000 (proposed)—$830,000 = $170,000 (low costs and understand that those costs generally are to implement systems and procedures to satisfy end); $1,500,000 (proposed)—$1,300,000 = estimated as a percentage of the initial costs of money market fund requirements regarding $200,000 (high end). See Proposing Release, supra building or modifying a system. omnibus accounts. We estimate that the costs note 25, at n.245 and accompanying text. 737 ‘‘Municipal money market fund’’ and ‘‘tax- would be attributable to the following activities: (i) 733 See supra notes 722–724 and accompanying exempt fund’’ are used interchangeably throughout planning, coding, testing, and installing system text. this Release. A municipal money market fund that modifications; (ii) drafting, integrating, and 734 See supra note 727. qualifies as a retail money market fund would not

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47803

key characteristics of tax-exempt funds, interest rates on VRDNs are typically Many commenters suggested that we commenter concerns regarding our reset either daily or every seven days.745 not apply our floating NAV reform 750 or proposal (and final amendments) to VRDNs include a demand feature that our fees and gates reform 751 to apply the fees and gates and floating provides the investor with the option to municipal money market funds. NAV reforms to tax-exempt funds, and put the issue back to the trustee at a Commenters raised specific concerns an analysis of potential economic price of plus accrued about the ability and extent to which effects. We note, as addressed below, interest.746 This demand feature is tax-exempt funds would qualify as retail that the majority of the comments supported by a liquidity facility such as money market funds as proposed (and received relating to tax-exempt funds letters of credit, lines of credit, or therefore be permitted to maintain a were given in the context of our floating standby purchase agreements provided stable NAV). Several commenters noted NAV reform.738 by financial institutions.747 The interest- that high-net-worth individuals, who often invest in tax-exempt funds a. Background rate reset and demand features shorten the duration of the security and allow it because of the tax benefits, engage in Tax-exempt funds primarily hold to qualify as an eligible security under periodic transactions that exceed the obligations of state and local rule 2a–7. Tax-exempt funds also invest proposed $1 million daily redemption governments and their in tender option bonds (‘‘TOBs’’), which limit, which would effectively instrumentalities, which pay interest typically are floating rate securities that disqualify them from investing in a that generally is exempt from federal provide the holder with a at retail municipal fund, as proposed.752 739 income taxes. Thus, the majority of par, supported by a liquidity facility We are addressing these concerns by investors in tax-exempt money market provided by a commercial bank.748 adopting a definition of retail money funds are those investors who are market fund that will allow many of subject to federal income tax and b. Discussion these individuals to invest in tax- therefore can benefit from the funds’ In the Proposing Release, we noted exempt funds that offer a stable NAV. tax-exempt interest. As discussed that because most municipal money Funds that wish to qualify as retail below, state and local governments rely market funds tend to be owned by retail money market funds will be required to in part on tax-exempt funds to fund investors, who are among the greatest limit beneficial ownership interests to 740 public projects. As of February 28, beneficiaries of the funds’ tax ‘‘natural persons’’ (e.g., individual 2014, tax-exempt funds held advantages, most tax-exempt funds accounts registered with social security approximately $279 billion of assets, out would qualify under our proposed numbers). Because the retail money of approximately $3.0 trillion in total definition of retail money market fund market fund definition is not 741 money market fund assets. and therefore would continue to offer a conditioned on a daily redemption Industry data suggests institutional stable share price.749 We stated that, limitation, but instead requires that investors hold approximately 29% ($82 although there are some tax-exempt retail money market funds restrict billion) of municipal money market money market funds that self-classify as beneficial ownership to natural persons, fund assets.742 This estimate is likely institutional funds, we believed these high-net-worth individuals will not be high, as omnibus accounts (which often funds’ shareholder base typically is subject to a redemption limit and thus represent retail investors) are often comprised of omnibus accounts with should be able to continue investing in categorized as institutional by third- underlying individual investors. As tax-exempt funds much like they do party researchers. One commenter, for 753 noted by commenters and discussed today. example, surveyed its institutional tax- below, we now understand that only Several commenters expressed exempt money market funds, and found some (and not all) of these funds’ concern that a number of municipal that approximately 50% of the assets in shareholder base is comprised of money market funds would not qualify these ‘‘institutional’’ funds were as retail money market funds, as beneficially owned by institutions.743 omnibus accounts with underlying individual investors. We also stated our proposed, because institutional On average, over 70% of tax-exempt investors hold them. Commenters noted funds’ assets (valued based upon belief that, like many securities in prime funds, municipal securities present that approximately 30% (and amortized cost) are comprised of 754 greater credit and liquidity risk than historically between 25% and 40% ) municipal securities issued as variable- of tax-exempt funds currently self-report 744 U.S. government securities and could rate demand notes (‘‘VRDNs’’). The 755 come under pressure in times of stress. as institutional funds. We understand that some but not all of these funds’ be subject to the floating NAV reform. See supra shareholder base is comprised of section III.C.2. 745 See Frank J. Fabozzi & Steven V. Mann eds, 738 Section III.C.7 below discusses more general Handbook of Securities 237 (8th ed. reasons for not excluding specific types of money 2012). 750 See, e.g., BlackRock II Comment Letter; market funds from the fees and gates amendments. 746 Id. Fidelity Comment Letter; ICI Comment Letter. These reasons apply equally to our analysis of 747 See Neil O’Hara, The Fundamentals of 751 See, e.g., ICI Comment Letter; J.P. Morgan municipal money market funds and the fees and Municipal Bonds 40–41 (6th ed. 2012). Comment Letter; Vanguard Comment Letter; see gates amendments. 748 See id. at 43–44. also Dreyfus II Comment Letter, (suggesting the fees 739 See 2009 Proposing Release, supra note 66. and gates requirements should be limited to taxable 749 A few commenters noted that, in addition to 740 prime funds); Legg Mason & Western Asset See infra section III.C.3.c; see also Investment individuals, corporations, partnerships, and other Comment Letter. Company Institute, Report of the Money Market business entities may enjoy the tax benefits of Working Group, at 18 (Mar. 17, 2009), available at 752 See, e.g., Fidelity Comment Letter; Dechert _ _ investments in tax-exempt funds. See, e.g., http://www.ici.org/pdf/ppr 09 mmwg.pdf (‘‘ICI Comment Letter of Federated Investors (Regulation Comment Letter; Fin. Svcs. Roundtable Comment Report’’). of Tax-Exempt Money Market Funds) (Sept. 16, Letter. 741 Based on data from Form N–MFP. 2013) (‘‘Federated VII Comment Letter’’). One 753 Tax-exempt funds would, however, be 742 Based on data from iMoneyNet and Form N– commenter noted that, while corporations may not potentially subject to our fees and gates reform. MFP as of February 28, 2014. See supra note 683. enjoy the tax advantages afforded under the Internal 754 Our staff’s analysis, based on iMoneyNet data, 743 See Comment Letter of the Dreyfus Revenue Code to exempt dividends to the full shows that the amount of municipal money market Corporation (Mar. 5, 2014) (‘‘Dreyfus II Comment degree that individuals can enjoy them, eligible fund assets held by institutional investors varied Letter’’). corporations can benefit from a tax exemption between 25% to 43% between 2001 to 2013. 744 Based on Form N–MFP data as of February 28, under certain conditions (such as meeting a 755 See, e.g., BlackRock II Comment Letter; 2014 (the remaining holdings are ‘‘other municipal minimum holding period). See Dreyfus II Comment Federated VII Comment Letter; J.P. Morgan debt’’). Letter. Comment Letter; Dreyfus II Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47804 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

omnibus accounts with underlying to shift assets from prime funds to Consistent with this observation, our individual investors. A number of municipal money market funds as an analysis indicates that the shadow price commenters supported the view that alternative stable NAV investment. This of tax-exempt funds is distributed more most investors in tax-exempt funds are could undermine the goals of reform similarly to that of prime funds than individuals.756 One commenter stated with respect to the floating NAV government funds.766 Specifically, the its belief, however, that institutions requirement by providing an easy way volatility of the distribution of rather than individuals or natural for institutional investors to keep stable municipal money market fund shadow persons beneficially own a significant, if value pricing while continuing to invest prices is significantly larger than the not majority, portion of the assets in funds with assets that, relatively volatility of government funds.767 In invested in these self-reported speaking, have a risk character that is addition, our staff’s analysis of institutional tax-exempt funds.757 significantly closer to prime funds than historical shadow prices shows that tax- Although we understand that some government funds.760 exempt funds are more likely than omnibus accounts may be comprised of Commenters argued that historical government funds to experience large institutions without underlying shareholder flows in municipal money losses.768 Thus, we believe municipal individual beneficial owners, the lack of market funds, as well as their past funds are more similar in nature to a statutory or regulatory definition of resiliency, demonstrate that they are not prime funds than government funds for institutional and retail funds, along with prone to runs or especially risky.761 purposes of the floating NAV reform. a lack of information regarding investor They pointed out that shareholder flows Several commenters noted that the attributes in omnibus accounts, prevents from tax-exempt funds were moderate diversity of the municipal issuer market us from estimating with precision the during times of recent market stress reduces the risks associated with portion of investors and assets in tax- compared to significant outflows from municipal money market funds.769 We exempt funds that self-report as institutional prime money market note that although there is some institutional that are beneficially owned funds.762 A review of money market diversity among the direct issuers of by institutions. As discussed above, fund industry asset flows during the municipal securities, the providers of however, industry data suggests that market stress in 2008 and 2011 shows most of the demand features for the approximately 30% of municipal money that tax-exempt funds remained VRDNs, most of which are financial market fund assets are held by relatively flat and tracked investor flows services firms, are highly 763 770 institutional investors—investors that in other retail prime funds. We concentrated. This is a significant may not qualify to invest in a retail believe that some of this stability may countervailing consideration because municipal money market fund.758 be attributable to municipal money VRDNs comprise the majority of tax- 771 Several commenters argued that tax- market funds’ significant retail investor exempt funds’ portfolios. This level 764 exempt funds should not be subject to base rather than low portfolio risk. In of concentration increases municipal the fees and gates and floating NAV this regard, we note that although funds’ exposure to financial sector risk investors did not flee municipal funds relative to, for example, government reforms because the municipal money 772 market fund industry is not systemically in times of market stress, they also did funds. And, in this regard, we are not move assets into municipal funds as mindful of the potential for increased risky. In support, commenters pointed 765 to the relatively small amount of assets they did into government funds. sector risk to the financial services firms managed by municipal money market Accordingly, it appears that those that provide the demand features if funds, the stability of tax-exempt funds investors did not perceive the risk investors reallocate assets to tax-exempt characteristics of municipal funds to be funds that are not subject to the fees and during recent periods of market stress, similar to those of government funds. gates and floating NAV reforms. and the diversity of the municipal issuer A number of commenters cited the market.759 As discussed above, we 760 In addition, as discussed below, municipal resilient portfolio construction of acknowledge that the current money market funds may be subject to heavy municipal money market funds and institutional municipal money market redemptions, even if they have not been in the past. fund industry is small relative to the The fees and gates amendments are intended to give funds and their boards tools to stem such heavy 766 Using data collected from Form N–MFP and overall money market fund industry. redemptions. iMoneyNet, the standard deviation of shadow Despite its relatively small size, 761 See, e.g., Fidelity Comment Letter (noting that, prices (which is a measure used to assess the however, we are concerned that more recently, the largest municipal bankruptcy overall riskiness of a fund) estimated over the time (City of Detroit) had no discernible effects on period from November 2010 to February 2014 are institutional investors that currently 0.00023, 0.00039, and 0.00052 for government, hold prime funds might be incentivized money market funds); ICI Comment Letter; J.P. Morgan Comment Letter. A number of commenters prime, and tax-exempt funds, respectively. This also noted that during these periods of market data shows that the standard deviation of tax- 756 See, e.g., T. Rowe Price Comment Letter stress, tax-exempt funds did not experience exempt funds is statistically significantly larger (‘‘[t]he tax-exempt money market is retail- contagion from heavy redemptions like those than the other two types of funds with a 99% dominated’’); Schwab Comment Letter; SIFMA experienced by institutional prime funds. See, e.g., confidence level. Furthermore, the frequency at Comment Letter. ICI Comment Letter (noting that a tax-exempt fund which the shadow prices for tax-exempt funds is 757 See Dreyfus II Comment Letter, supra note 743 sponsored by Lehman Brothers (the Neuberger less than 1.000 is greater than for government funds and accompanying text. This commenter provided Berman Tax-Free Fund) had two-thirds of its total and is increasing at lower shadow price values. Accordingly, this means that the likelihood for large data suggesting that approximately 50% of the net assets redeemed, but had no ripple effect on negative returns and hence large losses is greater for assets of its self-reported ‘‘institutional’’ tax-exempt other tax-exempt funds or the broader municipal tax-exempt funds than for government funds. funds are beneficially owned by institutional market); Dechert Comment Letter; BlackRock II 767 investors. We acknowledge that certain tax-exempt Comment Letter. Id. funds may be beneficially owned by a large number 762 Id. 768 Id. of institutional investors. However, this data, which 763 See iMoneyNet (analyzing money market fund 769 See supra note 759 and accompanying text. reflects only an analysis of this commenter’s money industry flows from September 12–December 19, 770 See DERA memo ‘‘Municipal Money Market market funds (rather than industry-wide data), does 2008 and June 1–November 16, 2011). See also Funds Exposure to Parents of Guarantors’’ http:// not necessarily support a finding that a majority of DERA Study, supra note 24, at 11, Figure 3. www.sec.gov/comments/s7-03-13/s70313-323.pdf. such assets is ‘‘institutional’’ in nature. 764 See ICI Comment Letter (stating that ‘‘[t]he 771 See supra note 744 and accompanying text. 758 See supra note 742. calm response of tax-exempt money market fund 772 Based on a review of Form N–MFP data as of 759 See, e.g., Fidelity Comment Letter; Schwab investors to events in Detroit is characteristic of February 28, 2014, over 10% of the amortized cost Comment Letter; Deutsche Comment Letter; T. how retail [emphasis added] investors are generally value of VRDNs are guaranteed by a single bank, Rowe Price Comment Letter; Dreyfus Comment perceived to respond to market stresses.’’). and approximately 54% of the amortized cost value Letter. 765 See DERA Study, supra note 24, at 7–8. is guaranteed by 10 banks.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47805

argued that the liquidity risk, interest Instead, the liquidity is provided VRDNs, and, to a lesser extent, TOBs,782 rate risk, issuer risk, and credit/default through the demand feature to a have structural features (e.g., contractual risk of tax-exempt funds are more concentrated number of financial credit enhancements or liquidity similar to government funds than prime institutions, and money market funds support provided by highly rated banks funds.773 As discussed above, however, have experienced problems in the past and one-to-seven day interest rate staff analysis shows that the distribution when a large number of puts on resets) that facilitate trading at par in the of fluctuations in the shadow NAV of securities were exercised at the same secondary market.783 We agree that tax-exempt funds is more similar to that time.778 these features lower the risk of portfolio of prime funds than government In fact, when we adopted the 2010 holdings as compared to prime money funds.774 Municipal securities typically amendments to rule 2a–7, we cited to market funds, but also recognize that present greater credit and liquidity risk commenter concerns regarding the holding municipal money market funds than government securities.775 We market structure of VRDNs and heavy presents higher risks than those believe that recent municipal reliance of tax-exempt funds on these associated with government or Treasury have highlighted liquidity security investments in determining not funds. Not all VRDNs have credit concerns related to municipal money to require that municipal money market support,784 and tax-exempt funds market funds and note that, although funds meet the 10% daily liquid asset present credit risk.785 Accordingly, we municipal money market funds have requirement that other money market previously weathered these events, funds must satisfy.779 Commenters did 782 Participation by banks and their affiliates in there is no guarantee that they will be TOB programs are subject to the prohibitions and not generally support adding such a restrictions applicable to covered funds under the able to do so in the future. requirement, but the lack of a mandated recently adopted (implemented by Further, although we recognize that supply of daily liquid assets leaves Title VI of the Dodd-Frank Act, named for former the structural features of VRDNs may these funds more exposed to potential Federal Reserve Chairman Paul Volcker, Section provide tax-exempt funds with higher 619 of the Dodd-Frank Wall Street Reform and increases in redemptions in times of Consumer Protection Act (12 U.S.C. 1851) (‘‘Volcker levels of weekly liquid assets and fund and market stress.780 As a result, Rule’’)). reduced interest rate risk as compared the portfolio composition of some tax- 783 See, e.g., Fidelity Comment Letter; ICI with prime funds, we do not find that exempt funds may change and present Comment Letter; SIFMA Comment Letter. 784 on balance that warrants treating different risks in the future. In addition, Based on Form N–MFP data as of February 28, municipal funds more like government 2014, only 57% of VRDNs, which make up a because of the daily liquidity issues majority of the assets in municipal money market funds than prime funds. This is so associated with VRDNs and the fact that funds, have a guarantee that protects a fund in case because, among other things, the tax-exempt money market funds are not of default. In comparison, the federal government liquidity risk, interest rate risk, and guarantees all government securities held by required to maintain 10% daily liquid government funds. credit risk characteristics result from 781 assets, these funds in particular may 785 Credit risk may result from the financial concentrated exposure to VRDNs, and experience stress on their liquidity health of the issuer itself, such as when the city of not because the municipal debt necessitating the use of fees and gates to Detroit recently filed for bankruptcy, becoming the securities underlying the VRDNs or the manage redemptions (even with respect largest municipal issuer default in U.S. history, related structural support are inherently leading to significant outflows from to the lower level of redemptions funds. See Jeff Benjamin, Detroit bankruptcy has liquid, free from interest rate risk, or expected in a tax-exempt retail money surprising long-term implications for muni bond immune from credit risks in the way market fund as compared to an market, Crain’s Detroit Business (Dec. 3, 2013) that government securities generally institutional prime fund). http://www.crainsdetroit.com/article/20131203/ 776 NEWS/131209950/detroit-bankruptcy-has- are. Indeed, long-term municipal debt Several commenters also argued that surprising-long-term-implications-for-muni#. securities underlie most VRDNs, and certain structural features of tax-exempt Although Detroit’s credit deteriorated over a long these securities infrequently trade.777 period of time and thus the bankruptcy did not funds make them more stable than cause tax-exempt money market funds, which had prime money market funds and largely anticipated the event, to experience 773 See, e.g., Fidelity Comment Letter (weekly significant losses, in the past there have not have liquid assets of tax-exempt funds is typically more therefore these commenters believe that not been significant lead times before a than double the current 30% requirement under the floating NAV reform should not municipality evidenced a credit deterioration. See, rule 2a–7). See also, e.g., ICI Comment Letter; apply to tax-exempt funds. For example, e.g., ICI Comment Letter. For example, Orange SIFMA Comment Letter; Invesco Comment Letter; these commenters observed that a tax- County, California, had high-quality bond credit Legg Mason & Western Asset Comment Letter. ratings just before filing one of the largest municipal Interest rate risk, as measured by weighted average exempt fund’s investments, primarily bankruptcies in U.S. history on December 6, 1994. maturity, is consistently lower for tax-exempt funds See Handbook of Fixed Income Securities, supra (averaging 35 days, well below the 60-day 778 See DERA Study, supra note 24, at Table 1 note 745, at 239. Orange County caused one money requirement in rule 2a–7) than prime and (discussing how money market funds were market fund to break the buck and several sponsors government funds. See Fidelity Comment Letter adversely affected because of credit events that to inject millions of dollars of additional cash to (citing iMoneyNet). Commenters also argued that resulted in large numbers of securities being ‘‘put’’ rescue their funds. See, e.g., Viral V. Acharya et al, the credit risk of tax-exempt funds is more similar back to demand feature providers, which resulted Regulating Wall Street: The Dodd-Frank Act and the to government funds than prime funds. See, e.g., ICI in bankruptcy, including Mutual Benefit Life New Architecture of Global Finance 308 (2011); see Comment Letter (tax-exempt securities have low Insurance Company and General American Life also Suzanne Barlyn, Investing Strategy What the credit risk because municipalities are not generally Insurance Co.). Orange County Fiasco Means to the Muni Bond interconnected and deterioration occurs over a 779 See 2010 Adopting Release, supra note 17, at Market, Fortune (Jan. 16, 1995), http:// protracted time); Dreyfus Comment Letter (many nn.240–243 and accompanying text. archive.fortune.com/magazines/fortune/ distressed issues (e.g., City of Detroit) become 780 See Fidelity Comment Letter; but see Wells fortune_archive/1995/01/16/201819/index.htm. ineligible under rule 2a–7s risk-limiting conditions Fargo Comment Letter. We note also that new Another type of credit risk arises when financial and therefore bankruptcy does not affect direct regulations also may affect the issuance of the institutions provide credit enhancement to holdings of tax-exempt funds). dominant types of securities that now provide the municipal securities. For example, in 1992, Mutual 774 See supra note 766. stability of tax-exempt funds. For example, because Benefit Life Insurance Company (‘‘Mutual Benefit’’) 775 See, e.g., Notice of the City of Detroit, TOB programs are not exempt from the Volcker went into conservatorship with the New Jersey Michigan’s bankruptcy filing with the rule, banks and their affiliates will no longer be able Insurance Commissioner. The company had Bankruptcy Court, Eastern District of Michigan, to sponsor or provide support to a TOB program. guaranteed forty-three municipal bond issues available at http://www.mieb.uscourts.gov/sites/ See Volcker Rule, infra note 782. As a result, the totaling $600 million, which financed money-losing default/files/detroit/Chp%209%20Detroit.pdf. portfolio composition of some tax-exempt funds projects. Mutual Benefit’s insolvency 776 See supra note 744 and accompanying text. may change and present different risks in the resulted in the termination of its guarantee on the 777 See supra notes 744–748 and accompanying future. bonds and halted interest payments resulting in text. 781 See rule 2a–7(d)(4)(ii). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47806 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

do not agree with commenters that, as described in section III.I for corporate instruments, other investors may fill the noted above, suggest that the credit risk issuers. gap. As discussed in the Proposing of tax-exempt funds is more similar to To the extent that institutions Release, ‘‘Between the end of 2008 and government funds than prime funds. currently invest in tax-exempt funds the end of 2012, money market funds and are unwilling to invest in a floating For all of the above reasons, we decreased their holdings of municipal NAV tax-exempt fund, the demand for 792 believe that tax-exempt funds should be debt by 34% or $172.8 billion. municipal securities, for example, may subject to the fees and gates and floating Despite this reduction in holdings by fall and the costs of financing for NAV reforms. As discussed, the risk money market funds, municipal issuers municipalities may rise.788 We increased aggregate borrowings by over profile of institutional municipal money anticipate the impact, however, will market funds more closely approximates 4% between the end of 2008 and the likely be relatively small. As of the last end of 2012. Municipalities were able to that of prime funds than government quarter of 2012, tax-exempt funds held funds. Tax-exempt funds present credit fill the gap by attracting other investor approximately 7% of the municipal debt types. Other types of mutual funds, for risk, typically rely on a concentrated outstanding.789 Of that 7%, institutional number of financial sector put or example, increased their municipal investors, who might divest their securities holdings by 61% or $238.6 guarantee providers, and have portfolios municipal fund assets if they do not billion.’’ 793 comprised largely of a single type of want to invest in a floating NAV fund, Although institutional municipal structured investment product—all of held approximately 30% of municipal funds represent a relatively small which may present future risks that may 790 money market fund assets. portion of the municipal debt market, be exacerbated by a potential migration Accordingly, we estimate institutional we recognize that these funds represent of investors from prime funds that are tax-exempt funds hold approximately a significant portion of the short-term unable or unwilling to invest in a 2% of the total municipal debt municipal debt market.794 According to floating NAV money market fund or outstanding and thus 2% is at risk of Form N–MFP data, municipal money money market fund that may impose 791 leaving the municipal debt market. market funds held $256 billion in fees and gates. Accordingly, we believe Although this could impact capital VRDNs and short-term municipal debt that tax-exempt funds should be subject formation for municipalities, there are as of the last quarter of 2013.795 to the fees and gates and floating NAV several reasons to believe that the 786 Effectively, municipal money market reforms adopted today. impact would likely be small (including funds absorbed nearly 100% of the minimal impact on efficiency and c. Economic Analysis of FNAV outstanding VRDNs and short-term competition, if any). First, institutional municipal debt. Considering that Although we expect that many tax- investors that currently invest in institutional tax-exempt funds exempt funds will qualify as retail municipal funds likely value the tax represented approximately 30% of the money market funds and therefore be benefits of these funds and many may municipal money market fund market, it able to maintain a stable NAV (as they choose to remain invested in them to follows that institutional tax-exempt do today), there are, as we discussed take advantage of the tax benefits even funds likely held about $77 billion in above, some institutional investors in though they might otherwise prefer VRDNs and short-term municipal debt. municipal money market funds that stable to floating NAV funds. Second, to Any reduction in municipal funds may be unable or unwilling to invest in the extent that institutional investors therefore could have an appreciable a floating NAV fund.787 To the extent divesting municipal funds lead to a impact on the ability of municipalities that institutional investors continue to decreased demand for municipal debt to obtain short-term lending. That said, invest in a floating NAV municipal this impact could be substantially 788 A number of commenters argued that applying money market fund, the benefits of a our floating NAV reform to tax-exempt funds would mitigated because, as discussed above, floating NAV discussed in section III.B reduce demand for municipal securities and raise other market participants may buy these extend to these types of funds. Because the costs of financing. See, e.g., Fidelity Comment securities or municipalities will adapt to a floating NAV requirement may reduce Letter (noting that tax-exempt funds purchase a changing market by, for example, approximately 65% of short-term municipal investment in those funds, however, we securities and that fewer institutional investors in altering their debt structure. As recognize that there will likely be costs tax-exempt funds will lead to less purchasing of discussed in the Proposing Release, for the sponsors of tax-exempt funds, short-term municipal securities by tax-exempt ‘‘[t]o make their issues attractive to the institutions that invest in these funds and a corresponding higher yield paid by alternative lenders, municipalities municipal issuers to attract new investors); types of funds, and tax-exempt issuers. BlackRock II Comment Letter; Federated VII lengthened the terms of some of their These costs are the same as those Comment Letter; ICI Comment Letter; Comment debt securities,’’ 796 in the face of described in section III.B for Letter of Mayors, City of Irving, TX, et al (Sept. 12, changing market conditions in recent institutional prime funds and the costs 2013) (‘‘U.S. Mayors Comment Letter’’). years. To the extent that other market 789 Other published data is consistent with this estimate. See, for example, the Federal Reserve participants step in and fill the potential losses for investors. See C. Richard Lehmann, Board ‘‘Flow of Funds Accounts of the United gap in demand, competition may Municipal Bond Defaults, in The Handbook of States’’ (Z.1), which details the flows and levels of increase. To the extent other market Municipal Bonds 509 (Susan C. Heide et al. eds., municipal securities and loans, to estimate participants do not step in and fill the 1994). outstanding municipal debt (March 6, 2014), gap, capital formation may be adversely 786 Our rationale is consistent with our finding, available at http://www.federalreserve.gov/releases/ discussed above, that we no longer believe that z1/current/. These estimates are consistent with affected. Finally, if municipalities are exempting institutional prime money market funds previous estimates presented in U.S. Securities and required to alter their debt structure to under section 6(c) of the Act is appropriate. See Exchange Commission. 2012 Report on the foster demand for their securities (e.g., supra note 446 and accompanying text . Municipal Securities Market. The estimates in the 787 We believe that the economic analysis that 2012 report were based on data from Mergent’s 792 The statistics in this paragraph are based on follows would apply equally in the context of the Municipal Bond Securities Database. the Federal Reserve Board’s Flow of Funds data. fees and gates reform. For a discussion of the 790 See supra note 742 and accompanying text. 793 economic implications that may arise for investors, 791 This estimate is calculated as follows: tax- See Proposing Release, supra note 25, at 309. including retail investors who may be unable or exempt funds hold 7% of municipal debt 794 See, e.g., BlackRock II Comment Letter; unwilling to invest in a fund that can impose fees outstanding x 30% of tax-exempt assets held by Dreyfus Comment Letter. and gates, including potential implications on state institutional investors = 2.1% of total tax-exempt 795 Based on data from N–MFP and iMoneyNet. and local funding, see infra section III.K. debt held by institutions. 796 See Proposing Release, supra note 25, at 309.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47807

because demand declined as a result of investments that provide a stable NAV have authority over the actions that our amendments), there may be an and/or do not restrict liquidity.800 GASB may or may not take, nor do we adverse effect on efficiency. Although A few commenters noted that it is the regulate LGIPs under rule 2a–7 or we discuss above ways in which the GASB reference to ‘‘2a–7 like’’ funds otherwise. In order for certain investors short-term municipal debt market may that links LGIPs to rule 2a–7, and not to continue to invest in LGIPs as they do adapt to continue to raise capital as it state statutes.801 Some commenters today, state legislatures may determine does today, we acknowledge that our noted that our money market fund that they need to amend state statutes floating NAV reform will impact reforms do not directly affect LGIPs and policies to permit investment in institutional investors in tax-exempt because the decision as to whether investment pools that adhere to rule 2a– funds and therefore likely impact the LGIPs follow our changes to rule 2a–7 7 as amended (unless GASB were to de- short-term municipal markets. On is determined by GASB and the states, couple LGIP accounting standards from balance, however, we believe that not the Commission.802 Some rule 2a–7). GASB and state legislatures realizing the goals of this rulemaking, commenters suggested that, in response may address these issues during the including recognizing the concerns to our floating NAV reform, GASB and two-year compliance period for the fees discussed above with respect to the the states might decouple LGIP and gates and floating NAV reforms.807 risks presented by tax-exempt funds, regulation from rule 2a–7 and continue As noted above, a few commenters justifies the potential adverse effects on to operate at a stable value.803 A few suggested that state statutes and efficiency, competition, and capital commenters suggested that we make investment policies may need to be formation. clear that the changes we are adopting amended, but did not provide us with to rule 2a–7 are not intended to apply information regarding how various state 4. Implications for Local Government to LGIPs,804 and also reiterated concerns legislatures and other market Investment Pools similar to those raised by other participants might react. Accordingly, As we discussed in the Proposing commenters on our floating NAV reform we remain unable to predict how Release, we recognize that many states more generally (e.g., concerns about various state legislatures and other have established local government using market-based valuation, rather market participants will react to our investment pools (‘‘LGIPs’’), money than amortized cost).805 reforms, nor do we have the information market fund-like investment pools that We acknowledge, as noted by necessary to provide a reasonable invest in short-term securities,797 which commenters, that there may be effects estimate of the impact on LGIPs or the are required by law or investment and costs imposed on LGIPs as a result potential effects on efficiency, policies to maintain a stable NAV per of the reforms we are adopting today. competition, and capital formation.808 share.798 Accordingly, as we discussed We expect it is likely that GASB will in the Proposing Release, the floating reevaluate its accounting standards in 5. Unregistered Money Market Funds NAV reform may have implications for light of the final amendments to rule Operating Under Rule 12d1–1 LGIPs, including the possibility that 2a–7 that we are adopting today and Several commenters expressed state statutes and policies may need to take action as it determines concern regarding amended rule 2a–7’s be amended to permit the operation of appropriate.806 We do not, however, effect on unregistered money market investment pools that adhere to funds that choose to operate under amended rule 2a–7.799 In addition, some 800 See, e.g., Comment Letter of TRACS Financial/ certain provisions of rule 12d1–1 under commenters suggested that our floating Institute of Public Investment Management (Sept. the Investment Company Act.809 Rule 17, 2013) (‘‘TRACS Financial Comment Letter’’); NAV reform, as well as the liquidity fees Comment Letter of Treasurer, State of Georgia (Sept. 12d1–1 permits investment companies and gates requirement, may result in 16, 2013) (‘‘Ga. Treasurer Comment Letter’’); (‘‘acquiring investment companies’’) to outflows of LGIP assets into alternative Comment Letter of County of San Diego Treasurer- acquire shares of registered money Tax Collector (Sept. 17, 2013) (‘‘San Diego market funds in the same or in a Treasurer Comment Letter’’). Because we are unable 797 LGIPs tend to emulate typical money market to predict how GASB will respond to our final different fund group in excess of the funds by maintaining a stable NAV per share amendments to rule 2a–7, we cannot quantify the limitations set forth in section 12(d)(1) through investments in short-term securities. See extent to which LGIP assets may migrate into 810 infra III.K.1, Table 1, note N. of the Investment Company Act. In alternative investments. 798 See, e.g., Comment Letter of U.S. Chamber of 801 See, e.g., TRACS Financial Comment Letter; Commerce to the Hon. Elisse Walter (Feb. 13, 2013) 807 See infra section III.N. Federated IX Comment Letter. (‘‘Chamber III Comment Letter’’), available at 808 As noted above, we do not have authority over 802 http://www.centerforcapitalmarkets.com/wp- See, e.g., Federated II Comment Letter; Ga. the actions of GASB and/or its decision to facilitate content/uploads/2010/04/2013–2.13-Floating-NAV- Treasurer Comment Letter; Va. Treasury Comment the operation of LGIPs as stable value investment Qs-Letter.pdf. See also, e.g., Virginia’s Local Letter. vehicles through linkage to rule 2a–7 (including, as Government Investment Pool Act, which sets 803 See, e.g., Federated II, Comment Letter; amended today). certain prudential investment standards but leaves Federated IV Comment Letter; TRACS Financial 809 Dechert Comment Letter; Comment Letter of it to the state treasury board to formulate specific Comment Letter. Russell Investments (Sept. 17, 2013) (‘‘Russell investment policies for Virginia’s LGIP. See Va. 804 See, e.g., Ga. Treasurer Comment Letter; Va. Comment Letter’’); Oppenheimer Comment Letter; Code Ann. § 2.2–4605(A)(3). Accordingly, the Treasury Comment Letter. UBS Comment Letter. See also Wells Fargo treasury board instituted a policy of managing 805 See Ga. Comment Letter; Comment Letter of Comment Letter (arguing that proposed Virginia’s LGIP in accordance with ‘‘certain risk- West Virginia Board of Treasury Investments (Sept. amendments to Form PF should not apply to limiting provisions to maintain a stable net asset 17, 2013) (‘‘WV Bd. of Treas. Invs. Comment unregistered liquidity vehicles owned exclusively value at $1.00 per share’’ and ‘‘GASB ‘2a–7 like’ Letter’’). by registered funds and complying with rule 12d1– requirements.’’ Virginia LGIP’s Investment Circular, 806 GASB has currently included as a potential 1 under the Investment Company Act). We address June 30, 2012, available at http:// project in 2014 an agenda item to identify potential the Form PF requirements for unregistered money www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs alternative pool structures that could be suitable in market funds below. See infra section III.H. are currently managed to maintain a stable NAV, the event that the Commission amends the way in 810 Under section 12(d)(1)(A), an investment however, see infra section III.K.1, Table 1, note N. which money market funds operate under rule 2a– company (and companies or funds it controls) is 799 GASB states that LGIPs that are operated in a 7, including a move to a floating NAV. See generally prohibited from acquiring more than three manner consistent with rule 2a–7 (i.e., a ‘‘2a–7-like Government Accounting Standards Board, percent of another investment company’s pool’’) may use amortized cost to value securities Technical Plan for the First Third of 2014: outstanding voting securities, investing more than (and presumably, facilitate maintaining a stable Technical Projects (2a7-Like External Investment five percent of its total assets in any given NAV per share). See GASB, Statement No. 31, Pools), available at http://gasb.org/cs/ investment company, and investing more than 10 Accounting and Financial Reporting for Certain ContentServer?c=Document_C&pagename= percent of its total assets in investment companies Investments and for External Investment Pools GASB%2FDocument_C%2FGASBDocumentPage& in the aggregate. See also section 12(d)(1)(B) (Mar. 1997). cid=1176163713461. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47808 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

addition to providing an exemption are privately offered and thus not as a cash management tool for an from section 12(d)(1) of the Investment registered under the Securities Act.814 acquiring investment company.818 Company Act, rule 12d1–1 also For purposes of investments in an Although we recognize the benefits of provides exemptions from section 17(a) unregistered money market fund, the using unregistered money market funds and rule 17d–1, which restrict a fund’s rule 12d1–1 exemption from the affiliate for these purposes, we do not believe ability to enter into transactions and transaction restrictions is available only that these types of funds are immune joint arrangements with affiliated for investments in an unregistered from the risks posed by money market 811 persons. A fund’s investments in money market fund that operates like a funds generally. Several commenters argued that unregistered money market unregistered money market funds is not money market fund registered under the restricted by section 12(d)(1).812 funds relying on rule 12d1–1 do not Investment Company Act. To be Nonetheless, these investments are present the type of risk that our eligible, an unregistered money market subject to the affiliate transaction amendments are designed to reduce.819 restrictions in section 17(a) and rule fund is required to (i) limit its These commenters also argued that, 17d–1 and therefore require exemptive investments to those in which a money given that unregistered money market relief from such restrictions.813 Rule market fund may invest under rule 2a– funds often are created solely for 12d1–1 thus permits a fund to invest in 7, and (ii) undertake to comply with all investment by acquiring investment an unregistered money market fund other provisions of rule 2a–7.815 companies and typically have the same without having to comply with the Therefore, unless otherwise exempted, sponsor, there is little concern of affiliate transaction restrictions in unregistered money market funds unforeseeable large-scale redemptions section 17(a) and rule 17d–1, provided choosing to operate under rule 12d1–1 or runs on these funds.820 that the unregistered money market would need to comply with the We disagree, and we believe that if fund satisfies certain conditions in rule amendments to rule 2a–7 we are registered funds invest in unregistered 12d1–1. adopting today. money market funds in a different fund Unregistered money market funds Several commenters argued that complex, these unregistered funds are typically are organized by a fund equally susceptible to the concerns that unregistered money market funds that adviser for the purpose of managing the our amendments are designed to currently conform their operations to cash of other investment companies in address, including concerns about the a fund complex and operate in almost the requirements of rule 12d1–1 should risks of investors’ incentives to redeem all respects as a registered money not be required to comply with certain ahead of other investors in times of market fund, except that their securities provisions of our amendments to rule market stress and the resulting potential 2a–7, particularly our floating NAV and dilution of investor shares. For example, (limiting the sale of registered open-end fund shares liquidity fees and gates amendments,816 if multiple registered funds are to other funds). and no commenters argued otherwise. investing in an unregistered money 811 Section 17(a) generally prohibits affiliated Some of these commenters argued that persons of a registered fund (‘‘first-tier affiliates’’) market fund in a different fund or affiliated persons of the fund’s affiliated persons the ability to invest in unregistered complex, a registered fund in one fund (‘‘second-tier affiliates’’) from selling securities or money market funds is a valuable tool complex may have an incentive to other property to the fund (or any company the for investment companies, because such redeem shares in times of market stress fund controls). Section 17(d) of the Investment Company Act makes it unlawful for first- and unregistered money market funds are prior to the redemption of shares by second-tier affiliates, the fund’s principal designed to accommodate the daily funds in other fund complexes. This underwriters, and affiliated persons of the fund’s inflows and outflows of cash of the redemption could have a potentially principal underwriters, acting as principal, to effect negative impact on the remaining any transaction in which the fund, or a company acquiring investment company, and can it controls, is a joint or a joint and several be operated at a lower cost than registered funds that are investing in the participant in contravention of Commission rules. registered investment companies.817 unregistered money market and could Rule 17d–1(a) prohibits first- and second-tier Some of these commenters also argued increase the risk of dilution of shares for affiliates of a registered fund, the fund’s principal underwriters, and affiliated persons of the fund’s that requiring unregistered money the remaining registered funds. principal underwriter, acting as principal, from market funds to adopt a floating NAV We also believe that unregistered participating in or effecting any transaction in would reduce the attractiveness of money market funds that are being used connection with any joint enterprise or other joint solely as investments by investment arrangement or profit-sharing plan in which the unregistered money market funds and fund (or any company it controls) is a participant possibly eliminate the unregistered fund companies in the same fund complex unless an application regarding the enterprise, remain susceptible to redemptions in arrangement or plan has been filed with the 814 times of fund and market stress. For Commission and has been granted. Id. 815 Rule 12d1–1(d)(2)(ii). In addition, the example, if multiple registered funds are 812 Private funds are generally excluded from the invested in an unregistered money definition of an ‘‘investment company’’ for unregistered money market fund’s adviser must be purposes of the Investment Company Act. However, registered as an investment adviser with the market fund in the same fund complex, private funds that fall under section 3(c)(1) or Commission. See rule 12d1–1(b)(2)(ii). In order for a portfolio manager of one registered 3(c)(7) are deemed to be an investment company for a registered fund to invest in reliance on rule 12d1– fund may have an incentive to redeem purposes of the limitations set forth in section 1 in an unregistered money market fund that does 12(d)(1)(A)(i) and 12(d)(1)(B)(i) governing the not have a board of directors, the unregistered shares in times of market stress, which purchase or other acquisition by such private fund money market fund’s investment adviser must could have a potentially negative impact of any security issued by any registered investment perform the duties required of a money market on the other registered funds that may company and the sale of any securities issued by fund’s board of directors under rule 2a–7. See rule also be invested in the unregistered any registered investment company to any such 12d1–1(d)(2)(ii)(B). Lastly, the investment company private fund. Although a private fund is subject to is also required to reasonably believe that the fund. After further consideration the limitations set forth in section 12(d) with unregistered money market fund operates like a regarding the comparability of risk in respect to its investment in a registered investment registered money market fund and that it complies these funds, we believe that it is company, a registered investment company is not with certain provisions of the Investment Company appropriate that our floating NAV subject to the limitations set forth in section 12(d) Act. See rule 12d1–1(b)(2)(i). with respect to its investment in any such private 816 Dechert Comment Letter; Russell Comment fund. Letter; Oppenheimer Comment Letter; UBS 818 See, e.g., Dechert Comment Letter; Russell 813 See Funds of Funds Investments, Investment Comment Letter. Comment Letter. Company Act Release No. 27399 (June 20, 2006) [71 817 See, e.g., Dechert Comment Letter; Russell 819 Id. FR 36640 (June 27, 2006)]. Comment Letter; UBS Comment Letter. 820 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47809

amendments apply to unregistered render advice which was not feeder structure is unique in that the money market funds that conform their disinterested.’’ 827 While we cannot feeder fund serves as a conduit to the operations to the requirements of rule determine whether a conflict of interest master fund—the master fund being the 12d1–1.821 exists in every case of an adviser fund that actually invests in money Some commenters also argued that advising both a registered fund and market securities. As a commenter our liquidity fees and gates amendments unregistered money market fund under pointed out, ‘‘the master feeder are ill-suited for unregistered money rule 12d1–1, we note that the adviser is structure comprises one pool of assets, market funds.822 Specifically, these subject to the requirement to adopt and managed by the master fund’s commenters noted that under rule implement written policies and investment adviser, under the oversight 12d1–1, the adviser typically performs procedures reasonably designed to of the master fund’s board of the function of the unregistered fund’s prevent violation of the Advisers Act directors.’’ 836 Because the feeder fund’s board for purposes of compliance with and the rules thereunder, as required by investments consist of the master fund’s rule 2a–7.823 Therefore, these rule 206(4)–7 under the Advisers Act.828 securities, its liquidity is determined by the master fund’s liquidity. commenters argued, if fees and gates are 6. Master/Feeder Funds—Fees and Accordingly, because a feeder fund’s implemented, the adviser would be Gates Requirements called upon to make decisions about liquidity is dictated by the liquidity of liquidity fees and gates, which could We are adopting, as suggested by a the master fund, we believe the master present a potential conflict of interest in commenter, a provision specifying the fund and its board are best suited, in situations when an affiliated investment treatment of feeder funds in a master/ consultation with the master fund’s company advised by the same adviser feeder fund structure under the fees and adviser, to determine whether liquidity 829 would be the redeeming shareholder.824 gates requirements. This provision is under stress and a fee or gate should We recognize that in many cases the will not allow a feeder fund to be imposed. We note that we took a independently impose a fee or gate in similar approach with respect to master/ adviser to an unregistered money 830 market fund typically performs the reliance on today’s amendments. feeder funds in rule 22e–3.837 function of the fund’s board,825 and that However, under the amended rule, a feeder fund will be required to pass 7. Application of Fees and Gates to this may create conflicts of interest. We Other Types of Funds and Certain continue to believe that, as discussed through to its investors a fee or gate imposed by the master fund in which it Redemptions above in section III.A.2.b and given the 831 role of independent directors, a fund’s invests. In response to our request for We have determined that all money market funds, other than government board is in the best position to comment on whether particular funds or money market funds and feeder funds in determine whether a fee or gate is in the redemptions should not be subject to a master/feeder fund structure, should best interests of the fund. However, fees and gates, a commenter be subject to the fees and gates when there is no board of directors, we recommended that we permit a master requirements. We received a number of believe that it is appropriate for the fund and its board, but not a feeder fund comments suggesting types of funds that adviser to the fund to determine when and its board, to impose and set the 832 should not be subject to the fees and and how a fund will impose liquidity terms of a fee or gate. The feeder fund gates requirements.838 In addition to the fees and/or redemption gates. We have would then have to ‘‘institute’’ the fee comments we received regarding the previously stated that, in order for a or gate on its redemptions ‘‘at the times application of fees and gates to the types registered fund to invest in reliance on and in the amounts instituted by the master fund.’’ 833 Another commenter of funds discussed above, commenters rule 12d1–1 in an unregistered money also proposed other specific types of market fund that does not have a board suggested, however, that fund boards should be given discretion to impose funds or entities that should not be of directors (because, for example, it is subject to the fees and gates organized as a limited partnership), the fees and/or gates on either or both a 834 requirements, including, for example, unregistered money market fund’s master or feeder fund(s). We have considered the comments money market funds with assets of less investment adviser must perform the received and have been persuaded that than $25 billion under management,839 duties required of a money market a feeder fund in a master/feeder or securities lending cash collateral fund’s board of directors under rule 2a– structure should only be permitted to reinvestment pools.840 7.826 In addition, we note that pass through the fees and gates imposed Because of the board flexibility and investment advisers are subject to a by the master fund.835 The master/ discretion included in the fees and gates fiduciary duty, which requires them, amendments we are adopting today, as when faced with conflicts of interest, to 827 SEC v. Capital Gains Research Bureau, Inc., well as for the reasons discussed fully disclose to clients all material 375 U.S. 180, 194 (1963). information, a duty that is intended ‘‘to 828 See rule 206(4)–7 of the Advisers Act (making liquidity fee to its investors and we would expect eliminate, or at least expose, all it unlawful for an investment adviser registered it would subsequently remit such fee to the master conflicts of interest which might with the Commission to provide investment advice fund. unless the adviser has adopted and implemented include an investment adviser— 836 See Stradley Ronon Comment Letter. We note written policies and procedures reasonably that only the master fund has an investment adviser consciously or unconsciously—to designed to prevent violation of the Advisers Act because a master fund’s shares are the only by the adviser or any of its supervised persons). investment securities that may be held by the feeder 821 We note that unregistered money market funds 829 See rule 2a–7(c)(2)(v) (defining ‘‘feeder fund’’ fund. See section 12(d)(1)(E). that otherwise meet the definition of a government as any money market fund that owns, pursuant to 837 See rule 22e–3(b). section 12(d)(1)(E), shares of another money market money market fund as defined in rule 2a–7(c)(2)(iii) 838 See, e.g., supra sections III.C.2 and III.C.3 fund). would not be subject to the floating NAV (discussing commenter support for excluding retail 830 requirement. See rule 2a–7(a)(16). See id. and municipal money market funds); but see, HSBC 822 See Dechert Comment Letter; Russell 831 Id. Comment Letter (‘‘[W]e believe all MMFs should be Comment Letter; UBS Comment Letter. 832 See Stradley Ronon Comment Letter. required to have the power to apply a liquidity fee 823 Id. 833 Id. or gate so that the MMF provider can manage a low 824 Id. 834 See UBS Comment Letter. probability but high impact event.’’); U.S. Bancorp 825 See supra note 815. 835 For example, if a master fund’s board Comment Letter. 826 See Funds of Funds Release, supra note 813, determines that the master fund should impose a 839 See PFM Asset Mgmt. Comment Letter. at n.42. See also supra note 815. liquidity fee, a feeder fund must pass through that 840 See State Street Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47810 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

below,841 we are requiring all funds, feeder funds for the reasons discussed plans.848 Some commenters expressed other than government money market above) to the fees and gates concern that fees and gates would create funds and feeder funds in a master/ requirements. issues for these plans.849 For example, feeder structure (for the reasons In addition to the reasons discussed commenters were worried about discussed above),842 to comply with the above, we describe more fully below our potential violations of certain minimum fees and gates requirements. As noted rationale for subjecting particular types required distribution rules that could be above, the fees and gates amendments of funds and redemptions to the fees impeded by the imposition of a gate,850 do not require a fund to impose fees and and gates amendments. potential taxation as a result of an gates if it is not in the fund’s best inability to process certain mandatory interests. Thus, even if a particular type a. Small Redemptions and Irrevocable refunds on a timely basis,851 problems of fund is subject to the fees and gates Redemptions arising in plan conversions or rollovers 852 provisions, it does not have to impose Some commenters suggested that in the event of a fee or gate, possible fees and gates. Rather, a fund’s board small redemptions should not be subject conflicts with the Department of Labor’s may use fees and gates as tools to limit to fees and gates because they are less (‘‘DOL’’) qualified default investment 853 heavy redemptions and must act in the likely to materially impact the liquidity (‘‘QDIA’’) rules, and certain general best interests of the fund in determining position of a fund.844 As discussed in fiduciary requirements on plan whether fees and gates should be the Proposing Release, we also have fiduciaries with respect to adequate imposed. 854 considered whether irrevocable liquidity in their plan. In addition, we note that the fees and redemption requests (i.e. requests that As an initial point, we note that gates amendments will not affect a money market funds are currently money market fund’s investors unless cannot be rescinded) that are submitted at least a certain period in advance permitted to use a redemption gate and the fund’s weekly liquid assets fall liquidate under rule 22e–3, and they below 30% of its total assets—i.e., the should not be subject to fees and gates as the fund should be able to plan for still continue to be offered as fund shows possible signs of heavy investment options under tax-qualified redemption pressure—and even then, it such liquidity demands and hold sufficient liquid assets.845 We are plans. However, in light of the is up to the board to determine whether commenters’ concerns, we have or not such measures are in the best concerned, however, that shareholders could try to ‘‘game’’ the fees and gates consulted the DOL’s Employee Benefits interests of the fund. Allowing specific Security Administration (‘‘EBSA’’) types of money market funds (other than requirements if we took such an approach with respect to these regarding potential issues under ERISA. government funds and feeder funds for With respect to general fiduciary the reasons discussed above) to not be redemptions, for example, by redeeming small amounts every day to fit under a requirements on plan fiduciaries subject to the fees and gates obligating them to prudently manage the requirements could leave funds and redemption size limit or by redeeming a certain irrevocable amount every week anticipated liquidity needs of their plan, their boards without adequate tools to EBSA staff advised our staff that a protect shareholders in times of stress. and then reinvesting the redemption proceeds immediately if the cash is not money market fund’s liquidity and its Also, allowing funds not to comply with potential for redemption restrictions is the fees and gates requirements would needed.846 We also remain concerned that allowing certain redemptions to not just one of many factors a plan fiduciary merely relieve a fund during normal would consider in evaluating the role market conditions of the costs and be subject to fees and gates could add cost and complexity to the fees and that a money market fund would play in burdens created by the prospect that the assuring adequate liquidity in a plan’s fund could impose a fee or gate if gates requirements both as an operational matter (e.g., fund groups investment portfolio. someday it was subject to heavy Additionally, we believe that certain 843 would need to be able to separately redemptions. In considering these other potential concerns presented by track which shares are subject to a fee risks, costs, and burdens, as well as the commenters, such as concerns regarding or gate and which are not, and create the possibility of unprotected shareholders QDIAs and the imposition of a fee or and broader contagion to the short-term system and policies to do so) and in terms of ease of shareholder funding markets, we believe it is 848 See, e.g., Schwab Comment Letter; Fin. Svcs. appropriate to subject all money market understanding without providing Inst. Comment Letter; Oppenheimer Comment funds (other than government funds and substantial benefits.847 Letter; TIAA–CREF Comment Letter. 849 See, e.g., Fin. Svcs. Roundtable Comment b. ERISA and Other Tax-Exempt Plans 841 See also supra sections III.C.2–III.C.5 for a Letter; Schwab Comment Letter; Comment Letter of American Benefits Council (Sept. 16, 2013) discussion of reasons specific to certain types of Many commenters raised concerns funds. (‘‘American Benefits Council Comment Letter’’). regarding the application of fees and 850 842 See supra sections III.C.1 and III.C.6. As See, e.g., Schwab Comment Letter; American discussed above with respect to feeder funds, we gates to funds offered in Employee Benefits Council Comment Letter; SPARK Comment believe feeder funds in a master/feeder structure are Retirement Income Security Act Letter. distinguishable from other funds in that their (‘‘ERISA’’) and/or other tax-exempt 851 See, e.g., id. liquidity is dictated by the liquidity of the master 852 See, e.g., American Benefits Council Comment fund. Thus, we believe the flexibility and discretion Letter (‘‘In some circumstances, retirement assets afforded to boards in today’s amendments should 844 See, e.g., Fin. Info. Forum Comment Letter. must be moved because of mandatory rollover be limited to a master fund’s board. We note that 845 See Proposing Release, supra note 25, at 200– requirements or because a plan has been although feeder funds may not individually impose 201. abandoned. Certain safe harbor regulations and fees and gates in reliance on today’s amendments, 846 See supra note 315 and accompanying text. prohibited transaction class exemptions effectively master funds are subject to today’s amendments and Commenters suggested that concerns over gaming require that funds be placed in an investment that their imposition of fees and gates will be passed could be addressed by putting additional policies seeks to maintain the dollar value that is equal to through to feeder funds’ investors. in place, such as placing limits on the number of the amount invested, generally is liquid and does 843 We noted in the Proposing Release that retail redemptions in any given period. See, e.g., Fin. not impose ‘substantial restrictions’ on money market funds experienced fewer Info. Forum Comment Letter. We believe that such redemptions.’’) (citations omitted); Schwab redemptions than institutional money market funds a solution to gaming, much like an exception to the Comment Letter. during the financial crisis and thus may be less fees and gates requirements, would create 853 See, e.g., Schwab Comment Letter; American likely to suffer heavy redemptions in the future. additional cost and complexity to the amendments Benefits Council Comment Letter. Nonetheless, we cannot predict if this will be the without substantial benefit. 854 See, e.g., American Bankers Ass’n Comment case if there is a future financial crisis. 847 See supra note 315 and accompanying text. Letter; American Benefits Council Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47811

gate within 90 days of a participant’s a contractual commitment by the c. Insurance Funds first investment, are unlikely to fiduciary or its affiliate to pay any A few commenters requested special materialize. We understand that the liquidity fee otherwise assessed to the treatment for money market funds imposition of a liquidity fee or gate IRA, to the extent such fee would be underlying variable annuity contracts or would have to relate to a liquidation or deducted from the principal amount other insurance products, citing transfer request within this 90-day rolled over. Additionally, to the extent contractual and state law restrictions period in order to create an issue with plan fiduciaries do not wish to take affecting insurance and annuity QDIA fiduciary relief. Even if this such steps, they can instead select products that would conflict with the occurred with respect to a specific government money market funds, which ability of a money market fund’s board participant, steps may be taken to avoid are not subject to the fees and gates to impose a fee or gate.864 Some concerns with the QDIA. We amendments, or other funds that do not commenters further noted that money understand, for instance, that a liquidity create prohibited transactions issues. market funds underlying variable fee otherwise assessed to the account of Staff at EBSA have communicated contract separate accounts are not prone a plan participant or beneficiary could that they will work with staff at the SEC to runs.865 Another commenter noted be paid by the plan sponsor or a service to provide additional guidance as that most insurance products have provider, and not by the participant, needed. ‘‘free-look’’ provisions, allowing an 855 With respect to the minimum beneficiary or plan. In addition, a owner to return his/her contract for full distribution requirement and the ability plan sponsor or other party in interest value if he/she is not satisfied with its to process certain mandatory could funds to the plan for the terms.866 During such initial periods, distributions or refunds on a timely payment of ordinary operating expenses insurance companies typically keep basis, we understand that although gates of the plan or for a purpose incidental client funds in money market funds, can hypothetically prevent required to the ordinary operation of the plan to which might be incompatible with fees 856 distributions or refunds, in practice it avoid the effects of a gate. We and gates.867 understand that if necessary, other steps will be unlikely to occur as participants We have determined not to provide may also exist. are unlikely to have their entire account special treatment for money market DOL staff has also advised the SEC invested in prime money market funds funds underlying variable annuity that the ‘‘substantial restrictions’’ or, more precisely, one or more prime contracts or other insurance products requirement, contained in Prohibited money market funds that determine to for the fees and gates requirements. We 857 861 Transaction Exemptions 2004–16 impose a gate at the same time. In recognize money market funds 858 and 2006–06, does not apply to addition, to the extent a gate does underlying variable annuity contracts or 859 money market funds. DOL staff prevent a timely minimum distribution other insurance products may be further indicated to us, however, that a or refund, we understand that there are indirectly subject to certain restrictions liquidity fee could raise issues under potential steps an individual or plan/ or requirements that do not apply to the conditions of these prohibited IRA can take to avoid the negative other money market funds. We note, transaction exemptions that require that consequences that may result from however, that these same funds the IRA owner be able to transfer funds failure to meet the minimum currently are permitted to suspend to another investment or another IRA distribution or refund requirements. For redemptions pursuant to rule 22e–3 and ‘‘within a reasonable period of time after example, with respect to the minimum their ability to do so has not prevented his or her request and without penalty distribution requirement, an individual them from being offered in connection to the principal amount of the who fails to meet this requirement as a with variable annuity and other 860 investment.’’ We understand that result of a gate is entitled to request a insurance products. In addition, to the while a gate of no longer than 10 waiver with respect to potential excise extent today’s fees and gates business days would not amount to an taxes by filing a form with the IRS that amendments are incompatible with 862 unreasonable period of time under the explains the rationale for the waiver. contractual or state law, or with free conditions, DOL staff has advised us In addition, with respect to plan look provisions, we note that an that, in order for a fiduciary to continue qualification issues that may arise in the insurance company can instead offer a to rely on the exemptions for the event a plan does not make timely government money market fund as an prohibited transactions arising from the minimum required distributions or investment option under its initial decision to roll over amounts to refunds as a result of a gate, we contract(s).868 Moreover, fees and gates a money market fund that is sponsored understand that a plan sponsor may will not affect the everyday activities of by or affiliated with the fiduciary, obtain relief pursuant to the Employee money market funds. They are instead additional steps would need to be taken Plans Compliance Resolution System 863 to protect the principal amount rolled (‘‘EPCRS’’). 864 See, .e.g., Dechert Comment Letter; Comment over in the event that a liquidity fee is Letter of American Council of Life Insurers (Sept. imposed. We understand that examples 861 In addition, with respect to the minimum 17, 2013) (‘‘ACLI Comment Letter’’); TIAA–CREF of such additional steps would include distribution requirement, we note that participants Comment Letter. could be encouraged to take required distributions 865 See ACLI Comment Letter; Comment Letter of before the deadline to avoid the possibility that a Committee of Annuity Insurers (Sept. 17, 2013) 855 See Department of Labor, Employee Benefits gate could prevent them from meeting the (‘‘CAI Comment Letter’’). Security Administration Field Assistance Bulletin requirements. 866 See Comment Letter of John Sklar (July 9, 2008–03, Q11 (Apr. 29, 2008). 862 See section 4974(d) of the Tax Code. We 2013) (‘‘Sklar Comment Letter’’). 856 See Prohibited Transaction Exemption 80–26, understand that to request a waiver, a taxpayer 867 See id. [45 FR 28545 (Apr. 29, 1980)], as amended at, [65 would file Form 5329 with the IRS. Whether to 868 To the extent an insurance company FR 17540 (Apr. 3, 2000)], [67 FR 9485 (Mar. 1, grant a waiver request is within the IRS’s discretion. determines to offer a government money market 2002)] and [71 FR 17917 (Apr. 7, 2006)]. 863 See Rev. Proc. 2013–12. We understand that, fund as a new investment option under a contract, 857 [69 FR 57964 (Sept. 28, 2004)]. pursuant to the EPCRS, if a minimum required we recognize that there may be costs associated 858 [71 FR 20856 (Apr. 21, 2006)], as amended, [73 distribution or refund timing failure is insignificant with this process, including costs associated with FR 58629 (Oct. 7, 2008)]. or is corrected within a limited time period, and disclosing a new investment option to contract- 859 See section IV(e) of PTE 2004–16 and section certain other requirements are satisfied, then the holders, negotiating arrangements with new V(c) of PTE 2006–06. failure can be voluntarily corrected without filing government money market funds, and filing with 860 See section II(i) of PTE 2004–16 and section with the IRS. Otherwise, we understand that a filing the Commission a substitution application under III(h) of PTE 2006–06. is required to correct qualification failures. section 26(c).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47812 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

designed to be used during times of We believe the expanded valuation possible in order to help stabilize the potential stress.869 If the market or a guidance, discussed below, will help funds’ NAV per share. money market fund is experiencing advance the goals of our money market As noted above, under existing stress, an insurance company could fund reform rulemaking, because, Commission guidance, funds would not choose not to place contract holders’ among other things, stronger valuation be able to use amortized cost valuation investments into a money market fund practices may lessen a money market to value certain debt securities when during free look periods, subject to fund’s susceptibility to heavy circumstances dictate that the amortized contractual provisions and prospectus redemptions by decreasing the cost value of the security is not fair 875 disclosures. likelihood of sudden portfolio write- value. The Commission’s guidance in the Proposing Release construed the D. Guidance on the Amortized Cost downs that may encourage financially sophisticated investors to redeem early. statute to effectively limit the use of Method of Valuation and Other amortized cost valuation to Valuation Concerns We provide below expanded guidance on the use of amortized cost valuation circumstances where it is the same as After further consideration, and as valuation using market-based factors.876 as well as other related valuation suggested by a number of commenters, Some commenters objected to this issues.873 our final rules will permit stable NAV interpretation and suggested that the money market funds (i.e., government 1. Use of Amortized Cost Valuation Commission more generally clarify this and retail money market funds) to guidance.877 maintain a stable NAV by using We consider it important, for a We recognize that existing valuation amortized cost valuation and/or the number of reasons, that funds and their guidance may not be clear on how penny rounding method of pricing.870 In investment advisers and boards of frequently funds should compare a debt addition, all other registered investment directors have clear guidance regarding security’s amortized cost value to its fair companies and business development amortized cost valuation. Typically, value determined using market-based companies (including floating NAV money market funds hold a significant factors and what extent of deviation money market funds under our portion of portfolio securities with between the two values is permissible. amendments) may, in accordance with remaining maturities of 60 days or We generally believe that a fund may Commission guidance, continue to use less,874 and therefore, a floating NAV only use the amortized cost method to amortized cost to value debt securities money market fund may use the value a portfolio security with a with remaining maturities of 60 days or amortized cost method to value these remaining maturity of 60 days or less less if fund directors, in good faith, portfolio securities if the fund’s board when it can reasonably conclude, at determine that the fair value of the debt determines that the amortized cost value each time it makes a valuation securities is their amortized cost value, of the security is fair value. In addition, determination,878 that the amortized unless the particular circumstances managers of floating NAV money market warrant otherwise.871 Accordingly, even funds may have an incentive to use 875 See ASR 219, Financial Reporting Codification (CCH) section 404.05.a and .b (May 31, 1977), supra for floating NAV money market funds, amortized cost valuation whenever amortized cost will continue to be an note 5 (‘‘Although debt securities with remaining maturities in excess of 60 days should not be valued important part of the valuation of 873 Although discussed here primarily in the at amortized cost, the Commission will not object money market fund portfolio context of money market funds, except as noted if the board of directors of a money market fund, securities.872 below, this guidance is applicable to all registered in good faith, determines that the fair value of debt investment companies and business development securities originally purchased with remaining maturities of 60 days or less shall be their amortized 869 companies. For ease of reference, throughout this We note that if, as suggested by commenters, cost value, unless the particular circumstances money market funds underlying variable annuity or section we refer to all of these entities as ‘‘funds.’’ We note that stable NAV money market funds that dictate otherwise. Nor will the Commission object other insurance contracts are less prone to runs, if, under similar circumstances, the fair value of then under the terms of our final rule amendments, qualify as retail or government money market funds debt securities originally purchased with maturities such funds may be less likely to reach the liquidity may use the amortized cost method of valuation to of in excess of 60 days, but which currently have thresholds that would trigger board consideration of compute the current share price provided, among maturities of 60 days or less, is determined by using fees or gates and, thus, may be less likely to be other things, the board of directors believes that the amortized cost valuation for the 60 days prior to affected by today’s amendments. See supra text amortized cost method of valuation fairly reflects accompanying note 865. the market-based NAV and does not believe that maturity, such amortization being based upon the market or fair value of the securities on the 61st day 870 See supra section III.B.5. such valuation may result in material dilution or prior to maturity’’ (footnotes omitted)). 871 See ASR 219, Financial Reporting Codification other unfair results to investors or existing 876 See Proposing Release, supra note 25, n.136. (CCH) section 404.05.a and .b (May 31, 1977), supra shareholders. See generally rule 2a–7(c)(1)(i) and 877 note 5. In this regard, the Commission has stated rule 2a–7(g)(1)(i)(A)–(C). We also note that stable See, e.g., Invesco Comment Letter (‘‘one of the that the ‘‘fair value of securities with remaining NAV money market funds that qualify as retail or footnotes to the Proposed Rule . . . refers to maturities of 60 days or less may not always be government money market funds may not rely on amortized cost pricing being available when it is the accurately reflected through the use of amortized this guidance to use amortized cost valuation in same as valuation based on market factors, implying cost valuation, due to an impairment of the shadow pricing because rule 2a–7 specifically that MMF could be barred from using amortized creditworthiness of an issuer, or other factors. In requires shadow prices to reflect ‘‘the current net cost pricing if it differs even minutely from the such situations, it would appear to be incumbent asset value per share calculated using available market value of the securities. While we believe this on the directors of a fund to recognize such factors market quotations (or an appropriate substitute that implication to have been unintentional, we and take them into account in determining ‘fair reflects current market conditions),’’ and we would nevertheless request the Commission to reaffirm value.’ ’’ not consider amortized cost valuation to be an clearly that MMFs, as all other mutual funds, can 872 For a mutual fund not regulated under rule appropriate substitute that reflects current market continue to use amortized cost pricing for securities 2a–7, the Investment Company Act and applicable conditions. See also 1983 Adopting Release, supra with maturities of 60 days and less.’’ (internal rules generally require that it price its shares at the note 3, at n.44 and accompanying text (‘‘In citations omitted)); ICI Comment Letter (also current NAV by valuing portfolio securities for determining the market-based value of the portfolio referring to this footnote and stating ‘‘It is unclear which market quotations are readily available at for purposes of computing the amount of deviation, whether this means that amortized cost must at all market value, or if market quotations are not readily all portfolio instruments, regardless of the time to times be identical to market-based price, or whether available, at fair value as determined in good faith maturity, should be valued based upon market it is just another way of saying funds must use by the fund’s board of directors. See section factors and not their amortized cost value.’’). market-based pricing and not amortized cost. We 2(a)(41)(B) and rules 2a–4 and 22c–1. 874 For example, we estimate that approximately urge the SEC to clarify that ASR 219 and its Notwithstanding these provisions, rule 2a–7 56% of prime money market funds’ portfolio interpretations remain unchanged.’’). currently permits money market funds to use the securities had remaining maturities of 60 days or 878 As discussed below, we believe that, in some amortized cost method of valuation and/or the less (not including interest-rate resets) as of circumstances (e.g., intraday), a fund may rely on penny rounding method of pricing. See current rule February 28, 2014. This estimate is based on Form the last obtained market-based data to assist it when 2a–7(c). N–MFP data. valuing its portfolio securities using amortized cost.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47813

cost value of the portfolio security is certificates of deposit are not actively stated that ‘‘it does not follow that the approximately the same as the fair value traded in the secondary markets.879 normal arguments for using actual of the security as determined without Accordingly, most money market fund market prices for calculating mutual the use of amortized cost valuation. portfolio securities are valued largely fund NAVs apply to using noisy Existing credit, liquidity, or interest rate based upon ‘‘mark-to-model’’ or ‘‘matrix guesstimates of true value of non-traded conditions in the relevant markets and pricing’’ estimates.880 In matrix pricing, assets.’’ 884 Another commenter stated issuer specific circumstances at each portfolio asset values are derived from that, with regard to matrix-priced such time should be taken into account a range of different inputs, with varying money market fund portfolio securities, in making such an evaluation. weights attached to each input, such as ‘‘[m]arket-based valuations are not more Accordingly, it would not be pricing of new issues, accurate valuations than amortized appropriate for a fund to use amortized information, spread information, and cost.’’ 885 cost to value a debt security with a yields or prices of securities of We acknowledge that matrix pricing remaining maturity of 60 days or less comparable quality, , maturity, and similar pricing methods involve and thereafter not continue to review and type.881 Money market funds also estimates and judgments—and thus may whether amortized cost continues to be may consider evaluated prices from introduce some ‘‘noise’’ into portfolio approximately fair value until, for third-party pricing services, which may security prices, and therefore into the example, there is a significant change in take into account these inputs as well as fund’s NAV per share when rounded to interest rates or credit deterioration. We prices quoted from dealers that make one basis point. However, we do not generally believe that a fund should, at markets in these instruments and agree that market-based prices of each time it makes a valuation financial models.882 portfolio securities do not provide determination, evaluate the use of We received a number of comments meaningful information or that amortized cost for portfolio securities, regarding the utility of market-based amortized cost generally provides better not only quarterly or each time the fund valuation for money market securities or more accurate values of securities produces financial statements. We note and other securities that do not that do not frequently trade or that may that, under the final rules, each money frequently trade in secondary markets. or may not be held to maturity given the market fund will be required to value, We also received comments discussing fund’s statutory obligation to investors on a daily basis, the fund’s portfolio certain other valuation matters more to satisfy redemptions within seven securities using market-based factors generally, such as the use of pricing days (and a fund’s disclosure and disclose the fund’s share price (or services in valuing such securities. commitment to generally satisfy shadow price) rounded to four decimal Together, these comments indicated to redemptions much sooner).886 Indeed, places on the fund’s Web site. As a us the need for further guidance in this many debt securities held by other types result, we believe that each money area, which we provide below. of funds do not frequently trade, but our market fund should have readily long-standing guidance on the use of a. Fair Value for Thinly Traded available market-based data to assist it amortized cost valuation is limited to Securities in monitoring any potential deviation debt securities with remaining between a security’s amortized cost and First, some commenters suggested maturities of 60 days or less and even fair value determined using market- that market-based valuations of money then only if the amortized cost value of based factors. We believe that, in certain market fund portfolio securities are not these securities is fair value.887 This circumstances, such as intraday, a fund particularly meaningful, given the guidance was based on our concern that may rely on the last obtained market- infrequent trading in money market ‘‘the use of the amortized cost method based data to assist it when valuing its fund portfolio securities and the use of i[n] valuing portfolio securities of portfolio securities using amortized matrix or model-based pricing or registered investment companies may cost. To address this, a fund’s policies evaluated prices from third-party result in overvaluation or and procedures could be designed to pricing services.883 One commenter undervaluation of the portfolios of such ensure that the fund’s adviser is actively 879 monitoring both market and issuer- See Proposing Release, supra note 25, at 884 See Angel Comment Letter. section II.B.1. 885 See Federated VI Comment Letter (‘‘Pricing specific developments that may indicate 880 See, e.g., Harvard Business School FSOC experts have confirmed to us that only a small that the market-based fair value of a Comment Letter (‘‘secondary markets for percentage of money market instruments actually commercial paper and other private money market portfolio security has changed during trade daily in secondary markets. While the assets such as CDs are highly illiquid. Therefore, the day, and therefore indicate that the amortized cost method of valuing MMF portfolios the asset prices used to calculate the floating NAV use of amortized cost valuation for that would largely be accounting or model-based is a simple and accurate means of valuing these security may no longer be appropriate. estimates, rather than prices based on secondary types of high-quality, short-term instruments that market transactions with sizable volumes.’’); generally are held to maturity, the effort to arrive 2. Other Valuation Matters Institutional Money Market Funds Association, The at market-based valuations for these types of instruments is time-consuming, complicated and Rule 2a–4 under the Investment Use of Amortised Cost Accounting by Money Market Funds, available at http://www.immfa.org/assets/ less exact.’’). Company Act provides that ‘‘[p]ortfolio files/IMMFA%20The%20use%20of%20 886 Many money market funds promise in fund securities with respect to which market amortised%20cost%20 disclosures to satisfy redemption requests on the quotations are readily available shall be accounting%20by%20MMF.pdf (noting that same day as the request, except in extraordinary investors typically hold money market instruments conditions. In addition, funds that are sold through valued at current market value, and to maturity and therefore there are relatively few broker-dealers seek to satisfy redemption requests other securities and assets shall be prices from the secondary market or broker quotes). within three business days because broker-dealers valued at fair value as determined in 881 See, e.g., Federated VI Comment Letter; Hai are subject to Securities Exchange Act rule 15c6– good faith by the board of directors of Jin, et al., Liquidity Risk and Expected Corporate 1, which establishes three business days as the Bond Returns, 99 J. of Fin. Econ. 628, at n.4 (2011) standard settlement period for securities trades the registered company.’’ As we (‘‘Matrix prices are set according to some algorithm effected by a broker or a dealer. discussed in the Proposing Release, the based on prices of bonds with similar 887 See ASR 219, Financial Reporting Codification vast majority of money market fund characteristics’’). (CCH) section 404.05.a and .b (May 31, 1977), supra portfolio securities do not have readily 882 See, e.g., Federated VI Comment Letter; Angel note 5. We have said that it is inconsistent with rule available market quotations because Comment Letter. 2a–4 to use the amortized cost method of valuation 883 See, e.g., Federated IV Comment Letter; Legg to determine the fair value of debt securities that most portfolio securities such as Mason & Western Asset Comment Letter; Chamber mature at a date more than 60 days after the commercial paper, repos, and II Comment Letter. valuation date.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47814 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

companies, relative to the value of the recognize that valuing thinly traded services, to provide market-based portfolios determined with reference to debt securities can be more complicated valuation data. Accordingly, we believe current market-based factors.’’ 888 Such and time-consuming than valuing liquid it is important to provide guidance to guidance is based on a preference equity securities based on readily funds and their boards regarding embodied in the Investment Company available market quotations or than reliance on pricing services. Act that funds value portfolio securities valuing debt securities using the We note that a fund’s board of taking into account current market amortized cost method. However, given directors has a non-delegable information.889 the redeemable nature of mutual fund responsibility to determine whether an Because most money market fund shares and the mandates of the evaluated price provided by a pricing portfolio securities are not frequently Investment Company Act to sell and service, or some other price, constitutes traded and thus are not securities for redeem fund shares at prices based on a fair value for a fund’s portfolio which market quotations are readily the current net asset values of those security.896 In addition, we have stated available, we understand that they are shares, we believe it is important for that ‘‘it is incumbent upon the [fund’s] typically fair valued in good faith by the funds to take steps to ensure that they Board of Directors to satisfy themselves fund’s board.890 As a general principle, are properly valuing fund shares and that all appropriate factors relevant to the fair value of a security is the amount treating all shareholders fairly. the value of securities for which market quotations are not readily available have that a fund might reasonably expect to b. Use of Pricing Services receive for the security upon its current been considered,’’ and that fund sale.891 Determining fair value requires As noted above, many funds, directors ‘‘must . . . continuously review taking into account market conditions including many money market funds, the appropriateness of the method used existing at that time. Accordingly, funds use evaluated prices provided by third- in valuing each issue of security in the holding debt securities generally should party pricing services to assist them in [fund’s] portfolio.’’ 897 Although a fund’s not fair value these securities at par or determining the fair values of their directors cannot delegate their statutory amortized cost based on the expectation portfolio securities. Some commenters duty to determine the fair value of fund that the funds will hold those securities have raised concerns that money market portfolio securities for which market until maturity, if the funds could not funds will place undue reliance on a quotations are not readily available, the reasonably expect to receive small market of third-party pricing board may appoint others, such as the approximately that value upon the vendors, even though they acknowledge fund’s investment adviser or a valuation current sale of those securities under that they provide only ‘‘good faith’’ committee, to assist them in 893 current market conditions.892 We opinions on valuation. A few determining fair value, and to make the commenters argued that eliminating actual calculations pursuant to the fair 888 Id. amortized cost valuation for money valuation methodologies previously 889 Section 22(c) and rules 2a–4 and 22c–1(a). market funds and requiring market- approved by the directors.898 890 As discussed further below, although a fund’s based pricing could provide third-party Before deciding to use evaluated directors cannot delegate their statutory duty to pricing services with a much greater prices from a pricing service to assist it determine the fair value of fund portfolio securities, degree of influence on fund’s portfolio the board may appoint others, such as the fund’s in determining the fair values of a investment adviser or a valuation committee, to valuation, which could increase fund’s portfolio securities, the fund’s assist them in determining fair value. See infra note operational complexity and risks.894 board of directors may want to consider 898 and accompanying text. We recognize that pricing services the inputs, methods, models, and 891 See Securities and Exchange Commission employ a wide variety of pricing assumptions used by the pricing service Codification of Financial Reporting Policies, methodologies in arriving at the Statement Regarding ‘‘Restricted Securities,’’ to determine its evaluated prices, and Investment Company Act Release No. 5847 (Oct. 21, evaluated prices they provide, and the how those inputs, methods, models, and 1969) [35 FR 19989 (Dec. 31, 1970)] (‘‘ASR 113’’); quality of those prices may vary widely. assumptions are affected (if at all) as Investment Companies, Investment Company Act We note that the evaluated prices market conditions change. In choosing a Release No. 6295 (Dec. 23, 1970) [35 FR 19986 (Dec. provided by pricing services are not, by 31, 1970)], Financial Reporting Codification (CCH) particular pricing service, a fund’s board section 404.03 (Apr. 15, 1982) (‘‘ASR 118’’). We themselves, ‘‘readily available’’ market may want to assess, among other things, generally believe that the current sale standard quotations or fair values ‘‘as determined the quality of the evaluated prices appropriately reflects the fair value of securities and in good faith by the board of directors’’ provided by the service and the extent other assets for which market quotations are not as required under the Investment to which the service determines its readily available within the meaning of section Company Act.895 To the extent that 2(a)(41)(B). The price that an unrelated willing evaluated prices as close as possible to buyer would pay for a security or other asset under certain money market funds are no the time as of which the fund calculates current market conditions is indicative of the value longer permitted to use the amortized its net asset value. In addition, the of the security or asset. See also FASB ASC cost method to value all of their paragraph 820–10–35–3 and FASB ASC paragraph portfolio securities and all money 820–10–20 (‘‘A fair value measurement assumes 896 See ASR 118, supra note 891 (‘‘[i]t is that the asset or liability is exchanged in an orderly market funds will be required to incumbent upon the Board of Directors to satisfy transaction between market participants to sell the perform daily market-based valuations, themselves that all appropriate factors relevant to asset or transfer the liability at the measurement funds may decide to rely more heavily the fair value of securities for which market date under current market conditions.’’; Fair Value on third parties, such as pricing quotations are not readily available have been means ‘‘the price that would be received to sell an considered and to determine the method of arriving asset or paid to transfer a liability in an orderly at the fair value of each such security.’’ A fund’s transaction between market participants at the No. 26290 (Dec. 11, 2003) at n.5 (settlement). See directors cannot delegate this responsibility to measurement date’’). also FASB ASC 820, at paragraph 820–10–35–54H anyone else). See, e.g., In the Matter of Seaboard 892 As we have previously stated: ‘‘Fair value (‘‘A reporting entity’s intention to hold the asset or Associates, Inc. (Report of Investigation Pursuant to cannot be based on what a buyer might pay at some to settle or otherwise fulfill the liability is not Section 21(a) of the Exchange Act), Investment later time, such as when the market ultimately relevant when measuring fair value because fair Company Act Release No. 13890 (Apr. 16, 1984) recognizes the security’s true value as currently value is a market-based measurement, not an entity- (‘‘The Commission wishes to emphasize that the perceived by the portfolio manager. Funds also may specific measurement.’’). directors of a registered investment company may not fair value portfolio securities at prices not 893 See, e.g., Federated VI Comment Letter; not delegate to others the ultimate responsibility of achievable on a current basis on the belief that the SIFMA Comment Letter; Angel Comment Letter. determining the fair value of any asset not having fund would not currently need to sell those 894 See, e.g., Federated VI Comment Letter; a readily ascertainable market value. . . .’’). securities.’’ See, e.g., In the Matter of Jon D. Chamber II Comment Letter. 897 See ASR 118, supra note 891. Hammes, et al., Investment Company Act Release 895 See section 2(a)(41)(B) and rule 2a–4. 898 See id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47815

fund’s board should generally consider 1. Required Disclosure Statement under the fees and gates alternative.902 the appropriateness of using evaluated a. Overview of Disclosure Statement Two commenters generally opposed the prices provided by pricing services as Requirements proposed disclosure statement, arguing the fair values of the fund’s portfolio that it would overstate the risks relative As discussed in the Proposing securities where, for example, the fund’s to other mutual funds and overwhelm Release, and as modified to reflect board of directors does not have a good investors with standardized mandated commenters’ concerns, we are adopting legends, which investors might ignore faith basis for believing that the pricing amendments to rule 482 under the service’s pricing methodologies produce as ‘‘boilerplate.’’ 903 Some commenters Securities Act and Item 4 of Form N–1A expressed concerns with particular evaluated prices that reflect what the to revise the disclosure statement fund could reasonably expect to obtain aspects of the proposed disclosure, such requirements concerning the risks of as the required disclosure regarding for the securities in a current sale under investing in a money market fund in its 904 current market conditions.899 sponsor support. These comments are advertisements or other sales materials discussed in more detail below. E. Amendments to Disclosure that it disseminates (including on the Today we are adopting amendments fund Web site) and in the summary Requirements to the requirements for disclosure section of its prospectus (and, statements that must appear in money We are amending a number of accordingly, in any summary market funds’ advertisements or other disclosure requirements related to the prospectus, if used). sales materials, and in the summary Money market funds are currently liquidity fees and gates and floating section of money market funds’ required to include a specific statement NAV requirements adopted today, as statutory prospectus. As discussed in concerning the risks of investing in their well as other disclosure enhancements more detail below, these amendments advertisements or other sales materials discussed in the proposal. These and in the summary section of the are being adopted largely as proposed, disclosure amendments improve fund’s prospectus (and, accordingly, in but with some modifications to the transparency related to money market any summary prospectus, if used).901 In proposed format and content. These funds’ operations, as well as their the Proposing Release, we proposed to modifications respond to comments we overall risk profile and any use of modify the format and content of this received and also reflect that we are affiliate financial support. In the required disclosure. Specifically, we adopting a liquidity fees and gates sections that follow, we first discuss proposed to require money market requirement for all non-government amendments to rule and form funds to present certain disclosure money market funds, including provisions applicable to various statements in a bulleted format. The municipal money market funds, as well disclosure documents, including content of the proposed disclosure as a floating NAV requirement for disclosures in money market funds’ statements would have differed under institutional prime funds. As we stated advertisements, the summary section of each of the proposed reform in the Proposing Release, we are modifying the current disclosure the prospectus, and the statement of alternatives. Under each reform requirements because we believe that additional information (‘‘SAI’’).900 Next, alternative, the proposed statement enhancing the disclosure required to be we discuss amendments to the would have included identical wording changes designed to clarify, and inform included in fund advertisements and disclosure requirements applicable to other sales materials, and in the money market fund Web sites, including investors about, the primary risks of investing in money market funds summary section of the prospectus, will information about money market funds’ help change the investment liquidity levels, shareholder flows, generally, including new disclosure emphasizing that money market fund expectations of money market fund market-based NAV per share (rounded sponsors are not obligated to provide investors, including any erroneous to four decimal places), imposition of financial support. Additionally, the expectation that a money market fund is liquidity fees and gates, and any use of proposed statement under the fees and a riskless investment.905 In addition, affiliate sponsor support. gates alternative would have included without such modifications, we believe disclosure that would call attention to that investors may not be fully aware of 899 See ASR 113 and ASR 118, supra note 891; the risks of investing in a money market potential restrictions on fund see also 1983 Adopting Release supra note 3 (‘‘If the fund that could impose liquidity fees or redemptions or, for floating NAV funds, [money market] fund uses an outside service to the fact that the value of their money provide this type of pricing for its portfolio gates, and the proposed statement under instruments, it may not delegate to the provider of the floating NAV alternative would have market fund shares will, as a result of the service the ultimate responsibility to check the included disclosure to emphasize the accuracy of the system.’’). particular risks of investing in a floating 902 See CFA Institute Comment Letter (noting that 900 In keeping with the enhanced disclosure the proposed disclosures would put investors on NAV money market fund. notice that money market funds are not riskless and framework we adopted in 2009, the amendments Comments regarding the amended would provide the information in a clear and are intended to provide a layered approach to disclosure statement were mixed. Two succinct manner); HSBC Comment Letter (generally disclosure in which key information about the new supporting both statements but suggesting additions features of money market funds would be provided commenters generally supported the proposed amendments to the disclosure to cross-reference the prospectus’s risk warnings in the summary section of the statutory prospectus and to make clear fees and gates would be used to (and, accordingly, in any summary prospectus, if statement under both alternatives, and protect investors); Federated II Comment Letter; used) with more detailed information provided one commenter expressed general Comment Letter of Federated Investors (Disclosure elsewhere in the statutory prospectus and in the support for the proposed disclosure Requirements for Money Market Funds and Current SAI. See Enhanced Disclosure and New Prospectus Requirements of Rule 2a–7) (Sept. 17, 2013) Delivery Option for Registered Open-End (‘‘Federated VIII Comment Letter’’) (concurring with 901 Rule 482(b)(4); Item 4(b)(1)(ii) of Form N–1A. Management Investment Companies, Investment the risk disclosure under the fees and gates Money market funds are currently required to alternative). Company Act Release No. 28584 (Jan. 13, 2009) [74 include the following statement: An investment in 903 FR 4546 (Jan. 26, 2009)] (‘‘Summary Prospectus the Fund is not insured or guaranteed by the See ABA Business Law Section Comment Adopting Release’’) at paragraph preceding section Federal Deposit Insurance Corporation or any other Letter; NYC Bar Committee Comment Letter. III (adopting rules permitting the use of a summary government agency. Although the Fund seeks to 904 See, e.g., Dreyfus Comment Letter; NYC Bar prospectus, which is designed to provide key preserve the value of your investment at $1.00 per Committee Comment Letter. information that is important to an informed share, it is possible to lose money by investing in 905 See Proposing Release, supra note 25, at investment decision). the Fund. sections III.A.8 and III.B.8.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47816 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

these reforms, increase and decrease as Funds with a floating NAV will also addresses concerns raised by a result of the changes in the value of be required to include a similar commenters that the length of the the underlying securities.906 disclosure statement in their proposed disclosure statement could Specifically, we are requiring money advertisements or other sales materials draw attention away from other market funds that maintain a stable and in the summary section of the important information in an NAV to include the following disclosure statutory prospectus, modified to advertisement or sales materials.911 statement in their advertisements or account for the characteristics of a c. Disclosure Concerning General Risk other sales materials and in the floating NAV, as follows: of Investment Loss summary section of the statutory You could lose money by investing in the prospectus: Fund. Because the share price of the Fund As proposed, the required disclosure You could lose money by investing in the will fluctuate, when you sell your shares they statement would have included a Fund. Although the Fund seeks to preserve may be worth more or less than what you bulleted statement providing: ‘‘You the value of your investment at $1.00 per originally paid for them. The Fund may could lose money by investing in the share, it cannot guarantee it will do so. The impose a fee upon the sale of your shares or Fund.’’ We are adopting identical Fund may impose a fee upon the sale of your may temporarily suspend your ability to sell content in the required disclosure shares or may temporarily suspend your shares if the Fund’s liquidity falls below statement. As discussed in the proposal, ability to sell shares if the Fund’s liquidity required minimums because of market we have taken into consideration conditions or other factors. An investment in falls below required minimums because of investor preferences for clear, concise, market conditions or other factors.907 An the Fund is not insured or guaranteed by the investment in the Fund is not insured or Federal Deposit Insurance Corporation or any and understandable language in guaranteed by the Federal Deposit Insurance other government agency. The Fund’s adopting the required disclosure and Corporation or any other government agency. sponsor has no legal obligation to provide also have considered whether strongly- The Fund’s sponsor has no legal obligation financial support to the Fund, and you worded disclaimer language would to provide financial support to the Fund, and should not expect that the sponsor will more effectively convey the particular you should not expect that the sponsor will provide financial support to the Fund at any risks associated with money market 909 provide financial support to the Fund at any time. funds than more moderately-worded 908 time. Below we describe in detail the ways language would.912 We received one in which the format and content of the comment on this language arguing that 906 Id. required disclosure statement that we 907 it is duplicative with other language in Government funds that are not subject to the 913 fees and gates requirements pursuant to rule 2a– are adopting today differ from that the required disclosure statement. We 7(c)(2)(iii) may omit the following sentence: ‘‘The which we proposed, as well as the have responded to this comment by Fund may impose a fee upon the sale of your shares reasons for these differences. shortening and modifying the required or may temporarily suspend your ability to sell disclosure statement.914 shares if the fund’s liquidity falls below required b. Format of the Statement minimums because of market conditions or other d. Disclosure Concerning Fees and Gates factors.’’ See rule 482(b)(4)(iii); Form N–1A Item We have decided not to adopt the 4(b)(1)(ii)(C). proposed requirement that funds As proposed, the required disclosure 908 See Rule 482(b)(4)(ii); Form N–1A Item provide the statement in a bulleted statement would have included bulleted 4(b)(1)(ii)(B). Besides the amendments to the format. One commenter argued that statements providing: ‘‘The Fund may disclosure statement requirements set forth in Rule prescribing a specific graphical format is 482(b)(4)(ii) and Form N–1A Item 4(b)(1)(ii)(B), we impose a fee upon sale of your shares also are adopting non-substantive changes to the not necessary and might be difficult to when the Fund is under considerable text of these rule and form provisions. If an execute in certain forms of advertising, stress’’ and ‘‘The Fund may temporarily affiliated person, promoter, or principal such as social media.910 We agree. We suspend your ability to sell shares of the underwriter of the fund, or an affiliated person of also believe that refraining from such person, has contractually committed to Fund when the Fund is under provide financial support to the fund, the fund requiring funds to provide the considerable stress.’’ Instead of would be permitted to omit the last sentence from disclosure statement in a bulleted including these bullet points in the the disclosure statement in advertisements and format, in combination with other required disclosure, we are adopting sales materials for the term of the agreement. See modifications discussed below that Note to paragraph (b)(4), rule 482(b)(4). Likewise, if similar content in the required an affiliated person, promoter, or principal shorten the disclosure statement, disclosure statement providing: ‘‘The underwriter of the fund, or an affiliated person of Fund may impose a fee upon the sale of such person, has contractually committed to market funds to disclose current and historical your shares or may temporarily suspend provide financial support to the fund, and the term instances of affiliate financial support on Form N– your ability to sell shares if the Fund’s of the agreement will extend for at least one year CR and Form N–1A, respectively. See infra sections following the effective date of the fund’s III.F.3, III.E.7. liquidity falls below required registration statement, the fund would be permitted 909 See Rule 482(b)(4)(i); Form N–1A Item to omit the last sentence from the disclosure 4(b)(1)(ii)(A). Besides the amendments to the 911 See NYC Bar Committee Comment Letter statement that appears in the fund’s registration disclosure statement requirements set forth in Rule (noting that, particularly in inherently brief formats statement. See Instruction to Item 4(b)(1)(ii) of Form 482(b)(4)(i) and Form N–1A Item 4(b)(1)(ii)(A), we like advertisements, there is a risk that mandated N–1A. also are adopting non-substantive changes to the legends may crowd out material informational The proposal likewise would have permitted a text of these rule and form provisions. Funds may content); ABA Business Law Section Comment similar omission from the proposed disclosure omit the last sentence regarding sponsor support Letter (arguing that the proposed disclosure statement. See Proposing Release, supra note 25, at under certain circumstances, such as when a fund’s statement could take up so much of the space nn.429 and 431. As proposed, such omission would sponsor has contractually committed to provide available in an advertisement that it will discourage have been permitted if ‘‘an affiliated person, support to the fund. See supra note 908; investors from viewing other important information promoter, or principal underwriter of the fund, or Instructions to Item 4(b)(1)(ii) of Form N–1A; Note in the communication). an affiliated person of such person, has entered into to paragraph (b)(4), rule 482(b)(4). The proposal 912 See Proposing Release, supra note 25, at an agreement to provide financial support to the likewise would have permitted this omission from nn.316–317. fund.’’ We have modified the language of the Note the proposed disclosure statement. See Proposing 913 See Federated VIII Comment Letter. to paragraph (b)(4), rule 482(b)(4) and the Release, supra note 25, at nn.307 and 313. As 914 As proposed, the required disclosure Instruction to Item 4(b)(1)(ii) of Form N–1A to discussed in more detail below, we are adopting statement included the statements ‘‘You could lose clarify that the omission would be permitted only amendments that would require money market money by investing in the Fund’’ and ‘‘Your in the case of contractual commitments to provide funds to disclose current and historical instances of investment in the Fund therefore may experience financial support, and not in the case of informal affiliate financial support on Form N–CR and Form losses.’’ As adopted, the required disclosure agreements that may not be enforceable. N–1A, respectively. See infra sections III.F.3, III.E.7. statement no longer includes the second statement, As discussed in more detail below, we are 910 See ABA Business Law Section Comment which could be construed to be repetitive with the adopting amendments that would require money Letter. first.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47817

minimums because of market conditions could be imposed ‘‘to protect investors that particular instances of sponsor or other factors.’’ One commenter, while of the fund,’’ as suggested by one support were not particularly generally supporting the proposed commenter. We believe that including transparent to investors in past years statement, suggested that the statement the additional suggested language could because sponsor support generally was be amended to say that the fund could detract from the statement’s emphasis not immediately disclosed, and was not impose a fee or a gate ‘‘in order to that a fee or gate could be imposed, required to be disclosed by the protect shareholders of the Fund.’’ 915 which could in turn diminish Commission.924 But although investors One commenter expressed concerns shareholders’ awareness of potential might not have known of particular about requiring the inclusion of restrictions on fund redemptions. The instances of sponsor support, we believe statements about fees and gates in language we have adopted reflects that many investors, particularly advertisements or other sales materials, commenter suggestions that any institutional investors, have historically arguing that the description of disclosure regarding fees or gates be understood that there was a possibility circumstances and conditions under combined into a single statement. We of financial support from the money which fees and gates might be imposed believe that the adopted language also market fund’s sponsor and that this is difficult to reduce to a brief responds to commenter concerns about possibility has affected investors’ 916 statement. No commenters explicitly the difficulty of briefly describing the perceptions about the level of risk in supported the inclusion of the term conditions under which fees and gates investing in money market funds.925 We ‘‘considerable stress,’’ and several might be imposed by providing that fees therefore disagree with the commenter commenters argued that this term was and gates could be imposed if ‘‘the who suggested that investors were not clear, and may cause investors to Fund’s liquidity falls below required generally unaware of this practice believe that funds could impose fees minimums because of market conditions preceding and during the financial and gates arbitrarily or, conversely, only or other factors.’’ 926 917 crisis. For this reason, we believe that during extreme market events. To it is important to emphasize to investors address this concern, one commenter e. Disclosure Concerning Sponsor Support that they should not expect a fund suggested requiring a different term than sponsor to provide financial support to ‘‘considerable stress,’’ arguing that this As proposed, the required disclosure the fund. term overstates the prospect for statement would have included a imposing fees or gates.918 Other bulleted statement providing: ‘‘The For similar reasons, we disagree with commenters suggested that the Fund’s sponsor has no legal obligation one commenter who argued that disclosure state explicitly that a fee or to provide financial support to the requiring this disclosure is at odds with gate could be imposed as a result of a Fund, and you should not expect that the requirement that funds publicly reduction in the fund’s liquidity.919 disclose instances of sponsor the sponsor will provide financial 927 Commenters also suggested that any support to the Fund at any time.’’ We support. As discussed below, we are disclosure regarding fees and gates are adopting identical content in the requiring funds to disclose current and could be combined into a single required disclosure statement. Several historical instances of sponsor support statement. commenters opposed the inclusion of a because we believe that such disclosure After considering the comments, we will help investors better understand reference to sponsor support in the 928 continue to believe that disclosure about required disclosure statement.921 Some the risks of investing in the funds. fees or gates should be included in commenters argued that the disclosure This reporting, which should help advertisements, sales materials, and the would raise sponsor support to an investors understand instances when summary section of the prospectus. unwarranted level of prominence, the fund has come under stress, Even some commenters that expressed noting that there have not been any provides historical information about concerns about including the disclosure studies to determine whether investors the fund. The required disclosure in advertisements acknowledged that actually rely on the potential for statement, on the other hand, is a the possible imposition of fees and gates sponsor support as a factor when forward-looking risk statement that is information that is likely to be determining whether to invest in a reminds current and prospective 920 important to investors. As we stated money market fund.922 Commenters investors that sponsors do not have an in the Proposing Release, we are also were concerned that investors will obligation to provide sponsor support concerned that investors will not be not understand the disclosure in fund and that investors should not expect fully aware of potential restrictions on advertisements, since advertisements that sponsors will provide support in fund redemptions. To address will not afford space or opportunity to the future. commenters’ concerns regarding the explain to investors who the fund’s ambiguity of the term ‘‘considerable ‘‘sponsor’’ is and what ‘‘financial 924 Proposing Release, supra note 25, at section II.B.3. stress,’’ we have revised the statement, support’’ means.923 as suggested by commenters, to make 925 See, e.g., Roundtable Transcript, supra note 63 We continue to believe that the (Lance Pan, Capital Advisors Group) (‘‘over the last clear that funds could impose a fee or disclosure statement should include a 30 or 40 years, [investors] have relied on the gate in response to a reduction in the statement that the fund’s sponsor has no perception that even though there is risk in money fund’s liquidity. The statement does not obligation to provide financial support. market funds, that risk is owned somehow include a reference that a fee or gate implicitly by fund sponsors. So once they perceive In the Proposing Release, we recognized that they are not able to get that additional assurance, I believe that was one probably cause of 915 See HSBC Comment Letter. 921 See Dreyfus Comment Letter; NYC Bar the run.’’). 916 See NYC Bar Committee Comment Letter. Committee Comment Letter; ABA Business Law 926 See NYC Bar Committee Comment Letter 917 See NYC Bar Committee Comment Letter; Section Comment Letter. But see CFA Institute (arguing that the Commission’s discussion of the ABA Business Law Section Comment Letter; Comment Letter; HSBC Comment Letter (both lack of transparency regarding instances of sponsor Dreyfus Comment Letter. generally supporting the proposed disclosure support shows that the proposed risk statement 918 See Dreyfus Comment Letter. statement, including the language discussing addresses a practice that investors were not aware 919 See NYC Bar Committee Comment Letter; sponsor support). of during the financial crisis). ABA Business Law Section Comment Letter. 922 See, e.g., ABA Business Law Section Comment 927 See Dreyfus Comment Letter. 920 See ABA Business Law Section Comment Letter; NYC Bar Committee Comment Letter. 928 See infra notes 1007–1010, 1132 and Letter; NYC Bar Committee Comment Letter. 923 Id. accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47818 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Finally, we are not persuaded that the proposed statement that investors that fund’s shares.938 Accordingly, we disclosure regarding sponsor support require a stable value not invest in the expect that, pursuant to current should not appear in advertisements fund. We were persuaded by disclosure requirements, floating NAV because this disclosure will not be commenters that the term ‘‘stable value’’ money market funds would include understood by investors. We recognize is often used by financial advisers when disclosure in their prospectuses about that upon reading the disclosure referring to certain investment products, the tax consequences to shareholders of statement, investors might have at least some of which do have a buying, holding, exchanging, and selling questions regarding financial support variable NAV.933 We are also not the shares of the floating NAV fund. In from sponsors, as commenters including in the disclosure addition, we expect that a floating NAV indicated, including questions regarding requirements the proposed statements money market fund would update its who the fund’s ‘‘sponsor’’ is, or what about the relationship between the fund prospectus and SAI disclosure regarding constitutes ‘‘financial support.’’ 929 We share price and the value of the fund’s the purchase, redemption, and pricing believe, however, that funds can address underlying securities and the risk of fund shares, to reflect any changes this issue through more complete factors that can affect the value of the resulting from the fund’s use of a disclosure elsewhere in the fund fund’s underlying securities. We were floating NAV.939 We also expect that a prospectus if they believe it is persuaded by one commenter who fund that intends to qualify as a retail necessary. noted that discussion of specific risk money market fund would disclose in factors will be addressed in other areas its prospectus that it limits investment f. Disclosure for Floating NAV Funds of the prospectus, including the to accounts beneficially owned by As proposed, the required disclosure summary prospectus.934 We also believe natural persons.940 The Proposing statement for floating NAV funds would that not including these statements Release requested comment on the have included bulleted statements addresses more general concerns disclosure that we expect floating NAV providing: ‘‘You should not invest in expressed by commenters regarding the money market funds would include in the Fund if you require your investment length and efficacy of the proposed their prospectuses about the tax to maintain a stable value’’ and ‘‘The disclosure statement.935 consequences to shareholders of buying, value of the Fund will increase and 2. Disclosure of Tax Consequences and holding, exchanging, and selling shares decrease as a result of changes in the of the fund, as well as the effects (if any) value of the securities in which the Effect on Fund Operations—Floating NAV on fund operations resulting from the Fund invests. The value of the securities transition to a floating NAV. We in which the Fund invests may in turn As discussed in the Proposing received no comments directly be affected by many factors, including Release, the requirement that discussing this disclosure. interest rate changes and defaults or institutional prime money market funds changes in the credit quality of a transition to a floating NAV will entail 3. Disclosure of Transition to Floating security’s issuer.’’ Instead of including certain additional tax- and operations- NAV these bullet points in the required related disclosure, but these disclosure Currently, a fund must update its disclosure, we are adopting similar requirements do not necessitate rule and registration statement to reflect any content in the required disclosure form amendments.936 As noted above, material changes by means of a post- statement providing: ‘‘Because the share taxable investors in institutional prime effective amendment or a prospectus price of the Fund will fluctuate, when money market funds, like taxable supplement (or ‘‘sticker’’) pursuant to you sell your shares they may be worth investors in other types of mutual funds, rule 497 under the Securities Act.941 As more or less than what you originally may now experience taxable gains and discussed in the Proposing Release, we paid for them.’’ While one commenter losses.937 Currently, funds are required would expect that, to meet this existing questioned whether the proposed to describe in their prospectuses the tax requirement, at the time that a stable disclosure was necessary for investors consequences to shareholders of buying, NAV money market fund transitions to in institutional prime funds,930 we holding, exchanging, and selling the a floating NAV (or adopts a floating believe it is important to emphasize to NAV in the course of a merger or other investors the potential impact of a 933 See NYC Bar Committee Comment Letter reorganization), it would update its 931 (noting that ‘‘stable value’’ commonly refers to a floating NAV. In response to registration statement to include 932 ‘‘retirement product that will use a combination of suggestions by commenters, we have government bonds, guaranteed return insurance relevant related disclosure, as discussed decided not to require that the wrappers and potentially other synthetic in sections III.E.1 and III.E.2 of this disclosure statement include the instruments to deliver a minimum rate of return’’). Release, by means of a post-effective 934 See Dreyfus Comment Letter. amendment or a prospectus 929 935 See ABA Business Law Section Comment See ABA Business Law Section Comment supplement. Two commenters explicitly Letter; NYC Bar Committee Comment Letter. Letter; NYC Bar Committee Comment Letter. The 930 See Dreyfus Comment Letter (‘‘[W]e also required disclosure statement that we are adopting supported that such disclosures be question the Commission’s concern that investors today (see supra text accompanying note 909) is made when transitioning to a floating will fail to understand that the value of the [floating about 30% shorter than the proposed bulleted NAV.942 We continue to believe that a NAV] MMF will fluctuate. We question at what disclosure statement. (We have modified the point investors will be given the benefit of the proposed bulleted disclosure statement to money market fund must update its doubt for understanding the product in which they encompass the proposed language referencing registration statement by means of a are invested and when such concerns will cease to fluctuating share price as well as the ability of a post-effective amendment or ‘‘sticker’’ drive additional regulatory action.’’) fund to impose fees or gates. The Proposing Release 931 Cf. ABA Business Law Section Comment conceived of two separate reform approaches, each with its own disclosure statement, while this 938 See Item 11(f) of Form N–1A. Letter (suggesting that ‘‘floating NAV money market 939 funds include in their advertisements a statement Release combines the approaches into a single We expect that a floating NAV money market that their principal value will fluctuate so that an reform package, and the disclosure statement we are fund would include this disclosure (as appropriate) investor’s shares, when redeemed may be worth adopting therefore references both reform elements, in response to, for example, Item 11 (‘‘Shareholder more or less than their original cost’’); CFA Institute as appropriate.) Information’’) and Item 23 (‘‘Purchase, Redemption, Comment Letter (stating that ‘‘[d]isclosures are 936 Prospectus disclosure regarding the tax and Pricing of Shares’’) of Form N–1A. needed to alert investors to the potential for loss of consequences of these activities is currently 940 See supra note 692 and accompanying text. principal and interest’’). required by Form N–1A. See Item 11(f) of Form N– 941 See 17 CFR 230.497. 932 See NYC Bar Committee Comment Letter; 1A. 942 See HSBC Comment Letter; PWC Comment ABA Business Law Section Comment Letter. 937 See supra section III.B.6. Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47819

to reflect relevant disclosure related to liquidation process. One commenter or to what extent to include this a transition to a floating NAV. argued against the utility of such disclosure in the prospectus or SAI, additional disclosure in helping money market funds should rely on the 4. Disclosure of the Effects of Fees and investors to understand the effects of principle that funds should limit Gates on Redemptions fees and gates on redemptions.947 We disclosure in prospectuses generally to As we discussed in the proposal, agree and decided against making any information that ‘‘would be most useful pursuant to the existing requirements in changes to the rule text in this regard. to typical or average investors in making Form N–1A, funds must disclose any As discussed in the Proposing an investment decision.’’ 951 Detailed or restrictions on fund redemptions in Release, we expect money market funds highly technical discussions, as well as their registration statements.943 As to explain in the prospectus the various information that may be helpful to more discussed in more detail below, we situations in which the fund may sophisticated investors, dilute the effect expect that, to comply with these impose a liquidity fee or gate.948 For of necessary prospectus disclosure and existing requirements, money market example, money market funds would should be placed in the SAI.952 funds (other than government money briefly explain in the prospectus that if Based on this principle, we anticipate market funds that are not subject to the the fund’s weekly liquid assets fall that funds generally would consider the fees and gates requirements pursuant to below 30% of its total assets and the following disclosure to be appropriate rule 2a–7(c)(2)(iii) and that have not fund’s board determines it is in the best for the prospectus, as disclosure chosen to rely on the ability to impose interests of the fund, the fund board regarding redemption restrictions liquidity fees and suspend redemptions) may impose a liquidity fee of no more provided in response to Item 11(c)(1) of will disclose in the registration than 2% and/or temporarily suspend Form N–1A: (i) Means of notifying statement the effects that the potential redemptions for a limited period of shareholders about the imposition and imposition of fees and/or gates, time.949 We also expect money market lifting of fees and/or gates (e.g., press including a board’s discretionary funds to briefly explain in the release, Web site announcement); (ii) powers regarding the imposition of fees prospectus that if the fund’s weekly timing of the imposition and lifting of and gates, may have on a shareholder’s liquid assets fall below 10% of its total fees and gates, including (a) an ability to redeem shares of the fund. assets, the fund will impose a liquidity explanation that if a fund’s weekly This disclosure should help investors fee of 1% on all redemptions, unless the liquid assets fall below 10% of its total evaluate the costs they could incur in board of directors of the fund (including assets at the end of any business day, redeeming fund shares—one of the goals a majority of its independent directors) the next business day it must impose a of this rulemaking. determines that imposing such a fee 1% liquidity fee on shareholder Commenters generally agreed that this would not be in the best interests of the redemptions unless the fund’s board of disclosure would help investors fund or determines that a lower or directors determines that doing understand the effects of fees and gates higher fee (not to exceed 2%) would be otherwise is in the best interests of the on redemptions.944 One commenter in the best interests of the fund.950 fund, (b) an explanation that if a fund’s specifically agreed that Items 11(c)(1) As discussed in the Proposing weekly liquid assets fall below 30% of and 23 of Form N–1A would require Release, we expect money market funds its total assets, it may impose fees or money market funds to fully describe to incorporate additional disclosure in gates as early as the same day, and (c) the circumstances under which the prospectus or SAI, as the fund an explanation of the 10 business day liquidity fees could be charged or determines appropriate, discussing the limit for imposing gates; (iii) use of fee redemptions could be suspended or operations of fees and gates in more proceeds by the fund, including any reinstated.945 In addition, two detail. Prospectus disclosure regarding possible return to shareholders in the commenters noted that the prospectus any restrictions on redemptions is form of a distribution; (iv) the tax should include disclosure of a board’s currently required by Item 11(c)(1) of consequences to the fund and its discretionary powers regarding the Form N–1A. In addition to the shareholders of the fund’s receipt of imposition of fees and gates, which disclosure required by Item 11(c)(1), we liquidity fees; and (v) general would serve to emphasize further the believe that funds could determine that description of the process of fund nature of money market funds as more detailed disclosure about the liquidation953 if the fund’s weekly investments subject to risk.946 The operations of fees and gates, as further liquid assets fall below 10%, and the Proposing Release requested comment discussed in this section, would fund’s board of directors determines on the utility of including additional appropriately appear in a fund’s SAI, that it would not be in the best interests disclosure about the operations and and that this more detailed disclosure is of the fund to continue operating.954 effects of fees and redemption gates, responsive to Item 23 of Form N–1A In addition, we expect that a including (i) requiring information (‘‘Purchase, Redemption, and Pricing of government money market fund that is about the basic operations of fees and Shares’’). In determining whether and/ not subject to the fees and gates gates to be disclosed in the summary section of the statutory prospectus (and 947 See Federated VIII Comment Letter (arguing 951 See Registration Form Used by Open-End any summary prospectus, if used) and that: (i) Requiring disclosure in the summary Management Investment Companies, Investment (ii) requiring details about the fund’s prospectus about ‘‘an exigent circumstance (i.e., Company Act Release No. 23064 (Mar. 13, 1998) [63 charging liquidity fees or suspending redemptions) FR 13916 (Mar. 23, 1998)], at section I. which is highly unlike[ly] to ever occur ’’ would be 952 Id. 943 See Items 11(c)(1) and 23 of Form N–1A. ‘‘highly inconsistent with the Commission’s goal of 953 See supra section III.A.4. 944 See, e.g., UBS Comment Letter; Chamber II ‘providing prospectuses that are simpler, clearer, 954 One commenter argued that it was Comment Letter; Federated VIII Comment Letter. and more useful to investors’ ’’ and (ii) no money unnecessary to describe the process of fund 945 See Federated VIII Comment Letter (suggesting market funds have relied on rule 22e–3 to suspend liquidation in either the prospectus or SAI. See that Form N–1A also would require money market the redemption of shares and liquidate the fund Federated VIII Comment Letter. We note that we are funds to describe how shareholders would be since the rule’s adoption, and thus suggesting that not mandating particular disclosures, but rather notified thereof, as well as other implications for disclosure about a fund’s liquidation process would providing examples of the types of disclosures we shareholders, such as the tax consequences not be useful to investors). believe that money market funds could provide in associated with the money market fund’s receipt of 948 Proposing Release, supra note 25, at section the prospectus or SAI. We further note that it is liquidity fees). III.B.8. important for funds to ensure that investors are 946 See UBS Comment Letter; Chamber II 949 See Items 11(c)(1) and 23 of Form N–1A. fully aware of the ability of the fund to permanently Comment Letter. 950 See Items 11(c)(1) and 23 of Form N–1A. suspend redemptions and liquidate.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47820 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

requirements pursuant to rule 2a– liquidity fee) and/or temporarily contain modified thresholds for 7(c)(2)(iii), but that later decides to rely suspend the fund’s redemptions’’ for the imposing fees and gates from what was on the ability to impose liquidity fees reasons detailed below. proposed,963 and we are therefore and suspend redemptions, would Specifically, we are amending Form modifying the disclosure requirements update its registration statement to N–1A to require that money market to conform to these amended threshold reflect the changes by means of a post- funds (other than government money levels. effective amendment or a prospectus market funds that are not subject to the As proposed, the SAI disclosure supplement pursuant to rule 497 under fees and gates requirements pursuant to requirements would not have directly the Securities Act. In addition, a rule 2a–7(c)(2)(iii)) 958 provide required a fund to disclose the size of government fund that later opts to rely disclosure in their SAIs regarding any any liquidity fee imposed. We are on the ability to impose fees and gates occasion during the last 10 years (but modifying the SAI disclosure provided in rule 2a–7(c)(2)(iii) should not for occasions that occurred before requirements to require a fund to consider whether to provide any the compliance date of these amended disclose the size of any liquidity fee it additional notice to its shareholders of rules) 959 on which (i) the fund’s weekly has imposed during the specified look- that election.955 liquid assets have fallen below 10%, back period. As discussed below in the and with respect to each such occasion, context of the Form N–CR disclosure 5. Historical Disclosure of Liquidity whether the fund’s board of directors requirements we are adopting, because Fees and Gates determined to impose a liquidity fee we are revising the default liquidity fee We are amending Form N–1A, and/or suspend the fund’s redemptions, from the proposed 2% to 1%, and thus generally as proposed, but with certain or (ii) the fund’s weekly liquid assets we expect that there may be instances modifications as discussed below, to have fallen below 30% (but not less where liquidity fees are above or below require that money market funds than 10%) and the fund’s board of the default fee (rather than just lower as provide disclosure in their SAIs about directors determined to impose a permitted under the proposal), we are historical occasions in which the fund liquidity fee and/or suspend the fund’s requiring that funds disclose the size of has considered or imposed liquidity fees redemptions.960 With respect to each the liquidity fee, if one is imposed.964 or gates.956 As proposed, we would have occasion, we are requiring funds to One commenter specifically required funds to disclose: (i) The disclose: (i) The length of time for supported the proposed 10-year ‘‘look- length of time for which the fund’s which the fund’s weekly liquid assets back’’ period for the historical weekly liquid assets remained below remained below 10% (or 30%, as disclosure, noting that a 10-year period 15%: (ii) the dates and length of time for applicable); (ii) the dates and length of should capture a number of different which the fund’s board of directors time for which the fund’s board of market stresses delivering a meaningful determined to impose a liquidity fee directors determined to impose a sample.965 Another commenter and/or temporarily suspend the fund’s liquidity fee and/or temporarily suggested limiting SAI disclosure to a redemptions; and (iii) a short discussion suspend the fund’s redemptions; and five-year period prior to the effective of the board’s analysis supporting its (iii) the size of any liquidity fee date of the registration statement decision to impose a liquidity fee (or not imposed.961 incorporating the SAI disclosure, to impose a liquidity fee) and/or We proposed to require a fund to although this commenter did not temporarily suspend the fund’s provide disclosure in its SAI regarding provide specific reasons why this redemptions.957 As discussed below, we any occasion during the last 10 years shortened look-back period would be are adopting modified thresholds for (but not before the compliance date) in appropriate.966 After further imposing fees and gates from what was which the fund’s weekly liquid assets consideration, and given that proposed; consequently, the had fallen below 15%, and with respect commenters did not provide any amendments we are adopting to Form to each such occasion, whether the specific reasons for implementing a N–1A to require historical disclosure of fund’s board of directors determined to shortened look-back period, we liquidity fees and gates have been impose a liquidity fee and/or suspend continue to believe that a 10-year look- modified from the proposed the fund’s redemptions.962 As discussed back period provides shareholders and amendments to conform to these previously, the final amendments the Commission with a historical amended threshold levels. In addition, perspective that would be long enough in a change from the proposed historical 958 Rule 2a–7(c)(2)(iii). to provide a useful understanding of 959 disclosure requirements, the Form N– See infra section III.N. past events. We believe that this period 960 See amended Item 16(g)(1) of Form N–1A. The would provide a meaningful sample of 1A amendments we are adopting require disclosure required by Item 16(g)(1) should a fund to disclose the size of any incorporate, as appropriate, any information that stresses faced by individual funds and liquidity fee imposed during the the fund is required to report to the Commission on in the market as a whole, and to analyze specified look-back period. We have Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form patterns with respect to fees and gates, N–CR. See Instruction 2 to Item 16(g)(1). This but would not be so long as to include also determined not to adopt the represents a slight change from the proposal, in that proposed requirement to disclose ‘‘a the required disclosure is now the same as what circumstances that may no longer be a short discussion of the board’s analysis would be disclosed in the initial filings of Form N– relevant reflection of the fund’s supporting its decision to impose a CR. We have made this change to reduce the management or operations. burdens associated with such disclosure so that liquidity fee (or not to impose a As discussed in the Proposing funds need only prepare this information once in Release, we continue to believe that a single manner. For the reasons discussed in 955 We note that 60-day notice is required by our section III.F of this Release, Form N–CR includes a money market funds’ current and rules for other significant changes by funds, for new requirement that funds report their level of prospective shareholders should be example, when a fund changes its name. See rules weekly liquid assets at the time of the imposition informed of historical occasions in 35d–1(a)(2)(ii) and (a)(3)(iii). of fees or gates, and accordingly, we are also which the fund’s weekly liquid assets 956 As we proposed, this historical disclosure requiring similar disclosure here. See Form N–CR would only apply to such events that occurred after Items E.3 and F.1. the compliance date of the amendments. See 961 See Instructions to amended Item 16(g)(1) of 963 See supra section III.A.2. Proposing Release, supra note 25, at n.983. Form N–1A. 964 See infra note 1316 and accompanying text. 957 See Proposing Release, supra note 25, at 962 See Proposing Release, supra note 25, at 965 See HSBC Comment Letter. section III.B.8.d. section III.B.8.d. 966 See Federated VIII Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47821

have fallen below 10% and/or the fund a liquidity fee or gate.969 One board’s analytical process going has imposed liquidity fees or commenter explicitly supported the forward.975 redemption gates. While we recognize utility of these disclosure requirements We discuss these commenters’ that historical occurrences are not in providing investors with useful concerns in detail in section III.F below necessarily indicative of future events, information regarding the frequency of and also provide our analysis we anticipate that current and the money market fund’s breaching of supporting our attempt to balance these prospective fund investors could use certain liquidity thresholds, whether a concerns with our interest in permitting this information as one factor to fee or gate was applied, and the level of the Commission and shareholders to compare the risks and potential costs of fee imposed, stating that ‘‘[t]his will understand why a board imposed (or investing in different money market allow investors to make informed did not impose) a liquidity fee or gate. funds. The DERA Study analyzed the decisions when determining whether to As a result of these considerations and distribution of weekly liquid assets and invest in [money market funds] and the analysis discussed in section III.F found that 83 prime funds per year, when comparing different [money below, we have adopted a Form N–CR corresponding to 2.7% of the prime market funds].’’ 970 No commenter requirement to require disclosure of the funds’ weekly liquid asset observations, argued that disclosure about the primary considerations or factors taken into account by the fund’s board in its saw the percentage of their total assets historical fact of occurrence of fees and decision to impose a liquidity fee or that were invested in weekly liquid gates would not be useful to investors. gate. However, in order to avoid assets fall below 30%. The DERA Study However, some commenters raised unnecessary duplication in the further showed that less than one (0.6) concerns about the potential disclosure that will appear in a fund’s fund per year, corresponding to 0.01% redundancy of the proposed registration SAI and on Form N–CR, we have of the prime funds’ weekly liquid asset statement, Web site, and Form N–CR determined not to require parallel observations, experienced a decline of disclosure requirements.971 total assets that were invested in weekly disclosure of these considerations or liquid assets to below 10%.967 We As discussed above, we also have factors in the fund’s SAI. Instead, a fund believe that funds will, in general, try to determined not to adopt the proposed will only be required to present certain avoid the need to disclose decreasing requirement for a fund to disclose ‘‘a summary information about the percentages of weekly liquid assets and/ short discussion of the board’s analysis imposition of fees and/or gates in its or the imposition of a liquidity fee or supporting its decision to impose a SAI (as well as on the fund’s Web gate, as required under the new liquidity fee (or not to impose a site 976), and will be required to present amendments to Form N–1A,968 by liquidity fee) and/or temporarily more detailed discussion solely on Form keeping the percentage of their total suspend the fund’s redemptions’’ in its N–CR.977 To inform investors about the assets invested in weekly liquid assets SAI (or as discussed below, on its Web inclusion of this more detailed at or above 30%. Of those 83 funds that site).972 We note that Form N–CR, as information on Form N–CR, funds will reported a percentage of total assets proposed, also would have required a be instructed to include the following invested in weekly liquid assets below fund imposing a fee or gate to disclose statement as part of their SAI disclosure 30%, it is unclear how many, if any, a ‘‘discussion of the board’s analysis’’ about the historical occasions in which would have attempted to keep the supporting its decision, and a number of the fund has considered or imposed percentage of their total assets invested commenters objected to this proposed liquidity fees or gates: ‘‘The Fund was in weekly liquid assets at or above 30% requirement.973 In particular, required to disclose additional to avoid having to report this commenters raised concerns that the information about this event [or ‘‘these information on their SAI (assuming they disclosures proposed to be required in events,’’ as appropriate] on Form N–CR were to impose, at their board’s Form N–CR and Form N–1A would not and to file this form with the Securities discretion, a liquidity fee or gate). be material to investors, would be and Exchange Commission. Any Form burdensome to disclose, would chill The required disclosure will permit deliberations among board members and 975 See SIFMA Comment Letter; Stradley Ronon current and prospective shareholders to hinder board confidentiality, and would Comment Letter (both stating that requiring assess, among other things, patterns of disclosure of the board’s analysis is not necessary encourage opportunistic litigation.974 stress experienced by the fund, as well to disclose patterns of stress in a fund, and that Commenters also argued that disclosure patterns of stress will be apparent via the proposed as whether the fund’s board has disclosures of historical sponsor support and previously imposed fees and/or of the board’s analysis is not necessary to disclose patterns of stress in a fund liquidity shortfalls). We note that the Proposing redemption gates in light of declines in Release does not specifically state that disclosure of portfolio liquidity. This disclosure also and that this disclosure is not likely to the board’s analysis supporting its decision to be a meaningful indication of the impose a liquidity fee or temporarily suspend the provides investors with historical fund’s redemptions would permit shareholders to information about the board’s past assess patterns of stress. Rather, the Proposing 969 analytical process in determining how See supra notes 157 and 162 and Release states that the proposed historical accompanying text. to handle liquidity issues when the fund disclosure of liquidity fees and gates (which 970 HSBC Comment Letter. disclosure would include a discussion of the experiences stress, which could 971 See, e.g., Dreyfus Comment Letter; SIFMA board’s analysis supporting its decision to impose influence an investor’s decision to Comment Letter. a liquidity fee or gate) generally would assist purchase shares of, or remain invested 972 However, as discussed below in section III.F.5, shareholders in assessing patterns of stress. See in, the fund. In addition, the required Form N–CR will require a fund to disclose the Proposing Release, supra note 25, at section primary considerations or factors taken into account III.B.8.d. We continue to believe that historical disclosure may impose market by the fund’s board in its decision to impose a disclosure of fees and gates, which would include discipline on portfolio managers to liquidity fee or gate. disclosures of historical liquidity shortfalls, would monitor and manage portfolio liquidity 973 See infra section III.F.5. assist shareholders in understanding patterns of in a manner that lessens the likelihood 974 See infra notes 1289–1293 and accompanying stress faced by the fund. See supra notes 969–970 that the fund would need to implement text. Most commenters made these arguments in and accompanying text. We believe that this reference to the proposed Form N–CR disclosure historical disclosure complements the disclosure of requirement; however, several commenters also historical instances of sponsor support in 967 See DERA Study, supra note 24, at 27. specifically referenced the proposed identical Form understanding patterns of stress. 968 See supra notes 960 and 961 and N–1A disclosure requirement. See SIFMA Comment 976 See infra section III.E.9.f. accompanying text. Letter; Stradley Ronon Comment Letter. 977 See infra section III.F.5.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47822 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

N–CR filing submitted by the Fund is summary section of the statutory in section III.F.992 This represents a available on the EDGAR Database on the prospectus (and, accordingly, in any slight change from the proposal, in that Securities and Exchange Commission’s summary prospectus, if used).985 If a the required disclosure is now identical Internet site at http://www.sec.gov.’’ 978 fund imposes a liquidity fee, to what would be disclosed in the initial In adopting these modified SAI shareholders will also be informed filings of Form N–CR. We have made disclosure requirements, we have about the imposition of this fee on the this change to reduce the burdens attempted to balance concerns about fund’s Web site 986 and possibly by associated with such disclosure so that potentially duplicative disclosure 979 means of a prospectus supplement.987 A funds need only prepare this with our interest in presenting the fund could also provide complementary information once in a single manner.993 primary information about the fund’s shareholder communications, such as a In the Proposing Release, we historical imposition of fees or gates that press release or social media update.988 requested comment on amending rule we believe shareholders may find useful Accordingly, we are adopting the 17a–9 (which allows for the in assessing fund risks. clarifying instruction to Item 3 as discretionary support of money market proposed. funds by their sponsors and other 6. Prospectus Fee Table affiliates) to potentially restrict the As proposed, we are clarifying in the 7. Historical Disclosure of Affiliate practice of sponsor support, but did not instructions to Item 3 of Form N–1A Financial Support propose any specific changes to the rule. (‘‘Risk/Return Summary: Fee Table’’) As discussed above in section II.B.4, While a few commenters suggested, in that the term ‘‘redemption fee,’’ for voluntary support provided by money response to this request for comment, purposes of the prospectus fee table, market fund sponsors and affiliates has that we prohibit affiliates from does not include a liquidity fee that may played a role in helping some money providing discretionary support to be imposed in accordance with rule 2a– market funds maintain a stable share maintain a money market fund’s share 980 994 7. Commenters on this aspect of our price, and, as a result, may have value, other commenters opposed proposal agreed that the liquidity fee lessened investors’ perception of the making any changes to rule 17a–9, should not be included in the level of risk in money market funds. arguing that transactions facilitated by prospectus fee table.981 For example, the rule are in the best interests of Such discretionary sponsor support 995 one commenter stated that the fees and was, in fact, not unusual during the shareholders. We continue to believe, expenses table is intended to show a financial crisis.989 Today we are as discussed in the Proposing Release, typical investor the range of anticipated adopting, with certain modifications that permitting financial support (with adequate disclosure) will provide fund costs that will be borne by the investor from the proposal to address commenter affiliates with the flexibility to protect directly or indirectly as a shareholder, concerns, amendments that require that shareholder interests, and we are not but is not an ideal presentation for the money market funds disclose current amending rule 17a–9 at this time.996 kind of highly contingent cost that and historical instances of affiliate Many commenters supported the would be represented by a liquidity ‘‘financial support.’’ The final 982 various financial support disclosures we fee. amendments define ‘‘financial support’’ are adopting today.997 We believe that As discussed in the Proposing Release in the same way it is defined in Form and as adopted today, a liquidity fee these disclosure requirements will N–CR,990 and specify that funds should will only be imposed when a fund provide transparency to shareholders incorporate certain information that the experiences stress, and because we and the Commission about the fund is required to report on Form N– anticipate that a particular fund would frequency, nature, and amount of CR in their SAI disclosure.991 We impose this fee rarely, if at all,983 affiliate financial support. we discuss this definition in detail, continue to believe that the prospectus including the modifications we have a. General Requirements fee table, which is intended to help made to address commenter concerns, shareholders compare the costs of We are adopting, with some changes investing in different mutual funds, from the proposal, amendments to Form 985 should not include the liquidity fee.984 See supra section III.E.4. N–1A to require a money market fund 986 See infra section III.E.9.f. We also note, as discussed above, that 987 See infra text accompanying notes 1126 and 992 shareholders will be adequately See infra section III.F.3. 1127. 993 See Item 16(g)(2) of Form N–1A. The informed about liquidity fees through 988 See infra text following note 1123. disclosure required by Item 16(g)(2) should other disclosures in funds’ SAI and 989 See, e.g., DERA Study, supra note 24, at incorporate, as appropriate, any information that nn.23–24 and accompanying text. the fund is required to report to the Commission on 990 978 See instructions to amended Item 16(g)(1) of See Instruction 1 to Item 16(g)(2) of Form N– 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). Form N–1A. 1A; Form N–CR Part C (defining financial support as ‘‘including any (i) capital contribution, (ii) 994 See, e.g., Systemic Risk Council Comment 979 See supra note 971 and accompanying text. As purchase of a security from the Fund in reliance on Letter; Capital Advisors Comment Letter; see also discussed in more detail in section III.F.5 below, § 270.17a–9, (iii) purchase of any defaulted or HSBC Comment Letter (supporting amending rule while similar information is required to be included devalued security at par, (iv) execution of letter of 17a–9, arguing that transactions facilitated by the on Form N–CR and on Form N–1A, we believe each credit or letter of indemnity, (v) capital support rule can result in shareholders having unjustified of these different disclosures to be appropriate agreement (whether or not the Fund ultimately expectations of future support being provided by because they serve distinct purposes. See infra received support), (vi) performance guarantee, or sponsors). notes 1308–1309 and accompanying text. (vii) any other similar action reasonably intended 995 See ICI Comment Letter; Dreyfus Comment 980 See Instruction 2(b) to amended Item 3 of to increase or stabilize the value or liquidity of the Letter; ABA Business Law Comment Letter. Form N–1A. Fund’s portfolio; excluding, however, any (i) 996 See Proposing Release, supra note 25, at text 981 See, e.g., HSBC Comment Letter; NYC Bar routine waiver of fees or reimbursement of Fund accompanying n.607. Committee Comment Letter; Dreyfus Comment expenses, (ii) routine inter-fund lending (iii) routine 997 See, e.g., Oppenheimer Comment Letter (‘‘We Letter. inter-fund purchases of Fund shares, or (iv) any support the SEC’s proposal to require money market 982 See NYC Bar Committee Comment Letter. action that would qualify as financial support as funds to disclose current and historical instances of 983 See supra note 247 and accompanying text. defined above, that the board of directors has sponsor support for stable NAV funds [. . .].’’). See 984 Instruction 2(b) to Item 3 of Form N–1A otherwise determined not to be reasonably intended also, e.g., Angel Comment Letter; American Bankers currently defines ‘‘redemption fee’’ to include any to increase or stabilize the value or liquidity of the Ass’n Comment Letter; Federated VIII Comment fee charged for any redemption of the Fund’s Fund’s portfolio.’’). Letter; Comment Letter of the SEC (Sept. shares, but does not include a deferred sales charge 991 See Instruction 3 to Item 16(g)(2) of Form N– 16, 2013) (‘‘Occupy the SEC Comment Letter’’); (load) imposed upon redemption. 1A. Thrivent Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47823

to disclose in its SAI historical instances the term of support, and any contractual particularly the case when financial in which the fund has received financial restrictions relating to support. support for a floating NAV fund could support from a sponsor or fund While multiple commenters obviate the need for it to impose a affiliate.998 Specifically, each money supported the proposed requirement for liquidity fee or redemption gate.1009 We market fund will be required to disclose money market funds to disclose therefore believe that transparency of any occasion during the last 10 years historical instances of financial support such support will help investors better (but not for occasions that occurred in the fund’s SAI,1003 other commenters evaluate the risks with respect to both before the compliance date of these expressed a number of concerns about stable and floating NAV funds.1010 amended rules) on which an affiliated this proposed requirement.1004 For Some commenters also suggested we person, promoter, or principal example, one commenter opposed this shorten the look-back period. For underwriter of the fund, or an affiliated disclosure, stating that ‘‘many investors example, one commenter proposed a person of such person,999 provided any would extrapolate such disclosure as an look-back period of 3 to 5 years (rather form of financial support to the fund. implied guarantee of future support by than 10 years, as proposed).1011 We For the reasons discussed in the the sponsor of the fund.’’ 1005 Another believe, however, that a look-back Proposing Release, we believe that the commenter rejected the notion that past period of less than 10 years would be disclosure of historical instances of sponsor support is indicative of a too short to achieve our goals. As we 1012 sponsor support will allow investors, sponsor’s management style and further noted in the Proposing Release, the regulators, academics, market observers observed that disclosure of historical 10-year look-back period will provide and market participants, and other support contradicts the proposed shareholders and the Commission with interested members of the public to disclosure that a fund’s sponsor has no a historical perspective that is long understand better whether a particular legal obligation to provide support.1006 enough to provide a useful fund has required financial support in While we acknowledge these concerns, understanding of past events, and to the past and the extent of sponsor we believe it is important for investors analyze patterns with respect to support across the fund industry.1000 As to understand the nature and extent that financial support received by the fund, proposed, with respect to each such a fund’s sponsor has discretionarily but not so long as to include occasion, funds would have been supported the fund in order to allow circumstances that may no longer be a required to describe the nature of them to fully appreciate the risks of relevant reflection of the fund’s support, the person providing support, investing in the fund.1007 Although we management or operations. We also note the relationship between the person recognize that historical occurrences are that, historically, episodes of financial support have occurred on average every providing support and the fund, the not necessarily indicative of future 5 to 10 years.1013 Accordingly, a shorter date the support provided, the amount events and that support does not equate look-back period would result in of support,1001 the security supported to poor fund management, we continue disclosure that not does reflect the and its value on the date support was to expect that these disclosures will typical historical frequency of instances initiated (if applicable), the reason for permit investors to assess the sponsor’s past ability and willingness to provide of financial support. support, the term of support, and any We proposed to limit historical financial support to the fund. This contractual restrictions relating to disclosure of events of affiliate financial 1002 disclosure also should help investors support. We are adopting the support to instances that occur after the gain a better context for, and proposed disclosure requirements, with compliance date of the amendments to understanding of, the fund’s risks, the exception of the requirements for a Form N–1A.1014 Several commenters fund to describe the reason for support, historical performance, and principal volatility. 1009 See generally, ABA Business Law Section 998 See Item 16(g)(2) of Form N–1A. A number of commenters stated that (with respect to retaining rule 17a–9, stating that 999 Rule 2a–7 currently requires a money market any disclosure of financial support, ‘‘the possibility of economic support from an fund to notify the Commission by electronic mail, including the historical disclosures, affiliated person would remain important to money directed to the Director of Investment Management market funds that have a floating NAV because should only apply to stable NAV [. . .] liquidity concerns [remain] significant to or the Director’s designee, of any purchase of 1008 money market fund portfolio securities by an funds. We disagree. Transparency of money market funds (and other funds holding the affiliated person, promoter, or principal financial support is important for stable same investments). [. . . .] In addition, retaining underwriter of the fund, or an affiliated person of NAV funds, given the potential for a [rule 17a–9] would not undercut the Commission’s such person, pursuant to rule 17a–9. See current ‘‘breaking the buck’’ event absent the goal of providing transparency of money market rule 2a–7(c)(7)(iii)(B). As proposed, we are fund risks, particularly in light of the Commission’s eliminating this requirement today, as it would be receipt of affiliate financial support. It is companion proposals calling for disclosure of duplicative with the proposed Form N–CR equally important, for both floating and historical instances of economic support from reporting requirements discussed below. See rule stable NAV money market funds, that sponsors of money market funds.’’). 1010 2a–7(f)(3); see also infra note 1254. However, investors have transparency about the See Proposing Release, supra note 25, at because the definition of ‘‘financial support’’ as section III.F.1.a (discussing reasons why funds adopted today includes the purchase of a security extent to which the fund’s principal should disclose historical sponsor support). pursuant to rule 17a–9 (as well as similar actions), stability or liquidity profile is achieved 1011 See, e.g., Dreyfus Comment Letter (stating we believe that the scope of the persons covered by through financial support as opposed to that ‘‘[s]imilar kinds of information (e.g., the definition should reflect the scope of persons portfolio management. This is management fees and 12b–1 fees paid, officers and covered by current rule 2a–7(c)(7)(iii)(B). The term directors biographies, financial highlights) generally ‘‘affiliated person’’ is defined in section 2(a)(3) and, [are] required in the registration statement only for in the context of an investment company, includes, 1003 See supra note 997. a 3–5 year period.’’); Federated VIII Comment Letter among other persons, the investment adviser of the 1004 See, e.g., U.S. Bancorp Comment Letter; (recommending five years). But see Occupy the SEC investment company. Dreyfus Comment Letter. Comment Letter (explicitly supporting the proposed 1000 See Proposing Release, supra note 25, at text 1005 See U.S. Bancorp Comment Letter. 10-year look-back period for disclosing events of following n.607. 1006 See Dreyfus Comment Letter. financial support). 1001 See infra section III.F.3 for Commission 1007 See supra notes 51–55 and accompanying 1012 See Proposing Release, supra note 25, at guidance on the amount of support to be disclosed. discussion; see also, e.g., Proposing Release, supra discussion following n.614. 1002 See proposed Item 16(g)(2) of Form N–1A. note 25, at n.607 and accompanying text. 1013 See Proposing Release, supra note 25, at See infra notes 1226–1243 and accompanying text 1008 See, e.g., ICI Comment Letter; IDC Comment section II.B, Table 1. for a discussion of actions that would be deemed Letter; Oppenheimer Comment Letter; Comment 1014 As we proposed, this historical disclosure to constitute ‘‘financial support’’ and additional Letter of State Street Global Advisors (Sept. 17, would only apply to such events that occurred after discussion of what is required to be reported. 2013) (‘‘SSGA Comment Letter’’). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47824 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

generally supported this approach, support, the term of support, and any fund has participated in a merger or suggesting that this disclosure contractual restrictions relating to other reorganization with another requirement should only apply to events support in its required SAI investment company during the last 10 that occur after the compliance date of disclosure.1019 Instead, a fund will only years, the fund must additionally the disclosure reforms.1015 We continue be required to present certain summary provide the required disclosure with to believe that these disclosures should information about the receipt of respect to the other investment only apply to affiliate financial support financial support in its SAI (as well as company.1024 events that occur after the compliance on the fund’s Web site 1020), and will be Rather than require that funds date of the disclosure reforms, in large required to present more detailed disclose financial support provided to a part because to do otherwise would discussion solely on Form N–CR.1021 To predecessor fund in all cases (as require funds and their affiliates to inform investors about the inclusion of proposed), we are revising the incur significant costs as they reexamine this more detailed information on Form instruction to permit a fund to exclude a variety of past transactions to N–CR, funds will be instructed to such disclosure where the person or determine whether such events fit our include the following statement as part entity that previously provided financial new definition of affiliate financial of the historical disclosure of affiliate support to the predecessor fund is not support. financial support appearing in the currently an affiliated person (including Finally, a few commenters suggested fund’s SAI: ‘‘The Fund was required to the adviser), promoter, or principal disclosing historical financial support in disclose additional information about underwriter of the disclosing fund.1025 Form N–MFP, N–CR, or N–CSR, rather this event [or ‘‘these events,’’ as A few commenters expressed concern than in the SAI (as proposed).1016 One appropriate] on Form N–CR and to file about historical disclosures with respect commenter noted that to the extent this this form with the Securities and to third-party reorganizations, asserting disclosure will serve as a reporting Exchange Commission. Any Form N–CR that past financial support would be function for analysis by regulators, other filing submitted by the Fund is available irrelevant to shareholders where the forms such as Form N–MFP have been on the EDGAR Database on the surviving fund had a new manager developed for that particular Securities and Exchange Commission’s unaffiliated with the prior manager.1026 purpose.1017 Commenters also raised Internet site at http://www.sec.gov.’’ 1022 These commenters noted that this concerns about the potential In adopting these modified SAI disclosure requirement could adversely redundancy of the proposed registration disclosure requirements, we have affect potential merger transactions with statement, Web site, and Form N–CR attempted to appropriately consider funds that have received sponsor disclosure requirements.1018 Because concerns about potentially duplicative support.1027 1023 these historical sponsor support disclosure as well as our belief, as We agree with these commenters that disclosures are intended to benefit discussed above, that the SAI is the historical sponsor support information investors, as well as regulators, we most accessible and efficient format for about a predecessor fund may be less believe that the SAI is the most investors to receive historical relevant when the fund is not advised accessible and efficient format for such disclosures about affiliate financial by, or otherwise affiliated with, the disclosure. As discussed in section support, and our interest in presenting entity that had previously provided III.F.3, we note that the contemplated the primary information about such financial support to the predecessor SAI disclosure would consolidate financial support that we believe fund. Accordingly, we are adopting an historical instances of sponsor support shareholders may find useful in exclusion to this disclosure requirement that have occurred in the past 10 years, assessing fund risks. based on whether the current fund which would permit investors to view b. Historical Support of Predecessor continues to have any affiliation with this information in a user-friendly Funds the predecessor fund’s affiliated persons manner, without the need to review (including the predecessor fund’s prior form filings to piece together a We also are amending, generally as we proposed, the instructions to Form adviser), promoter, or principal fund’s history of sponsor support. We 1028 N–1A to clarify that funds must disclose underwriter. We expect this also believe that, to the extent investors approach should mitigate commenter may not be familiar with researching any financial support provided to a predecessor fund (in the case of a concerns of adverse effects on fund filings on EDGAR, including this mergers. disclosure in a fund’s SAI, which merger or other reorganization) within investors may receive in hard copy the 10-year look-back period. As 8. Economic Analysis through the U.S. Postal Service or may discussed in the Proposing Release, this amendment will provide additional As discussed above, we are adopting access on a fund’s Web site, as well as a number of amendments to on EDGAR, may make this information transparency by providing investors the full extent of historical support requirements for disclosure documents more readily available to these investors that are related to both our fees and than disclosure on other SEC forms that provided to a fund or its predecessor. Specifically, except as noted below, the are solely accessible on EDGAR. 1024 See Instruction 2 to Item 16(g)(2). As discussed above, we are not amended instructions state that if the Additionally, if a fund’s name has changed (but the adopting the proposed requirements corporate or trust entity remains the same), the fund 1019 that a fund include the reason for See supra note 1002 and accompanying text. may want to consider providing the required 1020 See infra section III.E.9.g. disclosure with respect to the entity or entities 1021 See infra section III.F.3. identified by the fund’s former name. See Proposing the compliance date of the amendments. See 1022 See Instructions to amended Item 16(g)(2) of Release, supra note 25, at n.619. Proposing Release, supra note 25, at text Form N–1A. 1025 Id. In the Proposing Release we had proposed accompanying n.983. 1023 See supra note 1018 and accompanying text. to require disclosure of financial support provided 1015 See Federated VII Comment Letter; SIFMA As discussed in more detail in section III.F.3 below, to a predecessor fund in all cases. See Proposing Comment Letter. while similar information is required to be included Release, supra note 25, at n.618 and accompanying 1016 See, e.g., Dreyfus Comment Letter; U.S. on Form N–CR and Form N–1A, we believe each discussion. Bancorp Comment Letter. of these different disclosures to be appropriate 1026 See, e.g., Federated VIII Comment Letter; 1017 See Dreyfus Comment Letter. because they serve distinct purposes. See SIFMA Comment Letter. 1018 See, e.g., Dreyfus Comment Letter; SIFMA discussion following infra notes 1248 and 1249 and 1027 See id. Comment Letter. accompanying text. 1028 See Instruction 2 to Item 16(g)(2).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47825

gates and floating NAV requirements, as investors to decide that money market to invest in certain funds based on this well as other disclosure enhancements funds pose too great of an investment information. However, the disclosure of discussed in the proposal. We believe risk, and investors consequently decide sponsor support could advantage larger that these amendments improve not to invest in money market funds or funds and fund groups, if a fund transparency and will better inform to move their invested assets from sponsor’s ability to provide financial shareholders about the risks of investing money market funds. As such, capital support to a fund is perceived to be a in money market funds, which should formation could be negatively impacted competitive benefit. The disclosure of result in shareholders making if investors move their money from fees and gates also could advantage investment decisions that better match these types of funds to a different style larger funds and fund groups if the their investment preferences. We of fund, for example, from an ability to provide financial support believe that many of these amendments institutional prime fund to a reduces or eliminates the need to will have effects on efficiency, government fund and thus affecting the impose fees and/or gates (the imposition competition, and capital formation that short-term funding market. However, if of which presumably would be are similar to those that are outlined in investors move from a money market perceived to be a competitive the Macroeconomic Consequences fund to a money market fund alternative detriment). Additionally, if investors section below,1029 but some of the that invests in similar types of assets, move their assets among money market amendments introduce additional then there should not be an impact on funds or decide to invest in investment effects. capital formation with respect to the products other than money market Many of the new disclosure overall economy, but only within the funds as a result of the proposed requirements are designed to make money market fund industry. disclosure requirements, the investors aware of the more substantive To the extent that the disclosure competitive stance of certain money amendments discussed earlier in the amendments increase investor market funds, or the money market fund Release, i.e., the ability of certain funds awareness of the more substantive industry generally, could be adversely to impose redemption fees and gates reforms, there may be an effect on affected. and the requirement that certain funds competition because some of the The disclosure of affiliate financial float their NAV. Increasing investor disclosure requirements are specific to support could have additional effects on awareness via enhanced disclosure may the structure of the funds. As such, capital formation, depending on lead to more efficient capital allocations these funds will be competing with each whether investors interpret financial because investors will possess greater other based on, among other things, knowledge of risks and thus will be able what is stated in their advertisements, support as a sign of money market fund to make better informed investment sales materials, and the summary strength or weakness. If sponsor support decisions when deciding how to section of their statutory prospectus. (or the lack of need for sponsor support) allocate their assets. Increased investor Disclosure providing that funds with a were understood to be a sign of fund awareness also may promote capital stable NAV seek to preserve the value of strength, the requirements could formation if investors find a floating their investment at $1.00 per share, that enhance capital formation by promoting NAV and/or redemption fees and gates share prices of floating NAV funds will stability within the money market fund attractive and are more willing to invest fluctuate, that taxable investors in industry. On the other hand, the in this market. For instance, investors institutional prime money market funds disclosure requirements could detract may find fees and gates attractive may experience taxable gains or losses, from capital formation if sponsor insofar as imposing fees and gates or that non-government funds may support were understood to indicate during a time of market stress could impose a fee or gate may make investors fund weakness and make money market help protect the interests of more aware of different investment funds more susceptible to heavy shareholders, or could permit a fund options, which could increase redemptions during times of stress, or if manager to invest the proceeds of competition between funds. money market fund investors decide to maturing assets in short-term securities The amendments that require money move their money out of money market while the gate is down, thereby helping market funds to disclose current and funds entirely and not put it into an to protect the short-term financing historical information about affiliate alternative with similar types of assets markets.1030 Moreover, enhanced financial support and historical as a result. We did not receive investor awareness of fund risks may information about the implementation comments on this aspect of our incentivize fund managers to hold less of redemption fees and gates may also economic analysis. Similarly, the risky portfolio securities, which could affect efficiency, competition, and requirement to disclose historical also increase capital formation. Capital capital formation. As discussed in the redemption fees and gates could either formation could be negatively impacted Proposing Release, these amendments promote or hinder capital formation. if investors find a floating NAV and/or may increase informational efficiency Disclosing the prior imposition of fees redemption fees and gates unattractive by providing additional information to or gates may negatively impact capital or too complicated to understand. For investors and the Commission about the formation if investors view the instance, an investor could find it frequency, nature, and amount of imposition of fees and gates unattractive that imposing a fee or gate financial support provided by money unfavorably. Conversely, the would prevent them from moving their market fund sponsors,1032 as well as the requirement to disclose will allow investment into other investment frequency and duration of redemption investors to differentiate funds based on alternatives or using their assets to fees and gates. This in turn could assist the extent to which funds have imposed satisfy liquidity needs.1031 Additionally, investors in analyzing the risks fees and gates in the past, which could disclosing a general risk of investment associated with particular funds, which increase capital formation if investors loss may negatively impact capital could increase allocative efficiency and perceive the absence of past fees and formation if this disclosure leads could positively affect competition by gates as a sign of greater stability within permitting investors to choose whether the money market fund industry. 1029 See infra section III.K. Furthermore, these required disclosures 1030 See supra section III.A.1.b.ii. 1032 See Proposing Release, supra note 25, at text could assist the Commission in 1031 See supra section III.A.1.c.iii. following n.629. overseeing money market funds and

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47826 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

developing regulatory policy affecting average one-time costs for a government average one-time costs for a government the money market fund industry, which fund that is not subject to the fees and or retail money market fund would be might affect capital formation positively gates requirements pursuant to rule 2a– $2,204.1038 The proposal also estimated if the resulting more efficient or more 7(c)(2)(iii) would be $2,204.1034 The that the average annual costs for a effective regulatory framework proposal also estimated that the average money market fund to amend its encouraged investors to invest in money annual costs for a money market fund registration statement would be market funds. The Commission cannot (except government money market $148.1039 estimate the quantitative benefits of the funds that are not subject to the fees and We requested comment on the amendments to the disclosure forms gates requirements pursuant to rule 2a– estimates of the operational costs because of uncertainty about how 7(c)(2)(iii)) to amend its registration associated with the amended disclosure increased transparency may affect statement would be $296,1035 and the requirements. Certain commenters different investors’ or groups of average annual costs for a government generally noted that complying with all investors’ understanding of the risks fund that is not subject to the fees and of the new disclosure requirements, associated with money market funds. gates requirements pursuant to rule 2a– including the disclosure requirements Uncertainty regarding how the proposed 7(c)(2)(iii) would be $148.1036 involving the fund’s advertisements and disclosure may affect different investors’ Under the floating NAV alternative, sales materials and its registration behavior likewise makes it difficult for the proposal estimated that the average statement, would involve some the Commission to measure the one-time costs that would be incurred additional costs.1040 Several quantitative benefits of the proposed for a floating NAV money market fund commenters provided dollar estimates requirements. to amend its registration statement and As a possible alternative, we could update its advertising and sales amendments to Form N–1A relating to the floating have chosen to require disclosure, as 1037 NAV proposal, as well as the Form N–1A materials would be $3,092, and the requirements relating to the floating NAV proposal suggested by commenters, of the that would not necessitate form amendments historical information on Form N–MFP, support disclosure requirements ($148) = $1,628. ($1,480) + the costs estimated for each fund to Form N–CR, or Form N–CSR instead of The estimated costs included in section III.B.8 of comply with the proposed Form N–1A sponsor through the SAI. Because the historical the Proposing Release inadvertently omitted the support disclosure requirements ($148) = $1,628. costs estimated for each fund to update the fund’s The estimated costs included in section III.A.8 of disclosures are intended to benefit both advertising and sales materials to include the the Proposing Release inadvertently omitted the investors and regulators, we believe that required risk disclosure statement; however, these costs estimated for each fund to update the fund’s the SAI is the most suitable format for costs ($1,464) were discussed in the Paperwork advertising and sales materials to include the required risk disclosure statement; however, these such disclosure. As discussed above, we Reduction Act Analysis section of the Proposing Release. Adding these costs ($1,464) to the costs of costs ($1,464) were discussed in the Paperwork believe that including historical complying with the new requirements of Form N– Reduction Act Analysis section of the Proposing information about affiliate financial 1A ($1,628) results in total estimated costs of Release. Adding these costs ($1,464) to the costs of $3,092. See Proposing Release, supra note 25, at complying with the proposed amendments to Form support and the imposition of fees and N–1A ($1,628) results in total estimated costs of gates in the fund’s SAI may make this nn.461, 628, 1214 and accompanying text. 1034 This figure incorporates the costs estimated $3,092. See Proposing Release, supra note 25, at nn.330, 628, 1121–1125 and accompanying text. information more readily available to for each fund to comply with the proposed 1038 investors than disclosure on other SEC amendments to Form N–1A relating to the fees and This figure incorporates the costs estimated forms that are solely accessible on gates proposal, as well as the Form N–1A for each fund to comply with the proposed amendments to Form N–1A relating to the floating EDGAR. We therefore believe that requirements relating to the fees and gates proposal that would not necessitate form amendments ($592) NAV proposal, as well as the Form N–1A requiring this disclosure to appear in a + the costs estimated for each fund to comply with requirements relating to the floating NAV proposal fund’s SAI could increase informational the proposed Form N–1A sponsor support that would not necessitate form amendments ($592) disclosure requirements ($148) = $740. The + the costs estimated for each fund to comply with efficiency by facilitating the provision of the proposed Form N–1A sponsor support estimated costs included in section III.B.8 of the this information to investors. disclosure requirements ($148) = $740. The Proposing Release inadvertently omitted the costs estimated costs included in section III.A.8 of the We believe that all money market estimated for each fund to update the fund’s Proposing Release inadvertently omitted the costs funds will incur one-time and ongoing advertising and sales materials to include the estimated for each fund to update the fund’s required risk disclosure statement; however, these annual costs to update their registration advertising and sales materials to include the costs ($1,464) were discussed in the Paperwork statements, as well as their advertising required risk disclosure statement; however, these Reduction Act Analysis section of the Proposing costs ($1,464) were discussed in the Paperwork and sales materials. The proposal Release. Adding these costs ($1,464) to the costs of Reduction Act Analysis section of the Proposing estimated the costs that would be complying with the proposed amendments to Form Release. Adding these costs ($1,464) to the costs of incurred under the fees and gates N–1A ($740) results in total estimated costs of complying with the proposed amendments to Form alterative separately from those that $2,204. See Proposing Release, supra note 25, at N–1A ($1,628) results in total estimated costs of would be incurred under the floating nn.461, 628, 1214 and accompanying text. $2,204. See Proposing Release, supra note 25, at 1035 This figure incorporates the costs estimated NAV alternative. Under the fees and nn.330, 628, 1121–1125 and accompanying text. for a fund to: (i) Review and update the disclosure 1039 This figure reflects the costs estimated for a gates alternative, the proposal estimated in its registration statement regarding historical fund to review and update the disclosure in its that the average one-time costs for a occasions on which the fund has considered or registration statement regarding historical instances money market fund (except government imposed liquidity fees or gates, and to inform in which the fund has received financial support investors of any fees or gates currently in place by money market funds that are not subject from a sponsor or fund affiliate ($148). See means of a prospectus supplement ($148); and (ii) Proposing Release, supra note 25, at n.628 and to the fees and gates requirements to review and update the disclosure in its accompanying text. pursuant to rule 2a–7(c)(2)(iii)) to registration statement regarding historical instances 1040 See, e.g., Fin. Svcs. Roundtable Comment amend its registration statement and to in which the fund has received financial support Letter (noting that the proposed disclosure from a sponsor or fund affiliate ($148). See requirements generally would produce ‘‘significant update its advertising and sales Proposing Release, supra note 25, at nn.463, 628 1033 cost to the fund and ultimately to the fund’s materials would be $3,092, and the and accompanying text. investors’’); SSGA Comment Letter (urging the 1036 This figure reflects the costs estimated for a Commission to consider the ‘‘substantial 1033 This figure incorporates the costs estimated fund to review and update the disclosure in its administrative, operational, and expense burdens’’ for each fund to comply with the proposed registration statement regarding historical instances of the proposed disclosure-related amendments); amendments to Form N–1A relating to the fees and in which the fund has received financial support Chapin Davis Comment Letter (noting that the gates proposal, as well as the Form N–1A from a sponsor or fund affiliate ($148). See disclosure- and reporting-related amendments will requirements relating to the fees and gates proposal Proposing Release, supra note 25, at n.628 and result in increased costs in the form of fund staff that would not necessitate form amendments accompanying text. salaries, or consultant, accountant, and lawyer ($1,480) + the costs estimated for each fund to 1037 This figure incorporates the costs estimated hourly rates, that will ultimately be borne in large comply with the proposed Form N–1A sponsor for each fund to comply with the proposed part by investors and portfolio issuers).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47827

of the initial costs to implement a fees requirements pursuant to rule 2a– supplement. Because the required and gates or floating NAV regime and 7(c)(2)(iii), and floating NAV money registration statement disclosure noted that these estimates would market funds) to comply with these overlaps with the information that a include the costs of related disclosure, disclosure requirements would be fund must disclose on Parts C, E, F, and but these commenters did not $3,059 (plus printing costs).1044 We G of Form N–CR, we anticipate that the specifically break out the disclosure- estimate that the average one-time costs costs a fund will incur to draft and related costs in their estimates.1041 One for a government money market fund finalize the disclosure that will appear commenter stated that the costs to that is not subject to the fees and gates in its registration statement and on its update a fund’s registration statement to requirements pursuant to rule 2a– Web site will largely be incurred when 7(c)(2)(iii) to comply with these reflect the new fees and gates and the fund files Form N–CR, as discussed disclosure requirements would be floating NAV requirements would be below in section III.F. We estimate that $2,102 (plus printing costs).1045 Finally, ‘‘minimal when compared to other a fund (besides a government money costs.’’ 1042 Another commenter stated we estimate that the average one-time market fund that is not subject to the that it did not consider the disclosure costs for floating NAV money market fees and gates requirements pursuant to requirements burdensome and noted funds to comply with these disclosure that it did not believe the disclosure requirements would be $4,016 (plus rule 2a–7(c)(2)(iii)) will incur average requirements would impose printing costs).1046 annual costs of $319 to comply with 1047 unnecessary costs.1043 We have Ongoing compliance costs include the these disclosure requirements. We considered the comments we received costs for money market funds also estimate that a government money on the new disclosure requirements, periodically to: (i) Review and update market fund that is not subject to the and we have determined not to change the fund’s registration statement fees and gates requirements pursuant to the assumptions we used in our cost disclosure regarding historical occasions rule 2a–7(c)(2)(iii) will incur average estimates in response to these on which the fund has considered or annual costs of $160 to comply with comments, as the comments provided imposed liquidity fees or gates (as these disclosure requirements.1048 no specific suggestions or critiques applicable); (ii) review and update the 9. Web site Disclosure regarding our methods for estimating fund’s registration statement disclosure these costs. However, our current regarding historical instances in which a. Daily Disclosure of Daily and Weekly estimates reflect the fact that the the fund has received financial support Liquid Assets amendments we are adopting today from a sponsor or fund affiliate; and (iii) combine the floating NAV and fees and inform investors of any fees or gates We are adopting, as proposed, gates proposal alternatives into one currently in place (as applicable) or the amendments to rule 2a–7 that require unified approach, and also incorporate transition to a floating NAV (as money market funds to disclose updated industry data. applicable) by means of a prospectus prominently on their Web sites the We anticipate that money market percentage of the fund’s total assets that funds will incur costs to (i) amend the 1044 This figure incorporates the costs we are invested in daily and weekly liquid estimated for each fund to update its registration fund’s advertising and sales materials statement to include the required disclosure assets, as of the end of each business (including the fund’s Web site) to statement, the required disclosure about the effects day during the preceding six include the required risk disclosure that fees and gates may have on shareholder months.1049 The amendments we are redemptions, disclosure about historical occasions statement; (ii) amend the fund’s on which the fund has considered or imposed adopting would require, as proposed, a registration statement to include the liquidity fees or gates, and disclosure about fund to maintain a schedule, chart, required risk disclosure statement, financial support received by the fund ($1,595) + graph, or other depiction on its Web site disclosure of the tax consequences and the costs we estimated for each fund to update the fund’s advertising and sales materials to include the showing historical information about its effects on fund operations of a floating required risk disclosure statement ($1,464) = investments in daily liquid assets and NAV (as applicable), and the effects of $3,059. The costs associated with these activities weekly liquid assets for the previous six fees and gates on redemptions (as are all paperwork-related costs and are discussed in applicable); (iii) amend the fund’s more detail infra at sections IV.F and IV.G. 1045 This figure incorporates the costs we 1047 This figure incorporates the costs we registration statement to disclose post- estimated for each fund to update its registration estimated for each fund to review and update its compliance-period historical occasions statement to include the required disclosure registration statement disclosure regarding on which the fund has considered or statement and disclosure about financial support historical occasions on which the fund has imposed liquidity fees or gates; and (iv) received by the fund ($638) + the costs we considered or imposed liquidity fees or gates, and estimated for each fund to update the fund’s to inform investors of any fees or gates currently in amend the fund’s registration statement advertising and sales materials to include the place (as appropriate) or the transition to a floating to disclose post-compliance-period required risk disclosure statement ($1,464) = NAV (as appropriate) by means of a prospectus historical instances in which the fund $2,102. The costs associated with these activities supplement ($159.5) + the costs we estimated for has received financial support from a are all paperwork-related costs and are discussed in each fund to review and update its registration statement disclosure regarding historical instances sponsor or fund affiliate. These costs more detail infra at sections IV.F and IV.G. 1046 This figure incorporates the costs we in which the fund has received financial support will include initial, one-time costs, as estimated for each fund to update its registration from a sponsor or fund affiliate ($159.5) = $319. The well as ongoing costs. Each money statement to include the required disclosure costs associated with these activities are all market fund in a fund complex might statement, the required disclosure about the effects paperwork-related costs and are discussed in more detail infra at section IV.G. not incur these costs individually. that fees and gates may have on shareholder redemptions, disclosure about historical occasions 1048 This figure incorporates the costs we We estimate that the average one-time on which the fund has considered or imposed estimated for each fund to review and update its costs for a money market fund (except liquidity fees or gates, the required tax- and registration statement disclosure regarding government money market funds that operations-related disclosure about a floating NAV, historical instances in which the fund has received are not subject to the fees and gates and disclosure about financial support received by financial support from a sponsor or fund affiliate the fund ($2,552) + the costs we estimated for each (approximately $160). The costs associated with fund to update the fund’s advertising and sales these activities are all paperwork-related costs and 1041 See, e.g., Chamber I Comment Letter; Fidelity materials to include the required risk disclosure are discussed in more detail infra at section IV.G. Comment Letter. statement ($1,464) = $4,016. The costs associated 1049 See rule 2a–7(a)(4). As proposed, a ‘‘business 1042 See State Street Comment Letter, at Appendix with these activities are all paperwork-related costs day,’’ defined in rule 2a–7 as ‘‘any day, other than A. and are discussed in more detail infra at sections Saturday, Sunday, or any customary business 1043 See HSBC Comment Letter. IV.F and IV.G. holiday,’’ would end after 11:59 p.m. on that day.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47828 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

months,1050 and would require the fund the six-month look-back because it that the reforms we are adopting to update this historical information would require a restructuring of fund concerning fees and gates are a tool for each business day, as of the end of the Web sites that are already disclosing handling heavy redemptions once they preceding business day. Several this data.1058 We recognize, as discussed occur. Finally, we note that several commenters supported the disclosure below, that the amendments will funds have already voluntarily begun on a fund’s Web site of the fund’s daily impose costs on funds. We believe, disclosing liquidity information on their liquid assets and weekly liquid however, that it is important for funds Web sites.1064 assets.1051 Commenters supporting such to provide historical information for the A few commenters also believed that disclosure noted that daily disclosure of prior six months, and updating such the proposed disclosures should apply this information would promote information daily will help investors only to stable NAV funds.1065 We transparency and help investors better place current information in context and disagree with these commenters. We understand money market fund thus have a more complete picture of believe that the benefits we discuss risks.1052 A few commenters stated that current events. throughout this section regarding providing this information could help One commenter argued that daily disclosure apply regardless of whether a investors evaluate whether a fund is disclosure of this information would not fund has a stable or floating NAV. As we positioned to meet redemptions or be meaningful to investors,1059 while have noted in several instances, a could approach a threshold where a fee another commenter expressed concern floating NAV may reduce but does not or gate could be imposed.1053 A number that daily disclosure, in combination eliminate the risk of heavy redemptions of commenters suggested that daily with discretionary fees and gates, could if the fund comes under stress. Liquidity disclosure likely would impose external cause reactionary redemptions.1060 We information can help investors market discipline on portfolio managers recognize and have considered the risk understand a fund’s ability to withstand and encourage careful management of that daily disclosure of weekly liquid heavy redemptions. Additionally, this daily and weekly assets.1054 Finally, assets and daily liquid assets could information is relevant to investors to several commenters indicated that many trigger heavy redemptions in some understand the potential for either a money market funds are already situations, particularly the risk of pre- floating NAV fund or a stable NAV fund disclosing such information on either a emptive redemptions in anticipation of to impose a fee or a gate. We also daily or a weekly basis, a fact we noted a potential fee or gate. However, as believe that it is important for all money in the Proposing Release.1055 discussed in detail above, the board’s market funds, both floating NAV funds Other commenters, however, opposed discretion to impose a fee or a gate, and stable NAV funds, to disclose certain aspects of the proposed among other things, mitigates the liquidity information so that investors amendment. Two commenters opposed concern that investors will be able to will easily be able to compare this data daily disclosure of this information and accurately predict such an event which point, which could be seen as a risk thought the information could be in turn would lead them to pre- metric, across funds when making provided on a weekly basis.1056 We emptively withdraw their assets from investment decisions among types of disagree. In times of market stress, the fund.1061 In addition, as discussed money market funds (e.g., comparing an money market funds may face rapid, above, other aspects of today’s institutional prime money market fund heavy redemptions, which could amendments further mitigate the risks of to a government money market fund), as quickly affect their liquidity.1057 Having pre-emptive runs. We believe that daily well as between money market funds of daily information in times of market disclosure of weekly liquid assets and the same type (e.g., comparing two stress can reduce uncertainty, providing daily liquid assets ultimately benefits government money market funds). investors assurance that a money market investors and could both increase We continue to believe that daily Web fund has sufficient liquidity to stability and decrease risk in the site disclosure of a fund’s daily liquid withstand the potential for heavy financial markets.1062 As mentioned assets and weekly liquid assets will redemptions. One commenter opposed above, while there is a potential for increase transparency and enhance heavy redemptions in response to a investors’ understanding of money 1050 For purposes of the required Web site decrease in liquidity, the increased market fund risks. This disclosure will disclosure of daily and weekly liquid assets, the six- transparency could reduce run risk in help investors understand how funds month look-back period for disclosure would encompass fund data that occurs prior to the cases where it shows investors that a are managed, as well as help them compliance date. Accordingly, if a fund were to fund has sufficient liquidity to monitor, in near real-time, a fund’s update its Web site on the compliance date to withstand market stress events. We also ability to satisfy redemptions in various include the required schedule, chart, graph, or other agree with commenters and believe that market conditions, including episodes depiction showing historical data for the previous six months, the depiction would show data from six daily disclosure will increase market of market turbulence. We also agree months prior to the compliance date. See infra note discipline, which could ultimately deter with commenters and believe that this 2201. situations that could lead to heavy disclosure will encourage market 1051 See, e.g., Boston Federal Reserve Comment redemptions.1063 Also, as noted discipline on fund managers.1066 In Letter; Oppenheimer Comment Letter; Fidelity particular, we believe that this Comment Letter. elsewhere in this Release, we believe 1052 See, e.g., Oppenheimer Comment Letter; disclosure will encourage fund Blackrock II Comment Letter; Fidelity Comment 1058 See UBS Comment Letter. managers to manage the fund’s liquidity Letter. 1059 See Schwab Comment Letter. in a manner that makes it less likely that 1053 See, e.g., U.S. Bancorp Comment Letter; 1060 See Federated VIII Comment Letter; see also the fund crosses a threshold where a fee Goldman Sachs Comment Letter. supra section III.A.1.c.i. or gate could be imposed, and also 1054 1061 See, e.g., ICI Comment Letter; Dreyfus See supra note 171 and accompanying text. discourage month-end ‘‘window Comment Letter; American Bankers Ass’n Comment 1062 Although not a principal basis for our Letter. decision, we note that certain literature suggests dressing’’ (in this context, the practice 1055 See, e.g., U.S. Bancorp Comment Letter; that suspensions of withdrawals can prevent bank Blackrock II Comment Letter; J.P. Morgan Comment runs. See, e.g., Diamond, Douglas W., Spring 2007, 1064 See, e.g., BlackRock II Comment Letter; Letter. ‘‘Banks and Liquidity Creation: A Simple Boston Federal Reserve Comment Letter. 1056 See Schwab Comment Letter; Federated VIII Exposition of the Diamond-Dybvig Model,’’ 1065 See, e.g., Legg Mason & Western Asset Comment Letter. Economic Quarterly, Volume 93, Number 2, 189– Comment Letter; ICI Comment Letter; IDC Comment 1057 See generally DERA Study, supra note 24, at 200. Letter. section 3. 1063 See supra note 1054. 1066 See supra note 1054.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47829

of periodically increasing the daily shareholders, and thus we are adopting six months,1076 and would require the liquid assets and/or weekly liquid assets this requirement as proposed. In our fund to update this historical in a fund’s portfolio, such that the view, information on shareholder information each business day as of the fund’s month-end reporting will reflect redemptions can help provide important end of the preceding business day.1077 certain liquidity levels, and then context to data regarding the funds’ These amendments complement the decreasing the fund’s investment in liquidity, as a fund that is experiencing current requirement for a money market such assets shortly after the fund’s increased outflow volatility will require fund to disclose its shadow price month-end reporting calculations have greater liquidity. We understand, as monthly on Form N–MFP (broken out been made). commenters pointed out, that many weekly).1078 Disclosing the NAV per funds can experience periodic and share to the fourth decimal would b. Daily Disclosure of Net Shareholder expected large net inflows or outflows conform to the precision of NAV Flows on a regular basis. We believe that reporting that funds will be required to We are also adopting, as proposed, disclosure of this information over a report on Form N–MFP and to what amendments to rule 2a–7 that require rolling six-month period, however, will many funds are currently voluntarily money market funds to disclose mitigate the risk that investors will disclosing.1079 prominently on their Web sites the misinterpret this information. Several commenters supported the fund’s daily net inflows or outflows, as Information about the historical context proposed disclosure requirement of of the end of the previous business day, of fund inflows and outflows, which funds’ current NAV per share. These during the preceding six months.1067 As funds can include on their Web sites, commenters suggested that daily proposed, the amendments we are should help investors distinguish disclosure of the current NAV per share adopting would require a fund to between periodic large outflows that can would increase transparency and maintain a schedule, chart, graph, or occur in the normal course from periods investor understanding of money market other depiction on its Web site showing of increased volatility in shareholder funds.1080 One commenter noted that historical information about its net flow. Finally, we are not persuaded by the disclosure could impose discipline inflows or outflows for the previous six commenters who suggested that on portfolio managers, preventing, for months,1068 and would require the fund information regarding net shareholder example, month-end ‘‘window to update this historical information flows will promote front-running dressing.’’ 1081 Finally, as we noted in each business day, as of the end of the because we believe that front-running the Proposing Release, several preceding business day. One commenter concerns are not especially significant commenters indicated that many money expressed support for daily disclosure for money market funds on account of market funds are already disclosing of a fund’s net inflows and outflows, the specific characteristics of these such information on either a daily or a though it opposed the requirement to funds and their holdings.1073 weekly basis.1082 report and continually update historical c. Daily Disclosure of Current NAV Some commenters opposed certain information.1069 Several commenters aspects or questioned the usefulness of objected to Web site disclosure of net We are adopting, as proposed, the proposed disclosure requirement. shareholder flows, noting that money amendments to rule 2a–7 that would One commenter believed that frequent market funds often have large inflows require each money market fund to publication of a fund’s current NAV per and outflows as a normal course of disclose daily, prominently on its Web share would increase the risk of heavy business, and these flows are often site, the fund’s current NAV per share redemptions for stable NAV funds anticipated.1070 A number of (calculated based on current market during a period of market stress, noting commenters suggested that shareholders factors), rounded to the fourth decimal the incentive for investors to redeem if could misinterpret large inflows and place in the case of a fund with a they see the shadow price fall.1083 We outflows as a sign of stress even if the $1.0000 share price or an equivalent recognize and have considered the risk flows are anticipated and the fund’s level of accuracy for funds with a that daily disclosure of the current NAV 1074 liquidity is adequate to handle them.1071 different share price (the fund’s per share could encourage heavy Two commenters also expressed ‘‘current NAV’’) as of the end of the redemptions when it declines. We concern that a large net inflow or previous business day during the believe, however, that daily disclosure 1075 outflow could signal to the market that preceding six months. The will not lead to significant redemptions the money market fund would need to amendments require a fund to maintain and could, as we describe below, both buy or sell securities in the market, a schedule, chart, graph, or other potentially facilitating .1072 depiction on its Web site showing 1076 For purposes of the required Web site We continue to believe that daily historical information about its daily disclosure of the fund’s current NAV per share, the current NAV per share for the previous six-month look-back period for disclosure would disclosure of net inflows or outflows encompass fund data that occurs prior to the will provide beneficial information to compliance date. See supra note 1050. 1073 See, e.g., Investment Company Institute, 1077 See supra note 1049. Report of the Money Market Working Group, at 93 1067 1078 See rule 2a–7(h)(10)(ii); see also supra note (Mar. 17, 2009), available athttp://www.ici.org/pdf/ See infra section III.G.1.b. 1049. ppr_09_mmwg.pdf (‘‘Because of the specific 1079 See infra note 1087 and accompanying text. 1068 For purposes of the required Web site characteristics of money market funds and their 1080 See, e.g., MFDF Comment Letter; Blackrock II disclosure of net fund inflows or outflows, the six- holdings . . . the frontrunning concerns are far less Comment Letter. month look-back period for disclosure would significant for this type of fund. For example, 1081 See J.P. Morgan Comment Letter. encompass fund data that occurs prior to the money market funds’ holdings are by definition 1082 See, e.g., U.S. Bancorp Comment Letter; compliance date. See supra note 1050. very short-term in nature and therefore would not Blackrock II Comment Letter; J.P. Morgan Comment 1069 See UBS Comment Letter. lend themselves to frontrunning by those who may Letter. But see Federated VIII Comment Letter 1070 See Federated VIII Comment Letter; Vanguard want to profit by trading in a money market fund’s (noting that it has not received many ‘‘hits’’ on its Comment Letter; U.S. Bancorp Comment Letter; particular holdings. Rule 2a–7 also restricts the Web site after it began voluntarily posting Legg Mason & Western Asset Comment Letter; IDC universe of Eligible Securities to such an extent that information about the current market-based NAV Comment Letter. front running, to the extent it exists at all, tends to per share of its funds, suggesting that allowing 1071 See U.S. Bancorp Comment Letter; Blackrock be immaterial to money market fund market forces to determine when such disclosure is II Comment Letter; Dreyfus Comment Letter. performance.’’). valuable to investors is preferable to a ‘‘one size fits 1072 See ICI Comment Letter; Legg Mason & 1074 E.g., $10,000 or $100.00 per share. all’’ regulation). Western Asset Comment Letter. 1075 See rule 2a–7(h)(10)(iii). 1083 See HSBC Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47830 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

increase stability and decrease risk in we believe that it is important for all assess the effect of market events on the financial markets.1084 In particular, money market funds, both floating NAV funds’ portfolios, and will also provide we believe that greater transparency funds and stable NAV funds, to disclose investors the ability to discern trends regarding the current and historical NAV information so that investors will through the provision of the six months NAV per share could help investors easily be able to compare this data of historical data.1092 While some better assess the effects of market events point, which could be seen as a risk historical data regarding the current on a fund’s NAV and understand the metric, across funds when making NAV per share will be available through context of a fund’s principal stability investment decisions among types of monthly N–MFP filings,1093 we believe during particular market stresses. For money market funds (e.g., comparing an that requiring funds to place this data example, if an investor believes the institutional prime money market fund on the fund’s Web site will allow values of one or more securities held by to a government money market fund), as investors to consider this information in a fund are impaired, but does not see well as between money market funds of a more convenient and accessible that impairment reflected in the NAV the same type (e.g., comparing two format. In addition to increasing because it is only required to be institutional prime money market investors’ understanding of money disclosed once a month, they may sell funds). The disclosure of the current market funds’ risks, we believe that this their shares in the funds even though NAV per share will enhance investors’ disclosure will encourage market there is no actual impairment. Lack of understanding of money market funds discipline on fund managers, and transparency was one of the reasons and their inherent risks and allow particularly discourage month-end cited in the DERA Study as a possible investors to invest according to their ‘‘window dressing.’’ explanation for the large redemption risk preferences. This information will d. Daily Calculation of Current NAV per activity during the financial crisis.1085 make changes in a money market fund’s Share for Stable Value Money Market As one commenter noted, such market-based NAV a regularly Funds disclosure could allay concerns about observable occurrence, which could how a money market fund might be promote investor confidence and We are adopting, generally as affected by the occurrence of negative generally provide investors with a proposed, amendments to rule 2a–7 that market events.1086 We also believe that greater understanding of the money would require stable value money daily disclosure will increase market market funds in which they invest.1089 market funds to calculate the fund’s discipline, which could ultimately deter We note that this disclosure could make current NAV per share (which the fund heavy redemptions. Also, as noted floating NAV money market funds must calculate based on current market elsewhere in this Release, we believe appear to be volatile compared to factors before applying the amortized that the reforms we are adopting alternatives like ultra-short bond funds, cost or penny-rounding method, if concerning fees and gates are a tool for which are registered mutual funds that used), rounded to the fourth decimal handling heavy redemptions when they transact at three decimal places (and place in the case of funds with a occur. Finally, we note that many funds disclosure of these alternative funds’ $1.0000 share price or an equivalent have voluntarily begun disclosing NAV per share, consequently, would level of accuracy for funds with a information about their current market- likewise show three and not four different share price (e.g., $10.000 per based NAV per share on their Web sites, decimal places).1090 It is possible that share) as of the end of each business and such disclosures have not led to investors might be incentivized to move day.1094 Rule 2a–7 currently requires significant redemptions.1087 their money to these alternatives As with the proposed requirement because they appear more stable than 1092 One commenter opposed the disclosure of six months of historical information about a fund’s regarding daily disclosure of liquidity 1091 money market funds. current NAV per share because it would require a levels, several commenters supported The Commission continues to believe restructuring of fund Web sites that are already daily disclosure of a fund’s current NAV that requiring each fund to disclose disclosing data. See UBS Comment Letter. We per share only for stable NAV funds.1088 daily its current NAV per share and also estimate the costs of modifications to fund Web We disagree with commenters who sites in the Economic Analysis section infra. to provide six months of historical 1093 See infra note 1179 and accompanying text suggested that daily Web site disclosure information about its current NAV per (discussing our expectation that money market of the current NAV per share would share will increase money market funds’ funds will be able generally to use the same only be useful for shareholders of stable transparency and permit investors to software or service providers to calculate the fund’s NAV funds. We believe that the benefits better understand money market funds’ current NAV per share daily that they presently use we discuss above regarding disclosure to prepare and file Form N–MFP). risks. This information will permit 1094 See rule 2a–7(h)(10)(iii); see also text apply regardless of whether a fund has shareholders to reference funds’ current accompanying supra note 1074 for definition of a stable or floating NAV. For example, NAV per share in near real time to ‘‘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 1084 For a discussion of how disclosure of a fund’s 1089 See J.P. Morgan Comment Letter; BlackRock price its securities at the current NAV by valuing daily liquid assets and weekly liquid assets could II Comment Letter. its portfolio instruments at market value or, if similarly increase stability and decrease risk in the 1090 But see supra note 521 and accompanying market quotations are not readily available, at fair financial markets, see supra notes 1062–1064 and text (discussing staff analysis showing that, value as determined in good faith by the fund’s accompanying text. historically, over a twelve-month period, 100% of board of directors. See rule 2a–7(c)(1); section 1085 See DERA Study, supra note 24. ultra-short bond funds have fluctuated in price 2(a)(41)(B); rules 2a–4 and 22c–1; see also supra 1086 See Goldman Sachs Comment Letter. (using 10 basis point rounding), compared with note 5 and accompanying text. In addition, under 1087 A number of large fund complexes have 53% of money market funds that have fluctuated in rule 2a–7 as amended, a floating NAV money begun (or plan) to disclose daily money market price (using basis point rounding)). market fund is required to compute its price per fund market valuations (i.e., shadow prices), 1091 See infra section III.K, for an in-depth share for purposes of distribution, redemption, and including BlackRock, Charles Schwab, Federated discussion about the macroeconomic consequences repurchase by rounding the fund’s current NAV per Investors, Fidelity Investments, Goldman Sachs, J.P. of the amendments, including the extent to which share to a minimum of the fourth decimal place in Morgan, Reich & Tang, and State Street Global the requirements for institutional prime funds to the case of a fund with a $1.0000 share price or an Advisors. See, e.g., Money Funds’ New Openness transact at prices rounded to the fourth decimal equivalent or more precise level of accuracy for Unlikely to Stop Regulation, WALL ST. J. (Jan. 30, place (and also, like all money market funds, money market funds with a different share price 2013). disclose their current NAV to the fourth decimal (e.g., $10.000 per share, or $100.00 per share). See 1088 See, e.g., Legg Mason & Western Asset place each day) could cause investors to reallocate rule 2a–7(c)(1)(ii). Therefore, we did not propose Comment Letter; ICI Comment Letter; IDC Comment their investments to alternatives outside the money amendments to rule 2a–7 that would specifically Letter. market fund industry. require floating NAV money market funds to

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47831

money market funds to calculate the e. Harmonization of Rule 2a–7 and Form public on Form N–MFP.1100 One fund’s NAV per share, using available N–MFP Portfolio Holdings Disclosure commenter supported the proposed market quotations (or an appropriate Requirements amendments to harmonize portfolio substitute that reflects current market Money market funds are currently information on Form N–MFP and conditions), at such intervals as the required to file information about the information that funds disclose on their board of directors determines fund’s portfolio holdings on Form N– Web sites.1101 appropriate and reasonable in light of MFP within five business days after the The information that money market current market conditions.1095 We end of each month, and to disclose funds currently are required to disclose believe that daily disclosure of money much of the portfolio holdings about the fund’s portfolio holdings on market funds’ current NAV per share information that Form N–MFP requires the fund’s Web site includes, with would increase money market funds’ on the fund’s Web site each month with respect to each security held by the transparency and permit investors to 60-day delay. We are adopting money market fund, the security’s amortized cost value.1102 As part of the better understand money market funds’ amendments to rule 2a–7 in order to reforms to rule 2a–7, we proposed to risks, and thus we are adopting harmonize the specific portfolio holdings information that rule 2a–7 eliminate the use of the amortized cost amendments to rule 2a–7 that would valuation method for stable value require this disclosure.1096 Because we currently requires funds to disclose on the fund’s Web site with the money market funds, and to correspond are requiring money market funds to corresponding portfolio holdings with that elimination, we also proposed disclose their current NAV daily on the information required to be reported on to remove references to amortized cost fund Web site, we correspondingly are Form N–MFP pursuant to amendments from Form N–MFP.1103 To harmonize amending rule 2a–7 to require funds to to Form N–MFP, with changes to the Web site disclosure of funds’ make this calculation as of the end of conform to modifications we are making portfolio holdings with these changes to each business day, rather than at the to Form N–MFP from the proposal. We Form N–MFP, we additionally proposed board’s discretion. We received no believe that these amendments will amendments to the current requirement comments on this calculation benefit money market fund investors by for funds to disclose the amortized cost requirement separate from comments on providing additional, and more precise, value of each portfolio security; instead, the related current NAV disclosure information about portfolio holdings, funds would be required to disclose the requirement. As discussed above, many which should allow investors to better ‘‘value’’ of each portfolio security.1104 money market funds already calculate evaluate the current risks of the fund’s As discussed previously in section and disclose their current NAV on a portfolio investments. III.B.5, the final amendments will daily basis, and thus we do not expect Specifically, in a change from the permit the continued use of the that requiring all money market funds to proposal, we are adopting amendments amortized cost valuation method for perform a daily calculation should to the categories of portfolio stable value money market funds, and entail significant additional costs.1097 investments reported on Form N–MFP, therefore to conform the changes to and are therefore also adopting Form N–MFP to the final amendments conforming amendments to the calculate their current NAV per share daily, because to rule 2a–7, we are not adopting certain these funds already would be required to calculate categories of portfolio investments proposed Form N–MFP amendments their current NAV in order to price and sell their currently required to be reported on a that would have removed references to securities each day. As proposed, rule 2a–7 as money market fund’s Web site.1098 We the amortized cost of securities in amended would have permitted stable value funds are adopting, as proposed, an certain existing items.1105 However, as to compute their current price per share, for amendment to Form N–MFP that would proposed, we are amending Items 13 purposes of distribution, redemption, and require funds to report the maturity date and 41 of Form N–MFP by replacing repurchase, by use of the penny-rounding method for each portfolio security using the amortized cost with ‘‘value’’ as defined but not the amortized cost method. See Proposing maturity date used to calculate the Release, supra note 25, at n.170. Therefore, the in section 2(a)(41) of the Act (generally proposed daily current NAV calculation dollar-weighted average life maturity, the market-based value but can also be requirement would have specified that stable value and therefore we are also adopting, as the amortized cost value, as funds calculate their current NAV per share based proposed, conforming amendments to appropriate),1106 and therefore we are on current market factors before applying the penny the current Web site disclosure also adopting, as proposed, the rounding method. As adopted, rule 2a–7 permits requirements regarding portfolio requirement for funds to disclose the stable value funds to compute their current price securities’ maturity dates.1099 Currently, ‘‘value’’ (and not specifically the per share, for purposes of distribution, redemption, we do not require funds to disclose the amortized cost value) of each portfolio and repurchase, by use of the amortized cost market-based value of portfolio method and/or the penny rounding method. See security on the fund’s Web site. Because rule 2a–7(c)(1)(i). Therefore, the daily calculation securities on the fund’s Web site, the new information that a fund will be requirement we are adopting, as discussed in this because doing so would disclose this required to present on its Web site section III.E.9.d, specifies that stable value funds information prior to the time the overlaps with the information that a calculate their current NAV per share based on information becomes public on Form N– fund will be required to disclose on current market factors before applying the MFP (because of the current 60-day Form N–MFP, we anticipate that the amortized cost or penny-rounding method. See rule delay before Form N–MFP information costs a fund will incur to draft and 2a–7(c)(1)(i). becomes publicly available). Because we 1095 finalize the disclosure that will appear Current rule 2a–7(c)(1). As adopted today, are removing this 60-day delay, we are Items A.20 and B.5 of Form N–MFP will require on its Web site will largely be incurred money market funds to provide NAV data as of the also requiring funds to make the market- close of business on each Friday during the month based value of their portfolio securities 1100 See rule 2a–7(h)(10)(i)(B). reported. available on the fund Web site at the 1101 See ICI Comment Letter. 1096 See supra section III.E.9.c. same time that this information becomes 1102 See current rule 2a–7(c)(12)(ii)(H). 1097 See supra note 1082 and accompanying text. 1103 See Proposing Release, supra note 25, at The costs for those funds that do not already 1098 See rule 2a–7(h)(10)(i)(B); Form N–MFP, Item section III.H. calculate and disclose their market-based NAV on C.6. 1104 See id. a daily basis are discussed in detail below. See infra 1099 See rule 2a–7(h)(10)(i)(B); Form N–MFP, Item 1105 See infra section III.G.1.a. note 1179 and accompanying text. C.12. 1106 See infra note 1446 and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47832 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

when the fund files Form N–MFP, as fund only to present certain summary notify shareholders individually in discussed below in section III.G.1107 information about the imposition of fees order to allow a money market fund to and gates on its Web site,1112 whereas apply a fee or gate.1118 f. Disclosure of the Imposition of the fund will be required to present As discussed below, we continue to Liquidity Fees and Gates more detailed discussion solely on Form believe that certain information required We are adopting, largely as proposed, N–CR.1113 The Web site disclosure to be disclosed on Form N–CR must be an amendment to rule 2a–7 that requires requirements we are adopting regarding filed with the Commission within one a fund to post prominently on its Web the imposition of fees and gates are business day and that this information site certain information that the fund is similar to the proposed requirements in should also be posted on the fund’s Web required to report to the Commission on that they, like the proposed site within the same time-frame to help Form N–CR 1108 regarding the requirements, require a fund to post on ensure that the Commission, investors imposition of liquidity fees, temporary its Web site only that information about generally, shareholders in each suspension of fund redemptions, and the imposition of fees and gates that the particular fund, and other market the removal of liquidity fees and/or fund is required to disclose in an initial observers are all provided with these 1109 resumption of fund redemptions. report on Form N–CR.1114 In addition, critical alerts as quickly as possible.1119 The amendment requires a fund to the amendments to rule 2a–7 that we are Because we believe that these different include this Web site disclosure on the adopting also require a fund to include parties all have a significant interest in same business day as the fund files an the following statement as part of its receiving this information very quickly, initial report with the Commission in Web site disclosure: ‘‘The Fund was we do not agree with the commenter response to any of the events specified required to disclose additional who argued that Web site and 1110 in Parts E, F, and G of Form N–CR, information about this event [or ‘‘these registration disclosure should take and, with respect to any such event, to events,’’ as appropriate] on Form N–CR priority over the Form N–CR filing.1120 maintain this disclosure on its Web site and to file this form with the Securities We believe that it is important for a for a period of not less than one year and Exchange Commission. Any Form money market fund that may impose following the date on which the fund N–CR filing submitted by the Fund is fees and gates to inform existing and filed Form N–CR concerning the prospective shareholders on its Web site 1111 available on the EDGAR Database on the event. This amendment requires a Securities and Exchange Commission’s when: (i) The fund’s weekly liquid 1115 assets fall below 10% of its total assets; 1107 Internet site at http://www.sec.gov.’’ This disclosure may largely duplicate the One commenter stated that it (ii) the fund’s weekly liquid assets fall Form N–MFP filing, but merely providing a link to below 30% of its total assets and the the EDGAR N–MFP filing of this data would not supported the proposed requirement suffice to meet this requirement. We understand that money market funds should post on board of directors imposes a liquidity that investors have, in past years, become their Web sites certain of the fee pursuant to rule 2a–7; (iii) the fund’s accustomed to obtaining money market fund board of directors temporarily suspends information on funds’ Web sites (see infra note 1123 information required by Form N–CR, and accompanying text), and providing the noting that although Form N–CR is the fund’s redemptions pursuant to rule disclosure directly on a fund’s Web site would publicly available upon filing with the 2a–7; or (iv) a liquidity fee has been permit these investors to view this information in SEC, investors will more readily find removed or fund redemptions have been conjunction with other required Web site disclosure resumed. This information is about the fund’s liquidity and current net asset and make use of this information if value (see rule 2a–7(h)(10)(ii) and (iii)) without the posted on a particular funds’ Web particularly meaningful for shareholders need to independently locate and consolidate the site.1116 Another commenter, however, to receive, as it could influence information provided by this disclosure. argued that the proposed Web site prospective shareholders’ decision to 1108 See infra section III.F. purchase shares of the fund, as well as 1109 See rule 2a–7(h)(10)(v); Form N–CR Parts E, disclosure (and proposed Form N–CR) F, and G; see also infra section III.F (discussing filings are redundant and that it would current shareholders’ decision or ability Form N–CR requirements). With respect to the be challenging to comply with a one-day to sell fund shares. We also note, as events specified in Part E of Form N–CR discussed in more detail in the (imposition of a liquidity fee) and Part F of Form time frame, and also argued that the registration statement and Web site Paperwork Reduction Act analysis N–CR (suspension of fund redemptions), a fund is 1121 required to post on its Web site only the disclosure to investors should take section below, that we believe the preliminary information required to be filed on priority over the Form N–CR filing.1117 burdens a fund would incur to draft and Form N–CR on the first business day following the One commenter also supported a finalize the disclosure that would triggering event. See Instructions to Form N–CR appear on its Web site would largely be Parts E and F. A link to the EDGAR N–CR filing requirement for a money market fund to would not suffice to meet this requirement. We incurred when the fund files Form N– understand that investors have, in past years, 1112 A fund also will be required to present CR, and therefore we do not believe that become accustomed to obtaining money market summary information about the historical the one-day time-frame for updating the fund information on funds’ Web sites (see infra note imposition of fees and/or gates in the fund’s SAI. disclosure on the fund’s Web site 1123 and accompanying text), and providing the See supra section III.E.5. disclosure directly on a fund’s Web site would should be overly burdensome. 1113 See infra section III.F.5. permit these investors to view this information in We maintain our belief that Web site 1114 conjunction with other required Web site disclosure As discussed below, we have made changes disclosure provides important about the fund’s liquidity and current net asset to the proposed requirements of Form N–CR, and value (see rule 2a–7(h)(10)(ii) and (iii)) without the the information that a fund will be required to file 1118 need to independently locate and consolidate the on Parts E, F, and G of Form N–CR is therefore See HSBC Comment Letter. We are not information provided by this disclosure. different than that which was proposed. See infra imposing such an individual shareholder 1110 A fund must file an initial report on Form N– section III.F.5. The information a fund is required notification requirement because we believe the CR in response to any of the events specified in to post on its Web site mirrors certain of the costs of such notification may be extremely high, Parts E, F, or G (generally, the imposition or lifting information that the fund is required to disclose on the notification process might take significant time, of liquidity fees or gates) within one business day Form N–CR. To the extent Form N–CR disclosure and shareholders should be able to get effective after the occurrence of any such event. A fund need requirements that we are adopting have been notice on a fund’s Web site. not post on its Web site the additional information modified from the proposed requirements, the Web 1119 See infra section III.F.7. required in the follow-up Form N–CR filing 4 site disclosure requirements have also been 1120 See id.; see also text following this note 1120 business days after the event, if such a filing is modified. (discussing Web site disclosure of fees and gates); required. For additional discussion of the filing 1115 See rule 2a–7(h)(10)(v). infra notes 1124–1127 (discussing prospectus requirements provided in Parts E, F, and G of Form 1116 See CFA Institute Comment Letter. supplements informing money market fund N–CR, see infra section III.F.5. 1117 See Dreyfus Comment Letter; see also infra investors of the imposition of a fee or gate). 1111 See rule 2a–7(h)(10)(v). notes 1308 and 1309 and accompanying text. 1121 See infra section IV.A.6.d.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47833

transparency to shareholders regarding then were removed, during the previous following the date on which the fund occasions on which a particular fund’s 12 months. filed Form N–CR.1131 weekly liquid assets have dropped In addition, a fund currently must For the reasons discussed in the below certain thresholds, or a fund has update its registration statement to Proposing Release and below, we imposed or removed a liquidity fee or reflect any material changes by means of believe it is important for money market gate, because many investors currently a post-effective amendment or a funds to inform existing and prospective obtain important fund information on prospectus supplement (or ‘‘sticker’’) shareholders of any present occasion on the fund’s Web site.1122 We understand pursuant to rule 497 under the which the fund receives financial that investors have become accustomed Securities Act. In order to meet this support from a sponsor or other fund to obtaining money market fund requirement, and as discussed in the affiliate.1132 In particular, we believe information on funds’ Web sites, and Proposing Release,1126 a money market this disclosure could influence therefore we believe that Web site fund that imposes a redemption fee or prospective shareholders’ decision to disclosure provides significant gate should consider informing purchase shares of the fund and could informational accessibility to prospective investors of any fees or inform shareholders’ assessment of the shareholders and the format and timing gates currently in place by means of a ongoing risks associated with an of this disclosure serves a different prospectus supplement.1127 investment in the fund. While purpose than the Form N–CR filing g. Disclosure of Sponsor Support commenters also raised concerns about requirement.1123 While we believe that the potential redundancy of the it is important to have a uniform, central We are also amending rule 2a–7 to proposed registration statement, Web place for investors to access the required require that a fund post prominently on site, and Form N–CR disclosure disclosure, we note that nothing in these its Web site substantially the same requirements,1133 we believe that Web amendments would prevent a fund from information that the fund is required to site disclosure provides significant supplementing its Form N–CR filing and report to the Commission on Form N– informational accessibility to Web site posting with complementary CR regarding the provision of financial shareholders and that format and timing shareholder communications, such as a support to the fund.1128 The of this disclosure serves a different press release or social media update amendments that we are adopting purpose than the Form N–CR filing disclosing a fee or gate imposed by the reflect certain modifications from the requirement.1134 fund. proposal to address commenter However, in response to commenter We believe that the one-year concerns. Specifically, the proposal concerns about potentially duplicative minimum time frame for Web site would have required a fund to post on disclosure requirements, we have disclosure is appropriate because this its Web site substantially the same modified the proposed disclosure time frame would effectively oblige a information that the fund is required to requirements and are adopting fund to post the required information in report to the Commission on Form N– amendments to rule 2a–7 that would the interim period until the fund files an CR regarding the provision of financial require a fund to post on its Web site annual post-effective amendment support to the fund. As discussed in only a subset of the information that the updating its registration statement, more detail below, we are adopting fund is required to file on Form N–CR. which would incorporate the same amendments to rule 2a–7 that would A fund will only be required to present require a fund to post on its Web site information.1124 Although a fund may certain summary information about the only a subset of this information.1129 In inform prospective investors of any receipt of financial support on its Web addition, the amendments would redemption fee or gate currently in site (as well as in the fund’s SAI 1135), require a fund to include the following place by means of a prospectus and will be required to present more statement as part of its Web site supplement,1125 the prospectus detailed discussion solely on Form N– disclosure: ‘‘The Fund was required to supplement would not inform CR.1136 Specifically, a fund will be disclose additional information about required to disclose on its Web site only prospective and current shareholders of this event [or ‘‘these events,’’ as any fees or gates that were imposed, and that information that the fund is appropriate] on Form N–CR and to file required to file on Form N–CR within this form with the Securities and 1122 one business day after the occurrence of For example, fund investors may access the Exchange Commission. Any Form N–CR fund’s proxy voting guidelines, and proxy vote any one or more of the events specified report, as well as the fund’s prospectus, SAI, and filing submitted by the Fund is available in Part C of Form N–CR (‘‘Provision of shareholder reports if the fund uses a summary on the EDGAR Database on the Financial Support to Fund’’).1137 A fund prospectus, on the fund Web site. Securities and Exchange Commission’s thus will not be required, as proposed, 1123 See, e.g., 2010 Adopting Release, supra note Internet site at http://www.sec.gov.’’ 1130 16 (adopting amendments to rule 2a–7 requiring to disclose the reason for support, term money market funds to disclose information about A fund would be required to maintain of support, and any contractual their portfolio holdings each month on their Web this disclosure on its Web site for a restrictions relating to support on its sites); Comment Letter of the Securities Industry period of not less than one year and Financial Markets Association (Jan. 14, 2013) Web site, although a fund will be (available in File No. FSOC–2012–0003) (noting required to disclose this information on that some industry participants now post on their 1126 See Proposing Release, supra note 25, at Web sites portfolio holdings-related information section III.B.8.c. 1131 See id. beyond that which is required by the money market 1127 We expect that this supplement would 1132 reforms adopted by the Commission in 2010, as include revisions to the disclosure in the See Proposing Release, supra note 25, at text well as daily disclosure of market value per share); registration statement concerning restrictions on in paragraph prior to note 620; see also infra section see also infra note 1454 (discussing recent decisions fund redemptions. See supra section III.E.4. The III.F.3. by a number of money market fund firms to begin costs of filing such a supplement are discussed in 1133 See, e.g., Dreyfus Comment Letter; SIFMA reporting funds’ daily shadow prices on the fund section III.E.8, supra. Comment Letter. Web site). 1128 See rule 2a–7(h)(10)(v); Form N–CR Part C; 1134 See supra notes 1122 and 1123. 1124 See supra notes 960–961 and accompanying see also infra section III.F.3 (discussing the Form 1135 See supra section III.E.7. text. N–CR requirements). 1136 See infra section III.F.3 (Concerns of Potential 1125 See infra notes 1126–1127 and accompanying 1129 See rule 2a–7(h)(10)(v). Redundancy). text. 1130 See id. 1137 See rule 2a–7(h)(10)(v).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47834 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Form N–CR.1138 We believe that the costs of these requirements are than smaller entities to provide disclosure requirements we are adopting discussed above. These amendments financial support to their funds. appropriately consider commenters’ should improve transparency and better The requirements to disclose certain concerns about duplicative disclosure as inform shareholders about the risks of information about money market funds’ well as our interest in requiring funds investing in money market funds, which liquidity, shareholder flows, market- to disclose the primary information should result in shareholders making based NAV per share, imposition of fees about affiliate financial support that we investment decisions that better match and/or gates, and use of affiliate believe shareholders may find useful in their investment preferences. We financial support also could have effects assessing fund risks and determining believe that this will have effects on on capital formation. The required whether to purchase fund shares. We efficiency, competition, and capital disclosures may impose external market also address general commenter formation that are similar to those that discipline on portfolio managers, which concerns 1139 about the possible are outlined in the Macroeconomic in turn could create market stability and duplicative effects of the concurrent Consequences section below.1144 enhance capital formation, if the Web site and Form N–CR disclosures in We believe that the requirements resulting market stability encouraged section III.F.3 below, where we discuss could increase informational efficiency more investors to invest in money how Form N–CR and Web site by providing additional information market funds. However, the disclosure serve different purposes.1140 about money market funds’ liquidity, requirements could detract from capital As proposed, we are requiring the shareholder flows, market-based NAV formation by decreasing market stability Web site disclosure to be posted for a if investors redeem more quickly during period of not less than one year per share, imposition of fees and/or gates, and use of affiliate financial times of stress as a result of the following the date on which the fund disclosure requirements, and one filed Form N–CR concerning the support, to investors and the Commission. This in turn could assist commenter noted this increased risk as event.1141 As we stated in the Proposing 1145 investors in analyzing the risks a potential cost to the fund. The Release, we believe that the one-year required disclosure could assist the minimum time frame for Web site associated with certain funds. In particular, the daily disclosure of daily Commission in overseeing money disclosure is appropriate because this market funds and developing regulatory time frame would effectively oblige a and weekly liquid assets, along with the daily disclosure of NAV to four decimal policy affecting the money market fund fund to post the required information in industry, which might affect capital the interim period until the fund files an places, should better enable investors to understand the risks of a specific fund, formation positively if the resulting annual post-effective amendment regulatory framework more efficiently or updating its registration statement, which could increase allocative efficiency and could positively affect more effectively encouraged investors to which would incorporate the same invest in money market funds. information.1142 We received no competition by permitting investors to choose whether to invest in certain The requirement to disclose the comments on this requirement, and we fund’s current NAV to four decimal are adopting it as proposed. funds based on this information. However, if investors were to move their places should not have any effect on h. Economic Analysis assets among money market funds or capital flows because funds will also As discussed above, and in our decide to invest in investment products transact at four decimal places. When proposal, we are adopting a number of other than money market funds as a compared to alternatives like ultra-short amendments to rule 2a–7 to amend a result of the disclosure requirements, bond funds, which disclose and transact number of requirements that money this could adversely affect the at three decimal places, money market market funds post certain information to competitive stance of certain money prices may appear more volatile on a funds’ Web sites. These amendments market funds, or the money market fund day-to-day basis if the greater precision require disclosure of information about industry generally. in NAV disclosure leads to a greater 1146 money market funds’ liquidity levels, frequency of fluctuations in NAV. Certain parts of the disclosure This could incentivize investors to shareholder flows, market-based NAV amendments may have other specific per share (rounded to four decimal switch to these alternatives. However, effects on competition. To the extent over longer horizons like a month or a places), and the use of affiliate financial some money market funds do not support.1143 The qualitative benefits and year these alternatives are likely to have currently and voluntarily calculate and more volatile NAVs than money market disclose daily market-based NAV per 1138 funds. The disclosure of daily and See id.; Form N–CR Part C. share data (rounded to the fourth 1139 weekly liquid assets may increase the See, e.g., Dreyfus Comment Letter. decimal place), our amended disclosure 1140 See infra section III.F.3 (Concerns over volatility of capital flows for money Potential Redundancy). requirements may promote competition market funds, as it may create an 1141 See rule 2a–7(h)(10)(v). by helping to level the associated costs incentive for investors to redeem shares 1142 See supra notes 1126–1127 and incurred by all money market funds and when liquid assets fall or reach the accompanying text. Of course, in the event that the neutralize any competitive advantage fund files a post-effective amendment within one threshold at which the board may year following the provision of financial support to associated with determining not to impose a redemption fee or gate. the fund, information about the financial support calculate and disclose daily current per- Disclosing levels of liquid assets could would appear both in the fund’s registration share NAV. We also note that our lead to pre-emptive redemptions if daily statement and on the fund’s Web site for the amendment to require disclosure of remainder of the year following the provision of support. affiliate sponsor support may adversely 1145 See State Street Comment Letter, at Appendix 1143 We believe that the effects on efficiency, affect competition if investors move A. The commenter did not provide a quantitative competition, and capital formation related to the their assets to larger fund complexes on estimate of such risk. amendments to conform the portfolio holdings Web the theory that they may be more likely 1146 But see supra note 521 and accompanying site disclosure to our amendments to Form N–MFP text (discussing staff analysis showing that, will be the same as those described in the section historically, over a twelve-month period, 100% of discussing our amendments to Form N–MFP. See support reported on Form N–CR will be similar to ultra-short bond funds have fluctuated in price infra section III.G. We also note that the economic economic effects we discuss relating to new Form (using 10 basis point rounding), compared with effects related to disclosure of information related N–CR. See infra section III.F.8. 53% of money market funds that have fluctuated in to the imposition of fees and/or gates and sponsor 1144 See infra section III.K.2. price (using basis point rounding)).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47835

or weekly liquid assets drop to a level investors’ increased willingness to and net shareholder flows on a fund’s at which investors anticipate that there participate in this market, which could Web site because of the expense is a greater likelihood of the fund also lead to additional capital for funds. involved in restructuring fund Web sites imposing a redemption fee or gate. and maintaining such information, but i. Costs of Disclosure of Daily and did not provide a quantitative estimate However, as discussed in detail above, Weekly Liquid Assets and Net of such expenses.1154 One commenter the board’s discretion to impose a fee or Shareholder Flows a gate mitigates the concern that also noted the potential cost of the risk investors will be able to accurately Costs associated with the requirement of shareholders making redemption forecast such an event, leading them to for a fund to disclose information about decisions in reliance on the disclosed pre-emptively withdraw their assets its daily liquid assets, weekly liquid information.1155 The commenter, from the fund. We discuss this concern assets, and net shareholder flows on the however, did not provide a quantitative in more detail in section III.A. fund’s Web site include initial, one-time estimate for this risk.1156 A possible alternative suggested by costs, as well as ongoing costs. Initial We agree that the costs for certain commenters was to only have Web site costs include the costs to design the money market funds to upgrade internal disclosure apply to stable NAV schedule, chart, graph, or other systems and software, and/or engage funds.1147 Allowing floating NAV funds depiction showing historical liquidity third-party service providers if a money not to disclose information on their Web and flow information in a manner that market fund does not have existing site would lower the costs for these clearly communicates the required relevant systems, could be higher than funds. Nevertheless, we rejected this information and to make the necessary those average one-time costs estimated alternative because we believe that the software programming changes to the in the Proposing Release. However, benefits we discuss above regarding fund’s Web site to present the depiction because the estimated one-time costs disclosure apply regardless of whether a in a manner that can be updated each were based on the mid-point of a range fund has a stable or floating NAV. Both business day. Funds also would incur of estimated costs, the higher costs that types of funds, for example, could ongoing costs to update the depiction of may be incurred by certain industry impose a fee or a gate so this daily liquid assets and weekly liquid participants have already been factored assets and net shareholder flows each into our estimates.1157 While requiring information is valuable to both types of 1149 investors and, if only offered to one, business day. The Proposing Release weekly disclosure instead of daily could affect competition. For example, estimated that the average one-time disclosure could reduce costs for funds, if a stable NAV investor has more costs for each money market fund to we continue to believe that daily design and present the historical information than a floating NAV disclosure would convey important depiction of daily liquid assets and investor about a possible fee or gate, information to shareholders that weekly weekly liquid assets, as well as the 1158 then it is reasonable to assume that a disclosure may not. We also believe fund’s net inflows or outflows, would be stable NAV investor would have more that the benefits of increased $20,150.1150 The Proposing Release also confidence in his or her investment. The transparency that would result from the estimated that the average ongoing added disclosure for stable NAV funds disclosure requirements at hand annual costs that each fund would incur could also increase market discipline in outweigh the potential costs of to update the required disclosure would these funds, leading to investors’ reactionary redemptions resulting from be $9,184.1151 1159 increased willingness to participate in the disclosure. The Commission In the Proposing Release, we stated this market and increase capital agrees that money market funds may that we believed funds should incur no formation in these funds. incur additional costs associated with additional costs in obtaining the Another alternative would have been the enhanced controls required to percentage of daily liquid assets and to require weekly instead of daily Web publicly disseminate daily and weekly weekly liquid assets, as funds are site disclosure of the daily and weekly liquid asset data, which costs were not currently required to make such liquid assets and net shareholder estimated in the Proposing Release. The calculation under rule 2a–7. One flow.1148 Being required to disclose this Commission has incorporated these commenter disagreed, noting that there additional costs into its new estimates information weekly instead of daily would be costs because of additional would lower the costs on funds because of ongoing annual costs. controls associated with public Based on these considerations, as well they would not have to report daily. disclosure, but did not provide a as updated industry data, we now However, we rejected this alternative quantitative estimate of such costs.1152 estimate that the average one-time costs because, as discussed above, in times of Two commenters generally believed that for each money market fund to design market stress, money market funds may weekly disclosure of the data, as and present the historical depiction of face rapid, heavy redemptions, which opposed to daily disclosure, would daily liquid assets and weekly liquid could quickly affect their liquidity. substantially reduce costs to funds, but assets, as well as the fund’s net inflows These stresses could happen over a they did not provide a quantitative or outflows, would be $20,280.1160 We period of a day. As such, if investors estimate of the difference between the have confidence that they will have the cost of daily and weekly disclosure.1153 1154 See UBS Comment Letter. necessary information to make an 1155 Additionally, one commenter objected Id. informed decision quickly in a time of 1156 to including historical information See supra section III.E.8 for a discussion of stress, then this may lead to additional the reasons that the Commission cannot measure regarding weekly and daily liquid assets capital for funds. Likewise, we also the quantitative benefits of these proposed believe that daily disclosure instead of requirements at this time. 1149 See State Street Comment Letter. 1157 See Proposing Release, supra note 25, at weekly could lead to more market 1150 See Proposing Release, supra note 25, at n.1044. discipline among funds, resulting in n.642. 1158 See supra notes 1056–1057 and 1151 See Proposing Release, supra note 25, at accompanying text. 1147 See, e.g., Legg Mason & Western Asset n.643. 1159 See supra notes 1060–1063 and Comment Letter; ICI Comment Letter; IDC Comment 1152 See State Street Comment Letter, at Appendix accompanying text. Letter. A. 1160 We estimate that these costs would be 1148 See Schwab Comment Letter; Federated VIII 1153 See Federated VIII Comment Letter; Schwab attributable to project assessment (associated with Comment Letter. Comment Letter. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47836 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

also estimate that the average ongoing third-party service providers for those into our estimates.1168 Based on these annual costs that each fund would incur money market fund managers that do considerations, as well as updated to update the required disclosure would not have existing relevant systems.1165 industry data, we now estimate that the be $10,274.1161 Our estimate of average One commenter noted that these costs average one-time costs for each money ongoing annual costs incorporates the could potentially be ‘‘significant to [a market fund to design and present the costs associated with the enhanced money market fund] and higher than fund’s daily current NAV would be controls required to publicly those estimated in the Proposal.’’ 1166 $20,280.1169 We also estimate that the disseminate daily and weekly liquid However, another commenter stated that average ongoing annual costs that each asset data.1162 it agrees that those money market funds fund would incur to update the required that presently publicize their current disclosure would be $9,024.1170 ii. Costs of Disclosure of Fund’s Current NAV per share daily on the fund’s Web NAV Per Share iii. Costs of Daily Calculation of Current site will incur few additional costs to NAV per Share Costs associated with the requirement comply with the proposed disclosure for a fund to disclose information about requirements, and also that it agrees The primary costs associated with the its daily current NAV on the fund’s Web with the Commission’s estimates for the requirement for a fund to calculate its site include initial, one-time costs, as ongoing costs of providing a depiction current NAV per share each day are the well as ongoing costs. Initial costs of the fund’s current NAV each business costs for funds to determine the current include the costs to design the schedule, day.1167 values of their portfolio securities each chart, graph, or other depiction showing We agree that the costs for certain day.1171 We estimate that 25% of active historical NAV information in a manner money market funds to upgrade internal money market funds, or 140 funds, will that clearly communicates the required systems and software, and/or engage incur new costs to comply with this information and to make the necessary third-party service providers if a money requirement,1172 because the software programming changes to the market fund does not have existing requirement will result in no additional fund’s Web site to present the depiction relevant systems, could be higher than costs for those money market funds that in a manner that will be able to be those average one-time costs estimated presently determine their current NAV updated each business day. Funds also in the Proposing Release. However, per share daily on a voluntary basis.1173 would incur ongoing costs to update the because the estimated one-time costs The Proposing Release estimated that depiction of the fund’s current NAV were based on the mid-point of a range the average additional annual costs that each business day. Because floating of estimated costs, the higher costs that a fund would incur associated with NAV money market funds will be may be incurred by certain industry calculating its current NAV daily would 1174 required to calculate their sale and participants have already been factored range from $6,111 to $24,444. One redemption price each day, these funds commenter stated that it agrees with the should incur no additional costs in 1165 See, e.g., UBS Comment Letter (‘‘The SEC Commission’s estimates for the ongoing obtaining this data for purposes of the also proposed additional information regarding the costs of providing a depiction of the disclosure requirements. Stable price posting of: (i) The categories of a money fund’s fund’s current NAV each business money market funds, which will be portfolio securities; (ii) maturity date information day.1175 However, most comments on for each of the fund’s portfolio securities; and (iii) required to calculate their current NAV market-based values of the fund’s portfolio the proposed current NAV disclosure per share daily pursuant to amendments securities at the same time as this information requirement did not discuss the to rule 2a–7, likewise should incur no becomes publicly available on Form N–MFP. We Commission’s estimates of the costs a additional costs in obtaining this data believe this information is too detailed to be useful fund would incur to calculate its current to most investors and would be cost prohibitive to for purposes of the disclosure provide. Complying with these new Web site NAV per share daily, separate from their requirements. The Proposing Release disclosure requirements would add notable costs discussion of the general costs estimated that the average one-time for each money fund that UBS Global AM costs for each money market fund to advises.’’); Chamber II Comment Letter (‘‘With 1168 See Proposing Release, supra note 25, at design and present the fund’s current respect to the Web site disclosure requirements, n.1056. internal systems and software would need to be 1169 We estimate that these costs would be NAV each business day would be upgraded or, for those MMF managers that do not attributable to project assessment (associated with $20,150.1163 The Commission also have existing systems, third-party service providers designing and presenting the historical depiction of would need to be engaged. The costs (which estimated that the average ongoing the fund’s daily current NAV per share), as well as ultimately would be borne by investors through annual costs that each fund would incur project development, implementation, and testing. higher fees or lower yields) could potentially be The costs associated with these activities are all to update the required disclosure would significant to an MMF and higher than those paperwork-related costs and are discussed in more be $9,184.1164 estimated in the Proposal.’’); Dreyfus Comment detail below. See infra section IV.A.6.c. Certain commenters generally noted Letter (noting that ‘‘several of the new Form 1170 See id. that complying with the new Web site reporting and Web site and registration statement disclosure requirements . . . come with . . . 1171 Additionally, funds may incur some costs disclosure requirements would add material cost to funds and their sponsors’’); see also associated with adding the current values of the costs for funds, including costs to Fin. Svcs. Roundtable Comment Letter (noting that fund’s portfolio securities and dividing this sum by upgrade internal systems and software the disclosure requirements would produce the number of fund shares outstanding; however, relevant to the Web site disclosure ‘‘significant cost to the fund and ultimately to the we expect these costs to be minimal. 1172 The Commission estimates that there are requirements, as well as costs to engage fund’s investors’’); SSGA Comment Letter (urging the Commission to consider the ‘‘substantial currently 559 active money market funds. This administrative, operational, and expense burdens’’ estimate is based on a staff review of reports on designing and presenting the historical depiction of of the proposed disclosure-related amendments); Form N–MFP filed with the Commission for the daily liquid assets and weekly liquid assets and net Chapin Davis Comment Letter (noting that the month ended February 28, 2014. 559 money market shareholder flows), as well as project development, disclosure- and reporting-related amendments will funds × 25% = approximately 140 money market implementation, and testing. The costs associated result in increased costs in the form of fund staff funds. with these activities are all paperwork-related costs salaries, or consultant, accountant, and lawyer 1173 Based on our understanding of money market and are discussed in more detail below. See infra hourly rates, that will ultimately be borne in large fund valuation practices, we estimate that 75% of section IV.A.6.b. part by investors and portfolio issuers). active money market funds presently determine 1161 See id. 1166 See Chamber II Comment Letter. their current NAV daily. 1162 See id. 1167 See State Street Comment Letter, at Appendix 1174 See Proposing Release, supra note 25, at 1163 See Proposing Release, supra note 25, at A; see also HSBC Comment Letter (stating that the n.692. n.664. proposed disclosure requirements should not 1175 See State Street Comment Letter, at Appendix 1164 See id., at n.665. produce any ‘‘meaningful cost’’). A.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47837

associated with the proposed NAV Web discussed above, that 140 money market meaningful costs.1185 Another site disclosure requirement.1176 After funds do not presently determine and commenter urged the Commission to considering these comments, our publish their current NAV per share harmonize new disclosure requirements current methods of estimating the costs daily, the average additional annual cost so that funds would face lower associated with the NAV calculation that these 140 funds will collectively administrative burdens, and investors requirement, described in more detail incur would range from $855,540 to would bear correspondingly fewer below, are the same estimation methods $3,422,160.1181 These costs could be costs.1186 As described above, the we used in the Proposing Release. less than our estimates if funds were to portfolio holdings disclosure All money market funds are presently receive significant discounts based on requirements we are adopting have required to disclose their market-based economies of scale or the volume of changed slightly from those that we NAV per share monthly on Form N– securities being priced. proposed, in order to conform to modifications we are making to the MFP, and the frequency of this iv. Costs of Harmonization of Rule 2a– disclosure will increase to weekly.1177 proposed Form N–MFP disclosure 7 and Form N–MFP Portfolio Holdings requirements. However, we believe that As discussed below, some money Disclosure Requirements market funds license a software solution these revisions do not produce from a third party that is used to assist Because the new portfolio holdings additional burdens for funds and thus do not affect previous cost estimates. the funds to prepare and file the information that a fund is required to Because the 2010 money market fund information that Form N–MFP requires, present on its Web site overlaps with reforms already require money market and some funds retain the services of a the information that a fund would be funds to post monthly portfolio third party to provide data aggregation required to disclose on Form N–MFP, information on their Web sites,1187 and validation services as part of we believe that the costs a fund will funds should not need to upgrade their preparing and filing of reports on Form incur to draft and finalize the disclosure systems and software to comply with N–MFP on behalf of the fund.1178 We that will appear on its Web site will the new portfolio holdings information expect, based on conversations with largely be incurred when the fund files disclosure requirements. The industry representatives, that money Form N–MFP, as discussed below in Commission therefore does not believe market funds that do not presently section III.G. The Proposing Release estimated that, in addition, a fund that comments about the costs required calculate the current values of their to upgrade relevant systems and portfolio securities each day generally would incur annual costs of $2,484 associated with updating its Web site to software should affect its estimates of would use the same software or service the costs associated with the portfolio providers to calculate the fund’s current include the required monthly disclosure.1182 holdings disclosure requirements. Based NAV per share daily that they presently on these considerations, as well as use to prepare and file Form N– As discussed above, certain updated industry data, we now estimate 1179 MFP. For these funds, the associated commenters generally noted that that each fund would incur annual costs base costs of using this software or these complying with the new Web site of $2,724 in updating its Web site to service providers should not be disclosure requirements would add include the required monthly considered new costs. However, the costs for funds, including costs to disclosure.1188 third-party software suppliers or service upgrade internal systems and software providers may charge more to funds to relevant to the Web site disclosure v. Costs of Disclosure Regarding calculate a fund’s current NAV per requirements, as well as costs to engage Financial Support Received by the share daily, which costs would be third-party service providers for those Fund, the Imposition and Removal of passed on to the fund. While we do not money market fund managers that do Liquidity Fees, and the Suspension and have the information necessary to not have existing relevant systems.1183 Resumption of Fund Redemptions provide a point estimate (as such One commenter, however, noted that Because the required Web site estimate would depend on a variety of the portfolio holdings disclosure disclosure overlaps with the factors, including discounts relating to requirements ‘‘should not cause a information that a fund must disclose volume and economies of scale, which significant cost increase . . . as long as on Form N–CR when the fund receives pricing services may provide to certain the information is made available from financial support from a sponsor or fund funds), we estimate that the average relevant accounting systems,’’1184 and affiliate, or when the fund imposes or additional annual costs that a fund another commenter stated that the removes liquidity fees or suspends or would incur associated with calculating proposed disclosure requirements resumes fund redemptions, we its current NAV daily would range from generally should not produce any anticipate that the costs a fund will $6,111 to $24,444.1180 Assuming, as incur to draft and finalize the disclosure $6,111 (252 business days in a year × $24.25) to that will appear on its Web site will 1176 See supra notes 1165–1167. $24,444 (252 business days in a year × $97.00). largely be incurred when the fund files 1177 See Form N–MFP Item A.21 and B.5 1181 This estimate is based on the following Form N–CR, as discussed below in × (requiring money market funds to provide NAV calculations: low range of $6,111 140 funds = section III.F. The Proposing Release data as of the close of business on each Friday $855,540; high range of $24,444 × 140 funds = during the month reported). $3,422,160. See supra note 1180. This figure likely estimated that, in addition, a fund 1178 See infra section IV.C.3. overestimates the costs that stable price funds 1179 One commenter agreed with this expectation. would incur if the floating NAV proposal were 1185 See HSBC Comment Letter. See State Street Comment Letter, at Appendix A. adopted. This is because fewer than 559 active 1186 See Fin. Svcs. Roundtable Comment Letter. 1180 We estimate, based on discussions with money market funds would be stable price funds 1187 See 2010 Adopting Release, supra note 17, at industry representatives that obtaining the price of required to calculate their current NAV per share section II.E.1. daily, and thus the estimate of 140 funds (25% × a portfolio security would range from $0.25–$1.00 1188 We estimate that these costs would be 559 active funds) that would be required to comply per CUSIP number per quote. We estimate that each attributable to project assessment (associated with money market fund’s portfolio consists of, on with this requirement is likely over-inclusive. designing and presenting the required portfolio 1182 average, securities representing 97 CUSIP numbers. See Proposing Release, supra note 25, at holdings information), as well as project Therefore, the additional daily costs to calculate a n.672. development, implementation, and testing. The fund’s market-based NAV per share would range 1183 See supra note 1165. costs associated with these activities are all from $24.25 ($0.25 × 97) to $97.00 ($1.00 × 97). The 1184 See State Street Comment Letter, at Appendix paperwork-related costs and are discussed in more additional annual costs would therefore range from A. detail below. See infra section IV.A.6.a.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47838 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

would incur costs of $207 each time that they are lifted.1195 In most cases, a also will provide information more it updates its Web site to include the money market fund will be required to uniformly and efficiently to the required disclosure.1189 submit a brief summary filing on Form Commission. It will also provide While certain commenters generally N–CR within one business day of the investors and other market observers noted, as discussed above, that occurrence of the event, and a follow-up with better and more timely disclosure complying with the new Web site filing within four business days that of potentially important events. disclosure requirements would add includes a more complete description Commenters generally supported new 1196 Form N–CR.1200 For example, one costs for funds,1190 one commenter and information. We proposed requiring reporting on commenter noted that Form N–CR stated that the costs of disclosing Form N–CR under both the floating would generally ‘‘[alert] the SEC to liquidity fees and gates and instances of NAV and fees and gates reform issues the funds may be having’’ and financial support on the fund’s Web site alternatives, but the Form differed in ‘‘[provide] the public with current would be minimal when compared to certain respects depending on the information that investors need.’’1201 On other costs,1191 and another commenter alternative.1197 Today we are adopting a the other hand, some commenters also stated that the proposed disclosure combination of the alternatives, and voiced objections, suggesting that the requirements should not produce any therefore final Form N–CR is a form may be burdensome or redundant, meaningful costs.1192 As described combined single form.1198 and also offered specific above, we have modified the required As we stated in the Proposing improvements.1202 As discussed in time frame for disclosing information Release,1199 the information provided more detail below, we are making about financial support received by a on Form N–CR will enable the various changes to Form N–CR to fund on the fund’s Web site. However, Commission to enhance its oversight of address some of these concerns. this modification does not produce money market funds and its ability to However, while we appreciate additional burdens for funds and thus respond to market events. The commenters’ concerns about possible does not affect previous cost estimates. Commission will be able to use the redundancies of Form N–CR in light of Taking this into consideration, as well information provided on Form N–CR in the concurrent Web site or SAI as the fact that we received no its regulatory, disclosure review, disclosures, we believe each of these comments providing specific inspection, and policymaking roles. different disclosures to be appropriate suggestions or critiques about our Requiring funds to report these events because they serve distinct methods of estimating the burdens on Form N–CR will provide important purposes.1203 associated with the Form N–CR-linked transparency to fund shareholders, and Web site disclosure requirements, the 2. Part B: Defaults and Events of Commission has not modified the 1195 See Form N–CR Parts B–H. More specifically, Insolvency estimated costs associated with these adopted largely as proposed, these events include Part B of Form N–CR is being adopted requirements, although it has modified instances of portfolio security default (Form N–CR largely as proposed.1204 We are Part B), financial support (Form N–CR Part C), a its cost estimates based on updated decline in a stable NAV fund’s current NAV per industry data. We now estimate that a share (Form N–CR Part D), a decline in weekly 1200 See, e.g., CFA Institute Comment Letter; fund would incur costs of $227 each liquid assets below 10% of total fund assets (Form American Bankers Ass’n Comment Letter; Vanguard N–CR Part E), whether a fund has imposed or Comment Letter; Schwab Comment Letter; ICI time that it updates its Web site to Comment Letter. 1193 removed a liquidity fee or gate (Form N–CR Parts include the required disclosure. E, F and G), or any such other information a fund, 1201 See CFA Institute Comment Letter. at is option, may choose to disclose (Form N–CR 1202 See, e.g., Dreyfus Comment Letter; Fidelity F. Form N–CR Part H). In addition, as proposed, Form N–CR Part Comment Letter; ICI Comment Letter; Federated A will also require a fund to report the following 1. Introduction VIII Comment Letter; SIFMA Comment Letter. general information: (i) The date of the report; (ii) 1203 See discussion following infra notes 1248 the registrant’s central index key (‘‘CIK’’) number; and 1249 and accompanying text. Today we are adopting, largely as we (iii) the EDGAR series identifier; (iv) the Securities 1204 See proposed (FNAV) Form N–CR Part B; proposed, a new requirement that Act file number; and (v) the name, email address, proposed (Fees & Gates) Form N–CR Part B. In the money market funds file a current report and telephone number of the person authorized to Proposing Release, we proposed Form N–CR to receive information and respond to questions about require a fund to disclose the following with us when certain significant events the filing. See Form N–CR Part A. As proposed the 1194 information: (i) The security or securities affected; occur. New Form N–CR will require name, email address, and telephone number of the (ii) the date or dates on which the defaults or events disclosure of certain specified events. person authorized to receive information and of insolvency occurred; (iii) the value of the affected Generally, a money market fund will be respond to questions about the filing will not be securities on the dates on which the defaults or disclosed publicly on EDGAR. required to file Form N–CR if a portfolio events of insolvency occurred; (iv) the percentage 1196 A report on Form N–CR will be made public of the fund’s total assets represented by the affected security defaults, an affiliate provides on the Commission’s Electronic Data Gathering, security or securities; and (v) a brief description of financial support to the fund, the fund Analysis, and Retrieval system (‘‘EDGAR’’) the actions the fund plans to take in response to experiences a significant decline in its immediately upon filing. such event. See id. 1197 shadow price, or when liquidity fees or For example, under the liquidity fees and Among the other changes discussed in this gates alternative, we proposed Form N–CR to section, in the final amendments we are also adding redemption gates are imposed and when include additional disclosures specifically related the clause ‘‘or has taken’’ to the ‘‘brief description to liquidity fees and gates, which we did not of actions fund plans to take, or has taken, in propose to under the floating NAV alternative. See 1189 See Proposing Release, supra note 25, at response to the default(s) or event(s) of insolvency’’ Proposing Release, supra note 25, at section III.G.2; nn.464, 629. as required by Item B.5 of Form N–CR. See Form proposed (Fees & Gates) Form N–CR Parts E, F and 1190 See supra note 1165. N–CR Item B.5. We are clarifying that filers should G. In addition to other changes we are making today not omit in Item B.5 any actions that they may have 1191 See State Street Comment Letter, at Appendix to the form, the final version of Form N–CR already taken in response to a default or event of A. includes these additional Parts. See Form N–CR insolvency prior to their filing of Form N–CR. In 1192 See HSBC Comment Letter. Parts E, F and G. We are also reconciling the particular, if a fund were able to complete all 1193 The costs associated with these activities are introduction of Part D, which was worded actions in response to a default before the deadline all paperwork-related costs and are discussed in differently under each of the respective main of the follow-up filing, it could have otherwise more detail below. See infra section IV.A.6.d. alternatives. See proposed (FNAV) Form N–CR Part effectively omitted its entire response to the default 1194 As we proposed, this requirement will be D; proposed (Fees & Gates) Form N–CR Part D; see from being disclosed in Item B.5. We believe such implemented through our adoption of new rule also, infra note 1263. an omission would significantly diminish the 30b1–8, which requires money market funds to file 1198 Id. informational utility of Form N–CR to the a report on new Form N–CR in certain 1199 See Proposing Release at paragraph Commission and investors in understanding how a circumstances. See rule 30b1–8; Form N–CR. containing n.697. fund has responded to a default.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47839

adopting, as proposed, the requirement the title of the issue and at least two from the proposal.1214 We have that a money market fund report to us identifiers, if available (e.g., CUSIP, modified the definition of financial if the issuer or guarantor of a security ISIN, CIK, Legal Entity Identifier support from the proposal in response that makes up more than one half of one (‘‘LEI’’)) when they file a report under to comments, as discussed below. This percent of a fund’s total assets defaults part B of the form.1209 This requirement revised definition will affect when Part or becomes insolvent.1205 Such a report is similar to what we proposed and are C needs to be filed. When filed, the Part will, also as proposed, include the adopting with respect to Items C.1 to C.5 C report will, as proposed, require nature and financial effect of the default of Form N–MFP.1210 In particular, better disclosure of the nature, amount, and or event of insolvency, as well as the identification of the particular fund terms of the support, as well as the security or securities affected.1206 As we portfolio security or securities subject to relationship between the person noted in the Proposing Release, the a default or event of insolvency at the providing the support and the fund 1215 Commission believes that the factors time of notice to the Commission will specified in the required disclosure are facilitate the staff’s monitoring and this requirement, as it would duplicate the Form N– necessary to understand the nature and analysis efforts, as well as inform any CR reporting requirements discussed in this section. As we stated in the text following note 711 of the extent of a default, as well as the action that may be required in response Proposing Release, the Form N–CR reporting potential effect of a default on the fund’s to the risks posed by such an event. requirement will permit the Commission operations and its portfolio as a Fund shareholders and potential additionally to receive notification of other kinds of whole.1207 investors will similarly benefit from the financial support (which could affect a fund as As stated above, we proposed to significantly as a security purchase pursuant to rule clear identification of defaulted fund 17a–9) and a description of the reason for the require disclosure of the security or portfolio securities when evaluating support, and it will also assist investors in securities affected by the default.1208 In their investments.1211 understanding the extent to which money market a change from the proposal, to help us One commenter expressed concern funds receive financial support from their sponsors better identify defaulted portfolio that publicly identifying a single or other affiliates. 1214 See proposed (FNAV) Form N–CR Part C; securities, the final form now requires security that has defaulted could be proposed (Fees & Gates) Form N–CR Part C. In funds to report the name of the issuer, problematic if other contextual particular, in the Proposing Release we proposed information about the quality of the the term ‘‘financial support’’ to include, but not be 1205 See Form N–CR Part B (requiring filing if the fund’s other holding is not immediately limited to, (i) any capital contribution, (ii) purchase issuer of one or more of the fund’s portfolio available.1212 We note that the Form N– of a security from the fund in reliance on rule 17a– securities, or the issuer of a demand feature or 9, (iii) purchase of any defaulted or devalued guarantee to which one of the fund’s portfolio CR report will provide the value as well security at par, (iv) purchase of fund shares, (v) securities is subject, and on which the fund is as the relative size of any defaulted execution of or letter of indemnity, relying to determine the quality, maturity, or security compared to the rest of a fund’s (vi) capital support agreement (whether or not the liquidity of a portfolio security, experiences a portfolio, providing some context for the fund ultimately received support), (vii) performance default or event of insolvency (other than an guarantee, or (viii) any other similar action to immaterial default unrelated to the financial default. In addition, as further described increase the value of the fund’s portfolio or condition of the issuer), and the portfolio security in section III.F.6 below, we are also otherwise support the fund during times of stress. or securities (or the securities subject to the demand adopting a new Part H of Form N–CR See Proposing Release, supra note 25, at nn.705– 1 feature or guarantee) accounted for at least ⁄2 of 1 that will permit money market funds, in 712 and accompanying discussion. We also percent of the fund’s total assets immediately before proposed Form N–CR to require a fund to disclose the default or event of insolvency). their discretion, to discuss any other the following information: (i) A description of the 1206 Form N–CR Part B, adopted largely as events or information that they may nature of the support; (ii) the person providing proposed, will require a fund to disclose the consider material or relevant, which support; (iii) a brief description of the relationship following information: (i) The security or securities should allow for additional context if between the person providing the support and the affected, including the name of the issuer, the title fund; (iv) a brief description of the reason for the of the issue (including coupon or yield, if necessary. support; (v) the date the support was provided; (vi) applicable) and at least two identifiers, if available; the amount of support; (vii) the security supported, (ii) the date or dates on which the defaults or events 3. Part C: Financial Support if applicable; (viii) the market-based value of the of insolvency occurred; (iii) the value of the affected We are also adopting a requirement security supported on the date support was securities on the dates on which the defaults or that money market funds report initiated, if applicable; (ix) the term of support; and events of insolvency occurred; (iv) the percentage (x) a brief description of any contractual restrictions of the fund’s total assets represented by the affected instances of financial support by relating to support. In addition, if an affiliated security or securities; and (v) a brief description of sponsors or other affiliates on Part C of person, promoter, or principal underwriter of the the actions the fund plans to take, or has taken, in Form N–CR 1213 with several changes fund, or an affiliated person of such a person, response to such event. As proposed, an instrument purchases a security from the fund in reliance on subject to a demand feature or guarantee would not rule 17a–9, we proposed that the money market 1209 be deemed to be in default, and an event of See Form N–CR Item B.1. These requirements fund would be required to provide the purchase insolvency with respect to the security would not are similar to Form N–MFP Items C.1 to C.5 but are price of the security, as well as certain other be deemed to have occurred, if: (i) In the case of reported on a more timely basis on Form N–CR. information. See Instruction to proposed (FNAV) an instrument subject to a demand feature, the Much like under Form N–MFP, we note that the Form N–CR Part C; Instruction to proposed (Fees & demand feature has been exercised and the fund requirement to include multiple identifiers is only Gates) Form N–CR Part C. required if such identifiers are actually available. has recovered either the principal amount or the 1215 See id. Form N–CR Items C.1 through C.10 1210 amortized cost of the instrument, plus accrued See Proposing Release, supra note 25, at will require, with changes from the proposal, a fund interest; (ii) the provider of the guarantee is nn.754–757 and accompanying text; see supra to disclose the following information: (i) A continuing, without protest, to make payments as section III.G. description of the nature of the support; (ii) the due on the instrument; or (iii) the provider of a 1211 Although current rule 2a–7(c)(7)(iii)(A) person providing support; (iii) a brief description of guarantee with respect to an asset-backed security requires money market funds to report defaults or the relationship between the person providing the pursuant to rule 2a–7(a)(16)(ii) is continuing, events of insolvency to the Commission by email, support and the fund; (iv) the date the support was without protest, to provide credit, liquidity or other as proposed, we are eliminating this now provided; (v) the amount of support, including the support as necessary to permit the asset-backed duplicative requirement. amount of impairment and the overall amount of security to make payments as due. See Instruction 1212 See Dreyfus Comment Letter. securities supported; (vi) the security supported, to Form N–CR Part B. This instruction is based on 1213 See Form N–CR Part C. Today, when a including the name of the issuer, the title of the the current definition of the term ‘‘default’’ in the sponsor supports a fund by purchasing a security issue (including coupon or yield, if applicable) and provisions of rule 2a–7 that require funds to report pursuant to rule 17a–9, we require prompt at least two identifiers, if available; (vii) the market- defaults or events of insolvency to the Commission. disclosure of the purchase by email to the Director based value of the security supported on the date See current rule 2a–7(c)(7)(iv). of the Commission’s Division of Investment support was initiated, if applicable; (viii) a brief 1207 See Proposing Release, supra note 25, at text Management, but we do not otherwise receive description of the reason for the support; (ix) the following n.703. notice of such support unless the fund needs and term of support; and (x) a brief description of any 1208 Proposed (FNAV) Form N–CR Item B.1; requests no-action or other relief. See current rule contractual restrictions relating to support. We have Proposed (Fees & Gates) Form N–CR Item B.1. 2a–7(c)(7)(iii)(B). As proposed, we are eliminating Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47840 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

except that, in a change from the commenters suggested that the catchall investors.1224 We also were asked to proposal, the report will also require provision of the proposed definition, clarify what constitutes financial certain identifying information about which would require reporting of ‘‘any support in order to standardize securities that are the subject of any other similar action to increase the disclosures by different funds.1225 financial support.1216 value of the Fund’s portfolio or We appreciate these commenters’ As we noted in the Proposing Release, otherwise support the Fund during concerns, and are today amending the we believe that requiring disclosure of times of stress,’’ was too broad.1221 final definition of ‘‘financial support’’ to financial support from a fund sponsor or Some commenters stated that the minimize unnecessary filings of Form affiliate will provide important, near proposed definition would trigger N–CR and reduce inconsistencies real-time transparency to shareholders reports on Form N–CR of routine among different filers. In response to and the Commission, and will therefore transactions that occur in the ordinary these comments, we are, among other help shareholders better understand the course of business, which do not things, modifying the rule text to specify ongoing risks associated with an that certain routine actions, and actions indicate stress on the fund.1222 For investment in the fund.1217 The not reasonably intended to increase or example, a few commenters suggested information provided in the required stabilize the value or liquidity of the that the proposed definition would disclosure is necessary for investors to fund’s portfolio, do not need to be result in Form N–CR filings with respect understand the nature and extent of the reported as financial support on Form sponsor’s discretionary support of the to ordinary fee waivers and expense N–CR, as discussed below.1226 The fund and will also assist Commission reimbursements, inter-fund lending, revised definition should help avoid staff in analyzing the economic effects purchases of fund shares, Form N–CR filings that do not represent of such financial support.1218 reimbursements made by the sponsor in actions that the Commission, error, and certain other routine fund shareholders, and other market a. Definition of Financial Support 1223 transactions. Because many of the observers would consider significant Although a number of commenters above actions likely would not indicate enough in evaluating or monitoring for generally supported the proposed stress on a fund, commenters noted that financial support. Each item of financial financial support disclosure,1219 many reporting these actions would not support in the definition is the same as of these supporters and other enhance investors’ ability to fully was proposed, except we have deleted commenters also argued that the appreciate the risks of investing in a ‘‘purchase of fund shares’’ from the proposed definition of ‘‘financial fund, potentially lead to further investor definition, we have refined the ‘‘catch- support’’ was ambiguous and could confusion and possibly even cause all provision,’’ and we have added trigger unnecessary filings.1220 Many ‘‘disclosure fatigue’’ among several exclusions, all discussed below. As we are adopting it today, the term also rearranged proposed Item C.4 (description of sponsor support would provide investors with ‘‘financial support’’ is defined to the reason for the support) to be new Item C.8 in useful context for analyzing the stability of the include (i) any capital contribution, (ii) order to better streamline the disclosures required fund, though we would note that not all instances to be filed within one business day (Items C.1 purchase of a security from the fund in of sponsor support are indicative of a fund under through C.7) versus four business days (Items C.8 even mild stress, let alone nearing the point of reliance on rule 17a–9, (iii) purchase of through C.10). See infra section III.F.7. breaking the buck.’’); ICI Comment Letter (‘‘We are any defaulted or devalued security at 1216 See Form N–CR Item C.6 (now requiring, for concerned that the definition of ‘financial support’ par, (iv) execution of letter of credit or any security supported, disclosure of the name of for purposes of the required disclosures is overly the issuer, the title of the issue (including coupon broad and would include the reporting of routine or yield, if applicable) and at least two identifiers, 1224 See, e.g., Federated VIII Comment Letter; fund matters.’’); Federated II Comment Letter; if available. We are including the new securities Fidelity Comment Letter; ICI Comment Letter; Deutsche Comment Letter; UBS Comment Letter. identification requirements for the same reasons we SIFMA Comment Letter; Chamber II Comment 1221 are including it in Part B, as discussed above. See, e.g., Dreyfus Comment Letter, Deutsche Letter. Comment Letter, ICI Comment Letter, Fidelity 1217 See Proposing Release, supra note 25, at 1225 See SIFMA Comment Letter (stating that n.705 and accompanying text. See also, e.g., Comment Letter; UBS Comment Letter. clarifying the definition of financial support is Schwab Comment Letter (noting that the 1222 See, e.g., Dechert Comment Letter (stating ‘‘necessary to standardize disclosures across the ‘‘[p]roposed disclosures around instances of that the ‘‘definition of ‘financial support’ is over- industry.’’). With respect to the ‘‘catch-all’’ sponsor support would provide investors with inclusive and would capture certain actions taken provision of the definition, see discussion infra and useful context for analyzing the stability of the in the ordinary course of business that would not cf., e.g., Dreyfus Comment Letter. Certain of our fund’’). In addition, as we discussed at n.712 in the signal any financial distress on the part of the final changes to the definition of ‘‘financial Proposing Release, money market funds’ receipt of money fund.’’); SIFMA Comment Letter, ICI support’’ are intended to address concerns about financial support from sponsors and other affiliates Comment Letter, Federated II Comment Letter, inconsistent disclosures by different funds. See, has not historically been prominently disclosed to Vanguard Comment Letter. e.g., infra notes 1226 and 1232 and the respective investors, which has resulted in a lack of clarity 1223 See, e.g., PWC Comment Letter (‘‘. . . an accompanying discussions. among investors about which money market funds expense waiver is more often than not a means to 1226 In addition, in the Proposing Release, we have received such financial support. limit a fund’s expense ratio, and not to avoid the explained that the instructions specified that the 1218 See Proposing Release, supra note 25, at text NAV falling below $1.00 per share.’’); BlackRock II term financial support included, but was not following n.708. Another commenter also suggested Comment Letter (‘‘[a]ffiliates and fund sponsors limited to certain examples of financial support. See that disclosure of financial support on Form N–CR often use a fund as a cash management vehicle and Proposing Release, supra note 25, at n.617 and may have the effect of reducing the likelihood that routinely purchase fund shares. These purchases in accompanying text. Similarly, in the proposed Form funds will need such support in the future. See no way indicate a fund is under stress.’’); Fidelity N–CR, we had included the phrase ‘‘for example’’ American Bankers Ass’n Comment Letter Comment Letter (noting that ‘‘a ‘(iv) purchase of before the definition of financial support, (‘‘[k]nowing that any form of sponsor support fund shares’ may be interpreted to include a suggesting that this definition was a non-exhaustive would be required to be disclosed within 24 hours, sponsor’s investment of seed money to launch a list of actions that constitute financial support. See fund managers would likely do everything they new fund and investment by affiliated funds or proposed (FNAV) Form N–CR Part C; proposed could to avoid the need for sponsor support.’’). transfer agents on behalf of either funds using (Fees & Gates) Form N–CR Part C. In the final 1219 See, e.g., Oppenheimer Comment Letter MMFs as an overnight cash sweep or central funds amendments, we are eliminating these (‘‘. . . we support the SEC’s proposal to require investing pursuant to the terms of an exemptive qualifications in order to reduce any ambiguity over money market funds to disclose current and order.’’ and that other routine items might include what else might constitute sponsor support. We also historical instances of sponsor support for stable ‘‘expense caps, inter-fund lending, loans and clarify that the final definition encompasses the NAV funds [. . .].’’); Schwab Comment Letter; T. overdrafts due to settlement timing issues, and entire universe of what does (and does not) Rowe Price Comment Letter; American Bankers that service providers of a MMF may give constitute financial support for purposes of Form Ass’n Comment Letter; Federated VIII Comment as a result of cash held at the service provider’’). N–CR. We believe these clarifications, in addition Letter. See also, e.g., Vanguard Comment Letter, Federated to our other changes to the definition of ‘‘financial 1220 See, e.g., Schwab Comment Letter (noting VIII Comment Letter, SIFMA Comment Letter, support,’’ will provide for more standardized that the ‘‘[p]roposed disclosures around instances of Deutsche Comment Letter, ICI Comment Letter. disclosures across the industry.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47841

letter of indemnity, (v) capital support intentionality standard 1233 should serve inter-fund purchases of fund shares.1236 agreement (whether or not the fund to reduce the chance that a fund would We agree with commenters that the ultimately received support), (vi) need to report an action on Form N–CR actions we are excluding from the final performance guarantee, (vii) or any that does not represent true financial definition are not generally indicative of other similar action reasonably intended support that the Commission or stress at a fund.1237 Correspondingly, to increase or stabilize the value or investors would likely be concerned we have also deleted purchases of fund liquidity of the fund’s portfolio; with. By focusing on the primary shares as one of the items that had been excluding, however, any (i) routine intended effects of sponsor support— explicitly included in the proposed waiver of fees or reimbursement of fund increasing or stabilizing the value or definition.1238 We note that these expenses, (ii) routine inter-fund lending, liquidity of a fund’s portfolio 1234—we actions must be ‘‘routine’’ meaning that (iii) routine inter-fund purchases of believe the revised ‘‘catch-all’’ provision any such actions are excluded only to fund shares, or (iv) any action that will better capture actions that the the extent they are not reasonably would qualify as financial support as Commission, shareholders, and other intended to increase or stabilize the defined above, that the board of market observers would consider value or liquidity of the fund’s directors has otherwise determined not significant in evaluating or monitoring portfolio.1239 to be reasonably intended to increase or for financial support.1235 Actions that The final definition of financial stabilize the value or liquidity of the would likely fall within this ‘‘catch-all’’ support also includes a new fund’s portfolio.1227 provision include, for example, the intentionality exclusion that may be As some commenters suggested,1228 purchase of a defaulted or devalued invoked by boards.1240 Under this new we are refining the ‘‘catch-all’’ provision security at a price above fair value, or exclusion, a particular action need not of the financial support definition.1229 exchanges of securities with longer be reported as financial support under In the Proposing Release, we had maturities for ones with shorter Part C of Form N–CR if the board of proposed to require disclosure of ‘‘any maturities. directors of the fund finds that the other similar action to increase the We have also added exclusions to the action was not ‘‘reasonably intended to value of the fund’s portfolio or definition in a change from the increase or stabilize the value or otherwise support the fund during times proposal. The revised definition of liquidity of the Fund’s portfolio.’’ We of stress.’’ 1230 Under the final financial support explicitly excludes are adding this exclusion as a way to definition, we are changing this routine waivers of fees or address certain remaining concerns by provision to read: ‘‘any other similar reimbursement of fund expenses, commenters about the reporting of action reasonably intended to increase routine inter-fund lending, and routine actions that might otherwise still or stabilize the value or liquidity of the technically fall within the definition of Fund’s portfolio.’’ 1231 In particular, we 1233 See Form N–CR Part C. As noted above, if financial support, but are not intended have eliminated the phrases ‘‘otherwise increasing or stabilizing the value or liquidity of the as such.1241 During times of fund or Fund’s portfolio is an intended effect of an action, support’’ and ‘‘during times of stress’’ even if not the primary purpose, then it would need market stress, however, we believe that contained in the proposed definition to to be reported on Form N–CR. boards likely would find it difficult to address more general concerns that the 1234 To that end, we have also added ‘‘or determine that a particular action that is ‘‘catch-all’’ provision was too vague and stabilize’’ and ‘‘or liquidity’’ to what we had otherwise captured by the definition of originally proposed as the catch-all provision. See could be subject to different financial support should be excluded 1232 supra note 1231 and accompanying text. We are interpretations by different funds. doing so because we believe that increasing the under this intentionality exception. We We also eliminated the phrase ‘‘during value of a fund may not be the only primary recognize that an action may be made times of stress’’ because sponsors may intended effect of financial support. Rather, we for a number of reasons, but note that also provide support pre-emptively, believe that stabilizing the value of a fund (e.g., where a sponsor provides support to counter if an intent of the action is to increase before a fund is experiencing any actual foreseeable adverse market effects that may or stabilize the value or liquidity of the stress. Instead, we believe this new otherwise depress the fund’s value), as well as Fund’s portfolio, even if that is not the increasing or stabilizing the fund’s liquidity (e.g., where a sponsor might exchange securities with primary or sole purpose of the action, 1227 See Form N–CR Part C. This definition is the then it must be reported on the same as the one we are adopting today for purposes longer maturities for ones of equal value but with of the Web site disclosure of sponsor support. See shorter maturities) may also be intended effects of supra section III.F.3. See also, supra note 1214 for financial support. 1236 Cf., e.g., ICI Comment Letter (proposing to 1235 a description of the proposed definition in the We also considered whether to make this add ‘‘nonroutine’’ before ‘‘purchase of fund shares’’ Proposing Release. ‘‘catch-all’’ provision (or the definition of financial to ‘‘make it clear that routine affiliate purchases 1228 See, e.g., Dreyfus Comment Letter (‘‘we support generally) subject to a specific threshold or normally should not be deemed ‘‘financial recommend that ‘or otherwise support the fund general materiality qualification. See, e.g., T. Rowe support.’’). during times of market stress’ be eliminated from Price Comment Letter (stating that ‘‘if the sponsor 1237 See generally, commenters’ concerns at supra subparagraph (viii), or revised to be made more is investing in its own fund in order to support the note 1223 and accompanying discussion. NAV, we agree that the SEC could consider specific as to actual financial support provided. As 1238 See clause (iv) of the proposed definition, requiring disclosure [on Form N–CR] if a money proposed, this broad ‘catch-all’ provision re-opens supra note 1227. market fund’s NAV has dropped below a certain the door for debate about what constitutes 1239 threshold and the sponsor’s investment in the fund If increasing or stabilizing the value or ‘instances of sponsor support.’ ’’); ICI Comment liquidity of the Fund’s portfolio is an intended Letter. materially changes the market-based NAV.’’); Cf., e.g., ICI Comment Letter (among other things, effect of an action, even if not the primary purpose, 1229 See Form N–CR Part C. proposing to qualify purchases of fund shares by then it would need to be reported on Form N–CR. 1230 See Proposing Release, supra note 25, at adding ‘‘to support the fund during periods of stress 1240 See Form N–CR Part C. n.617 and accompanying text; proposed (FNAV) (e.g., when the fund’s NAV deviates by more than 1241 See, e.g., Fidelity Comment Letter (‘‘For Form N–CR Part C; proposed (Fees & Gates) Form 1⁄4 of 1 percent)’’ behind it). However, we are not example, ‘(i) any capital contribution’ could be N–CR Part C. including a specific threshold (e.g., a specific drop interpreted to include a reimbursement of error, as 1231 See Form N–CR Part C. in the fund’s NAV or liquidity) at this time (to the a MMF adviser or sponsor may reimburse a MMF 1232 See Dreyfus Comment Letter. See generally, ‘‘catch-all’’ provision or any other part of the for an error that occurred whether part of e.g., SIFMA Comment Letter (with respect to definitions) because not all types of sponsor investment operations, investment activity or other definition of financial support generally, stating support (e.g., a capital support agreement or services provided by a service provider to the that clarifications are ‘‘necessary to standardize performance guarantee) may result in an immediate funds.’’) In such a case, a fund’s board might be able disclosures across the industry.’’). But cf., ICI change in a fund’s NAV or liquidity. The utility of to determine that such reimbursement was not Comment Letter (proposing a modified ‘‘catch-all’’ the reporting might also be diminished with such ‘‘reasonably intended to increase or stabilize the provision that would retain the phrase ‘‘during a threshold if sponsors provided support pre- value or liquidity of the Fund’s portfolio’’ and thus periods of stress.’’). emptively, before the specified threshold is met. would not report the action on Form N–CR.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47842 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Form.1242 As is the case with any board specifically with respect to share fund’s value that is supported, if less determination, boards would typically purchases on Part C of Form N–CR. than the full amortized cost value). record in the board minutes the bases of With respect to share purchases in This guidance differs somewhat from any such determinations by the particular, we disagree with the the staff guidance relating to capital board.1243 commenter that when financial support support agreement disclosures on Form N–MFP because the context differs. b. Amount of Support is provided through the purchase of a fund portfolio security, the size of the Form N–MFP already requires reporting In the Proposing Release, we security position purchased is not on the overall size of the security proposed that filers disclose, among relevant in considering the amount of position reported (and information other things, the ‘‘amount of support’’ in support. When a distressed or about the size of the fund), so the Part C of Form N–CR.1244 One potentially distressed security is additional capital support agreement commenter asked the Commission to purchased out of a fund’s portfolio, reporting focuses on valuing the clarify the ‘‘amount’’ of financial support can be provided in two ways. impairment effectively removed through support that they must report under Part First, if it is purchased at amortized cost the capital support agreement. Our C of the form to avoid misleading and the security’s market-based value is guidance regarding ‘‘amount’’ of disclosures and to facilitate below amortized cost, one measure of financial support reportable on Form N– comparability in disclosures across the the amount of support is the amount of CR for capital support agreements thus 1245 industry. For example, in the case of the security’s impairment below provides similar information to that a purchase of a security from the fund, amortized cost. However, the purchase which could be collectively determined this commenter believed that it may be of the security position from the fund by reviewing various Form N–MFP line misleading to report the size of the also removes this entire risk exposure items. position purchased as the ‘‘amount’’ from the fund and protects the fund c. Concerns Over Potential Redundancy supported and rather thought the from subsequent further price declines One commenter argued that the amount of support should be the in the security. Accordingly, we believe financial support disclosure in Form N– increase in the fund’s NAV that results that the size of the position purchased CR is redundant in light of the from the purchase. This commenter also from the fund is also relevant when corresponding financial support asked that the Commission clarify that considering the ‘‘amount’’ of financial disclosures in the SAI, raising concerns SEC staff interpretations relating to support. Therefore, in such a case filers about the additional preparation costs reporting the valuation of capital should report under Part C of Form N– support agreements on Form N–MFP and burdens on fund personnel.1248 CR the following two separate items would be applicable for these More generally, commenters were also with respect to the ‘‘amount’’ of purposes.1246 concerned about the redundancy of Below we are providing guidance to financial support: (i) The amount of the various other Parts of Form N–CR, Form clarify what amounts should be reported impairment below amortized cost in the N–CR as a whole, and even the various security purchased and (ii) the proposed disclosures in the amortized cost value of the securities 1242 For example, a sponsor might purchase a aggregate.1249 While we appreciate these security from a fund (or take another similar action) purchased. concerns and have considered the costs to eliminate potential future risk associated with In the case of a capital support and burdens of Form N–CR,1250 we note that security, and may engage in such an action agreement, historically such agreements primarily out of concern for their reputation or that each of the Form N–CR and the other reasons. Nonetheless, if any intent of the have supported a particular security corresponding Web site and SAI action, even if it is not the primary intent, is to position while others, as noted by a disclosure requirements serves a increase or stabilize the value or liquidity of the commenter, may support the market- 1251 fund’s portfolio (in the present or future), then such distinct purpose. Therefore, an action would be reportable on Form N–CR. based NAV per share of the fund as a although we acknowledge there will be 1247 Similarly, one commenter suggested that we whole. Where a capital support some textual overlap between these exclude certain capital contributions provided by agreement is supporting a particular different formats, we believe there are the sponsor of an acquired fund in the case of a security position, we would consider merger or reorganization from the definition of strong public policy reasons for financial support for purposes of Form N–CR. See the amount of reportable financial requiring the various different Federated VIII Comment Letter. We have not done support on Form N–CR similar to that disclosures. We also note that we have so because in some cases such a contribution might described above relating to purchases of required other such parallel reporting be reasonably intended to increase or stabilize the portfolio securities. That is, the 1252 value or liquidity of the fund’s portfolio, even if the for similar reasons. primary intent was to facilitate the merger or ‘‘amount’’ of financial support is the Most significantly, Form N–CR will reorganization. In particular, such a contribution amount of security impairment alert Commission staff, shareholders may qualify as a ‘‘capital contribution’’ for purposes effectively removed through the capital and other market observers about any of clause (i) of the proposed definition of financial support agreement as well as the support. Given that the capital contribution in the reportable events on Form N–CR commenter’s example was intended to cover ‘‘any amortized cost value of the overall net losses previously realized by the acquired fund’’ position supported (assuming the entire 1248 See Dreyfus Comment Letter. or ‘‘if the shadow price of the acquired fund differs position is subject to the capital support 1249 See, e.g., Dreyfus Comment Letter; SIFMA materially from the acquiring fund’s shadow price,’’ agreement). For a capital support Comment Letter; Federated II Comment Letter; Fin. the recipient fund’s board would likely find it Svcs. Roundtable Comment Letter. difficult to conclude that such a capital agreement that supports the fund as a 1250 We consider and estimate the various costs contribution was not reasonably intended to whole, the amount of reportable and burdens of Form N–CR in more detail in infra increase or stabilize the value or liquidity of the financial support is the amount of section III.F.8 as well as in infra section IV.D.2.a. fund’s portfolio. Id. impairment to the fund’s NAV per share 1251 We note that there are also certain 1243 See supra note 709. effectively removed through the capital overlapping disclosures with respect to Form N– 1244 See proposed (FNAV) Form N–CR Item C.6; MFP, which we generally discuss in supra section proposed (Fees & Gates) Form N–CR Item C.6. support agreement with a notation III.G. 1245 See SIFMA Comment Letter. describing that the capital support 1252 For example, money market funds are 1246 This commenter was discussing Staff agreement supports the value of the currently required to disclose much of the portfolio Responses to Questions about Rule 30b1–7 and fund as a whole (or the extent of the holdings information they disclose on Form N–MFP Form N–MFP updated July 29, 2011, available at on the fund’s Web site as well. See current rule 2a– http://www.sec.gov/divisions/investment/guidance/ 7(c)(12)(ii); current rule 30b1–7; Form N–MFP, formn-mfpqa.htm. 1247 See SIFMA Comment Letter. General Instruction A.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47843

(including any financial support) on a observers about important events in a EDGAR.1260 Given that individual near real-time basis.1253 In particular, timely and meaningful manner. investors are typically most interested Form N–CR will enable the Commission Moreover, we note that certain Parts of in information about their own (or and other market observers to better Form N–CR as amended today will potential) investments and do not monitor the entire fund industry, as require more extensive disclosures than necessarily monitor the entire fund they will be able to locate on EDGAR all either the corresponding Web site or industry, visiting the Web sites of a few Form N–CR reports specific to any SAI disclosures,1257 which further particular funds would likely not particular time frame without having to minimizes the degree to which there become overly time-consuming or search through the SAIs of all the funds would have been any functionally burdensome for these investors.1261 in the industry. We expect financial overlapping disclosures. Finally, Form 4. Part D: Declines in Shadow Price news services to be among the market N–CR filings will also provide a Part D of Form N–CR will, as observers who will benefit from Form permanent historical record of any proposed, require funds that transact at N–CR, which in turn could then also financial support provided to the entire a stable price to file a report when the alert investors about these important money market fund industry, which 1254 fund’s current NAV per share deviates developments more expeditiously. will be accessible on EDGAR. Although any corresponding SAI downward from its intended stable disclosures will also be available on On the other hand, we believe that the price (generally, $1.00) by more than 1⁄4 EDGAR, because SAI filings contain consolidated discussion in the SAI will of 1 percent (i.e., generally below many other disclosures (including those be the most accessible format for $0.9975).1262 Today we are adopting unrelated to financial support or the disclosing historical instances of Part D of Form N–CR largely as other reportable events on Form N–CR), sponsor support in the past 10 years, as proposed.1263 As we discussed in the it could take significant amounts of time it would be a significant burden on the for the Commission and other market Commission, investors and other market 1260 See CFA Institute Comment Letter (‘‘We observers if they had to review various particularly endorse the proposed requirement that observers (such as the aforementioned money market funds would have to post on their financial news services) to continually prior Form N–CR filings to piece Web sites much of the information required in Form review all SAI filings for any relevant together a specific fund’s history of N–CR. While Form N–CR information is publicly alerts.1255 Similarly, we believe it would sponsor support,1258 even in light of the available upon SEC filing, investors will more readily find and make use of this information if be significantly more time-consuming, if additional costs and burdens faced by posted on a particular fund’s Web site.’’) not impractical, if the Commission and funds in providing these SAI 1261 We also generally consider and estimate the other market observers had to disclosures.1259 We also believe that, to costs and burdens of the related Web site continually check each fund’s Web site the extent investors may not be familiar disclosures in infra section III.F.8 as well as in infra for any relevant updates.1256 We with researching filings on EDGAR, section IV.A.6. 1262 Form N–CR Part D. As stated in the therefore believe that the corresponding including these disclosures in a fund’s introduction to Part D, with some changes from the Web site and SAI disclosures alone SAI (which investors may receive in proposal, the disclosure requirement under Part D would not accomplish the primary goal hard copy through the U.S. Postal is triggered ‘‘[if] a retail money market fund’s or a of Form N–CR in alerting the Service or may access on a fund’s Web government money market fund’s current net asset Commission, investors and other market value per share deviates downward from its site, as well as accessing on EDGAR) intended stable price per share by more than 1⁄4 of may make this information more readily 1 percent [. . .].’’ In turn, for each day the fund’s 1253 With respect to the need of the Commission available to these investors than current NAV is below this threshold, Part D will staff, shareholders and other market observers to require, with some changes from the proposal, a receive the alerts on Form N–CR on a near real-time disclosure on other SEC forms that are fund to disclose the following information: (i) The basis, cf. infra notes 1329–1333 and the solely accessible on EDGAR. date or dates on which such downward deviation accompanying text for a discussion on the exceeded 1⁄4 of 1 percent; (ii) the extent of deviation importance of the one and four business day Similarly, the Web site disclosures are between the fund’s current NAV per share and its deadlines of Form N–CR. intended to be more accessible than intended stable price; and (iii) the principal reason 1254 As noted in supra notes 1211 and 1213, with Form N–CR for individual investors or reasons for the deviation, including the name of respect to any portfolio defaults or fund share interested in information about any security whose market-based value or sale purchases under rule 17a–9, we are eliminating the price, or whose issuer’s downgrade, default, or corresponding email notifications to the Director of particular funds, in particular to the event of insolvency (or similar event) has Investment Management or the Director’s designee extent such investors may not be contributed to the deviation. under current rules 2a–7(c)(7)(iii)(A) and (B). familiar with researching filings on 1263 See proposed (FNAV) Form N–CR Part D; Among other reasons, we are replacing them with proposed (Fees & Gates) Form N–CR Part D. Under Form N–CR is because these email notifications are either main alternative, in the Proposing Release we currently not publicly available to investors and 1257 For example, with respect to disclosure of proposed Form N–CR to require an applicable fund, other market observers. any financial support, funds will be required to if its current NAV (rounded to the fourth decimal 1255 Even where a fund updates its registration disclose on their Web sites and in their SAIs only place in the case of a fund with a $1.00 share price, statement with equal promptness as Form N–CR, as that information that the fund is required to report or an equivalent level of accuracy for funds with a noted by the commenter cited below, it would still to the Commission on Items C.1, C.2, C.3, C.4, C.5, different share price) deviates downward from its likely take the Commission and other market C.6, and C.7 of Form N–CR. See supra notes 993 intended stable price per share by more than 1⁄4 of observers extensive effort and time to continually and 1137–1138 and accompanying text. We also 1 percent, to disclose the following information: (i) review all SAI filings for any relevant alerts. See note that Parts E, F, and G of Form N–CR as The date or dates on which such deviation Dreyfus Comment Letter (stating that ‘‘[w]hile the amended today will require more extensive exceeded 1⁄4 of 1 percent; (ii) the extent of deviation Commission may feel that Form N–CR will provide disclosures than the rule 2a–7 and Form N–1A between the fund’s current NAV per share and its the information on a more real-time basis, we provisions requiring funds to disclose certain intended stable price; and (iii) the principal reason expect registration statements also will have to be information about the imposition of fees or gates on for the deviation, including the name of any updated with equal promptness with these the fund’s Web site and in the fund’s SAI. See supra security whose market-based value or sale price, or disclosures (via Rule 497 filings with the notes 960 and 1112 and accompanying text. whose issuer’s downgrade, default, or event of Commission).’’). In addition, as discussed below, 1258 Given that funds will be required to disclose insolvency (or similar event) has contributed to the we note that certain Parts of Form N–CR as historical instances of sponsor support for the past deviation. See Proposed (FNAV) Form N–CR Part D; amended today will require more extensive 10 years, the corresponding filings on Form N–CR Proposed (Fees & Gates) Form N–CR Part D. In disclosures than either the corresponding Web site will provide a permanent record for any instances addition to the other change discussed in this or SAI disclosures. of financial support that occurred more than 10 section, we are making various conforming and 1256 Such Web site monitoring could be years ago in a single place. clarifying changes in the final amendments to Part particularly burdensome because the presentation 1259 We generally consider and estimate the costs D. In the introduction to Part D, in a conforming of this information would likely be different on and burdens of the SAI disclosures in infra sections change to the other amendments we are adopting each fund’s Web site. III.F.8 and IV.G. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47844 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Proposing Release,1264 this requirement shadow price decline, the potential shares (such as 0.5%),1276 the will not only permit the Commission effect on the fund, potential contagion disclosures would come too late to and others to better monitor indicators risk across funds more broadly, as well meaningfully allow the Commission and of stress in specific funds or fund as inform any action that may be others to effectively monitor and groups and in the industry, but also will required in response to the risks posed respond to indicators of stress. We also help increase money market funds’ by such an event. Fund shareholders believe a threshold of 1⁄4 of 1 percent transparency and permit investors to and potential investors will similarly strikes an appropriate balance with better understand money market funds’ benefit from the clear identification of a respect to the frequency of filings, risks.1265 To better understand the cause fund portfolio security or securities that because during periods of normal of such a decline in the fund’s shadow may have prompted a shadow price market activity we would expect price, we are also requiring, largely as decline when evaluating their relatively few Form N–CR filings for this proposed, funds to provide the principal investments.1270 part of the form.1277 In fact, our staff has reason or reasons1266 for the reduction, Some commenters expressed concerns analyzed Form N–MFP data from which would involve identifying the about the reporting of shadow price November 2010 to February 2014 and particular securities or events that declines on Form N–CR. For example, found that only one fund had a 1⁄4 of 1 prompted the decline.1267 In a change commenters argued that it would be percent deviation from the stable $1.00 from the proposal, we are also requiring redundant and unduly burdensome in per share NAV, suggesting the burden to the disclosure of the same identifying light of funds’ concurrent Web site funds would be minimal during normal information included in other parts of disclosure of the shadow price.1271 market activity. We note that funds may the Form.1268 In particular, the final However, as already discussed with also provide additional context about amendments to Item D.3 also now respect to the various concurrent the circumstances leading to the shadow require funds to report the name of the disclosures of financial support in price decline in Part H of Form N–CR, issuer, the title of the issue and at least section III.F.3 above, while we are discussed below. two identifiers, if available.1269 In sensitive to commenters’ concerns about Another commenter suggested that particular, better identification of the duplication, we believe it appropriate disclosure of a deviation in the NAV particular fund portfolio security or given the different audiences and uses might result in an increase in pre- securities that may have prompted a for such information.1272 emptive run risk, as shareholders could shadow price decline will facilitate the With respect to the particular come to use these filings as a trigger for staff’s monitoring and analysis efforts, deviation threshold of 1⁄4 of 1 percent redemptions.1278 Although we cannot which we expect to help us better that we are adopting today as proposed, predict individual shareholder actions understand the nature and extent of the one commenter considered this level of with certainty, as discussed previously, deviation to be arbitrary, ‘‘as there are we believe that the transparency today, we are now referring to retail and no other implications under Rule 2a–7 provided by this information is government money market funds instead of just to for the money market fund if it has a 25 important to the ability of money market ‘‘Fund’’ as proposed under the floating NAV basis point deviation.’’ 1273 However, as fund shareholders to understand and alternative or to funds ‘‘subject to the exemption 1274 provisions of rule 2a–7(c)(2) or rule 2a–7(c)(3)’’ as noted in the Proposing Release, we assess the risks of their investments. proposed under the liquidity fees and gates continue to believe that a deviation of Furthermore, while we acknowledge the 1 alternative). We are also pluralizing the ‘‘principal ⁄4 of 1 percent is sufficiently significant possibility of pre-emptive redemptions, reason’’ in Item D.3 to principal reason or reasons,’’ that it could signal future, further as there may be several successive or concurrent some of the other reforms we are causes that resulted in a reduction in the shadow deviations in the fund’s NAV that could adopting today (such as liquidity fees NAV. Furthermore, as another conforming change, require a stable price fund’s board to and redemption gates) will provide we are inserting the word ‘‘downward’’ before consider re-pricing the fund’s shares some fund managers additional tools for ‘‘deviation’’ in Item D.1 to remove any doubt that (among other actions). We note that we only downward deviations need to be reported, managing such redemptions, if they consistent with the introduction of Part D (which previously have similarly determined were to occur. We also note that some 1 already includes a reference to ‘‘downward’’). that a ⁄4 of one percent decline in the of our responses in section III.A.1.c.i to 1264 See Proposing Release, supra note 25, at text shadow price from its intended stable concerns over pre-emptive run risk accompanying n.714. price is an appropriate threshold 1265 related to the liquidity fees and gates See generally, supra section III.B.8.a requiring money market funds to report (discussing the potential benefits and costs of the 1275 requirement would similarly apply to requirement for a money market fund to disclose its to us. Moreover, if a Form N–CR run risk concerns over the disclosure of current NAV on its Web site). filing were not triggered until a higher a deviation in the NAV in Part D of 1266 In a change from the Proposing Release, we threshold such as after a fall in the NAV Form N–CR.1279 More generally, we are pluralizing the ‘‘principal reason’’ in Item D.3, that would require the re-pricing of fund as there may be several successive or concurrent causes that resulted in a reduction in the shadow 1276 See Federated VIII Comment Letter NAV. 1270 With respect to our corresponding changes to (proposing a deviation of 0.5% as the reporting 1267 Form N–CR Item D.3. This item would not Parts B and C of Form N–CR, see also, supra notes trigger). require additional analysis or explanation of the 1209 and 1216 and the accompanying discussions. 1277 Cf., e.g., State Street Comment Letter at principal reason or reasons for the deviation, 1271 See Federated VIII Comment Letter (stating Appendix A (‘‘During the September 2008 failure of beyond identifying the particular securities or that ‘‘so long [a]s the current shadow price is Lehman Brothers Holdings, a large number of events that prompted the deviation. publicly available, Federated does not view such a money market funds had a 1⁄4 of 1% or greater 1268 See Form N–CR Item D.3 (requiring, for any deviation as a material event that necessitates a deviation between the amortized-cost NAV and the such security, disclosure of the name of the issuer, separate reporting.’’); Dreyfus Comment Letter. market NAV. During times of market stress similar the title of the issue (including coupon or yield, if 1272 See discussion following supra notes 1248 to the 2008 crisis, our expectation is that the applicable) and at least two identifiers, if available); and 1249 and accompanying text. percentages would be similar. However, during see Form N–CR Item B.1. 1273 See Federated VIII Comment Letter. times of normal market activity, our expectation is 1269 These changes are similar to what we 1274 See Proposing Release, supra note 25, at that [a 1⁄4 of 1%] or greater deviation between stable proposed and are adopting with respect to Items C.1 n.715 and accompanying text. NAV and market NAV would be infrequent.’’) to C.5 of Form N–MFP. See Proposing Release, 1275 See rule 30b1–6T (interim final temporary 1278 See Federated VIII Comment Letter. supra note 25, at nn.754–757 and accompanying rule (no longer in effect) requiring money market 1279 For example, as discussed in further detail in text; see supra section III.G.2.f. As under Form N– funds to provide the Commission certain weekly section III.A.1.c.i, we expect that the additional MFP and with respect to Item B.1, we note that the portfolio and valuation information if their market- discretion we are granting fund boards to impose requirement to include multiple identifiers is only based NAV declines below 99.75% of its stable a fee or gate at any time after the fund’s weekly required if such identifiers are actually available. NAV). liquid assets have fallen below the 30% required

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47845

expect that Form N–CR could decrease, This report, as adopted, will require a generally,1286 and could inform rather than increase, redemption risk by description of the primary investors’ decisions to purchase shares heightening self-discipline at funds.1280 considerations the board took into of the fund or remain invested in the account in taking the action (modified fund.1287 5. Parts E, F, and G: Imposition and from the proposal and discussed below), Lifting of Liquidity Fees and Gates a. Board Disclosures as well as certain additional basic Today we are adopting a requirement information, such as the date when the A number of commenters objected to that a money market fund file a report fee or gate was imposed or lifted, the the proposed requirement that funds on Form N–CR when a fund imposes or fund’s liquidity levels, and the size of provide a ‘‘short discussion of the board lifts a liquidity fee or redemption gate, the fee.1283 Except for the change to the of director’s analysis supporting its or if a fund does not impose a liquidity requirement to describe the primary decision’’ 1288 whether or not to impose fee despite passing certain liquidity considerations the board took into liquidity fees or when imposing thresholds.1281 As discussed in more account in taking the action, the other redemption gates.1289 Many of these detail below, we are making some changes to Parts E, F and G generally commenters raised concerns that the 1282 changes from what we proposed. derive from the amendments to the disclosures might chill deliberations liquidity fees and gates requirements among board members, hinder board minimum should substantially mitigate the risk of that are being adopted today and are confidentiality and encourage pre-emptive redemptions. As discussed in supra opportunistic litigation.1290 More note 171 and the accompanying text, board designed to conform these Parts of Form discretion concerning when to impose a fee or gate N–CR to those operative requirements. generally, commenters also challenged may reduce shareholder incentive to pre-emptively These changes are discussed below.1284 the materiality or usefulness of the redeem shares, because shareholders will be less board disclosures to investors.1291 For As we noted in the Proposing Release, able to accurately predict specifically when, and example, one commenter stated that we believe that the items required to be under what circumstances, fees and gates will be although ‘‘whether the fund is imposing imposed. See Wells Fargo Comment Letter; see also disclosed are necessary for investors a liquidity fee or suspending Proposing Release, supra note 25, at n.362. For and us better to understand the similar reasons, we believe that it is less likely that redemptions’’ would be material, the circumstances leading to the imposition investors would use these filings under Part D of board’s underlying analysis would not or removal of a liquidity fee or Form N–CR as a trigger for redemptions in the first be.1292 Some commenters also place. redemption gate, or the decision not to 1280 expressed concern that such disclosure See American Bankers Ass’n Comment Letter impose one despite a reduction in would set a precedent for board (noting that certain disclosures including Form N– liquidity.1285 We believe such a better CR ‘‘would exert a discipline on fund advisers to disclosures in other contexts.1293 manage assets so conservatively as to avoid raising understanding will in turn enhance the concerns among investors about the credit quality Commission’s oversight of the fund and 1286 For example, by knowing the reason(s) for of fund investments that could lead to heavy regulation of money market funds why a board imposed a liquidity fee or gate, we redemptions.’’). See also, infra note 1346–1350 and expect to be able to better understand the potential the accompanying text for our additional discussion cause(s) that led to a fund experiencing stress, of concerns over widespread redemption risk as a proposed that the fund disclose the following which could inform our determination as to result of Form N–CR. information: (i) The initial date on which the fund’s whether further regulatory or other action on our 1281 weekly liquid assets fell below 15% of total fund See Form N–CR Parts E, F, and G. part is warranted. 1282 assets; (ii) the date on which the fund initially See proposed (Fees & Gates) Form N–CR Parts 1287 Government money market funds which are E, F, and G. In particular, in the Proposing Release, suspended redemptions; (iii) a brief description of the facts and circumstances leading to the fund’s not subject to our fees and gates requirements and if, at the end of a business day, a fund (except any which have not opted to apply them are exempt government money market fund that has chosen to weekly liquid assets falling below 15% of total fund assets; and (iv) a short discussion of the board of from the reporting requirements of parts E, F, and rely on the proposed (Fees & Gates) rule 2a–7 G of Form N–CR. exemption) has invested less than 15% of its total directors’ analysis supporting its decision to 1288 See proposed (Fees & Gates) Form N–CR Item assets in weekly liquid assets, we proposed to suspend the fund’s redemptions. Proposed Part F E.4 and Item F.4. require the fund to disclose the following further included instructions providing that a fund 1289 information: (i) The initial date on which the fund’s must file a report on Form N–CR responding to See, e.g., Dreyfus Comment Letter; Legg weekly liquid assets fell below 15% of total fund items (i) and (ii) above on the first business day Mason & Western Asset Comment Letter; MFDF assets; (ii) if the fund imposes a liquidity fee after the initial date on which the fund suspends Comment Letter; NYC Bar Committee Comment pursuant to proposed (Fees & Gates) rule 2a– redemptions, and that a fund must amend its initial Letter; SIFMA Comment Letter. 7(c)(2)(i), the date on which the fund instituted the report on Form N–CR to respond to items (iii) and 1290 See, e.g., Dreyfus Comment Letter (noting that liquidity fee; (iii) a brief description of the facts and (iv) by the fourth business day after the initial date ‘‘[t]his analysis will implicate significant amounts circumstances leading to the fund’s weekly liquid on which the fund suspends redemptions. See of confidential information, including the identity assets falling below 15% of total fund assets; and proposed (Fees & Gates) Form N–CR Part F. of shareholders and future expectations about (iv) a short discussion of the board of directors’ Finally, if a fund (except any government money investment flows.’’); NYC Bar Committee Comment analysis supporting its decision that imposing a market fund that has chosen to rely on the proposed Letter (noting that this ‘‘disclosure would liquidity fee pursuant to proposed (Fees & Gates) (Fees & Gates) rule 2a–7 exemption) that has subsequently be reviewed with the benefit of rule 2a–7(c)(2)(i) (or not imposing such a liquidity imposed a liquidity fee and/or suspended the hindsight and could be used against the board and fee) would be in the best interests of the fund. fund’s redemptions pursuant to proposed (Fees & the fund in the sort of opportunistic litigation that Proposed Part E further included instructions that Gates) rule 2a–7(c)(2) determines to remove such follows any financial crisis.’’); Legg Mason & a fund must file a report on Form N–CR responding fee and/or resume fund redemptions, we proposed Western Asset Comment Letter; MFDF Comment to items (i) and (ii) above on the first business day to require funds to disclose, as applicable, the date Letter; Stradley Ronon Comment Letter. In addition, after the initial date on which the fund has invested on which the fund removed the liquidity fee and/ one commenter stated that ‘‘[o]utside of the less than fifteen percent of its total assets in weekly or resumed fund redemptions. See proposed (Fees advisory contract approval process, for which there liquid assets, and that a fund must amend its initial & Gates) Form N–CR Part G. is a statutory basis under Section 15(c) of the 1940 report on Form N–CR to respond to items (iii) and 1283 See Form N–CR Parts E, F, and G. We note Act, the Commission has respected the (iv) above by the fourth business day after the initial that a fund would file a new Part E filing of Form confidentiality of board deliberations and findings date on which the fund has invested less than N–CR if it were to change the size of its liquidity that are recorded in board minutes.’’ See Dreyfus fifteen percent of its total assets in weekly liquid fee after its initial imposition. Observers will also Comment Letter. assets. See proposed (Fees & Gates) Form N–CR Part be able to determine the duration of any gate by 1291 See, e.g., Legg Mason & Western Asset E. comparing initial filings of Part F (suspension of Comment Letter; NYC Bar Committee Comment Similarly, a fund (except any government money redemptions) with filings of Part G (lifting of such Letter; Stradley Ronon Comment Letter; SIFMA market fund that has chosen to rely on the proposed suspensions). Comment Letter. (Fees & Gates) rule 2a-7 exemption) that has 1284 Also see infra note 1313 for a discussion of 1292 See Legg Mason & Western Asset Comment invested less than 15% of its total assets in weekly our related conforming changes and clarification to Letter. liquid assets (as provided in proposed (Fees & Form N–CR. 1293 See, e.g., SIFMA Comment Letter (stating that Gates) rule 2a–7(c)(2)) suspends the fund’s 1285 See Proposing Release, supra note 25, at text ‘‘a requirement to disclose the board’s analysis that redemptions pursuant to rule 2a–7(c)(2)(ii), we following n.719. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47846 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

We appreciate these concerns, but we important.1299 For these reasons, we possible factors or dissect a board’s believe that the imposition of a fee or believe this disclosure will convey internal deliberations. Instead, we gate is likely to be a very significant material information to those investors would expect only a description of the event for a money market fund 1294 and who are considering whether to redeem primary considerations or factors information about why it was imposed their shares in response to a fee or gate. leading to the action taken by the board, may prove pivotal to shareholders, With respect to concerns that the and a brief discussion of each. many of whom may be evaluating their board disclosures set a precedent That said, we caution that in investment decision in the money implying that the reasoning underlying preparing these board disclosures, funds market fund at that time.1295 every other important decision taken by should avoid ‘‘boilerplate’’ summaries Accordingly, as discussed in the the board should be similarly of all possible factors in addition to or Proposing Release, we continue to disclosed,1300 we disagree. As discussed in lieu of a more substantive believe that shareholders have a strong in section II.A, ready access to liquidity narrative.1304 Instead, filers generally interest in understanding why a board is one of the hallmarks that has made should provide information that is determined to impose (or not to impose) money market funds popular cash tailored to their fund’s particular a liquidity fee or gate.1296 For example, management vehicles for both retail and situation and the context in which their this information may enable investors to institutional investors. Because liquidity board’s decision was made. In preparing better understand the events that are fees and redemption gates could affect these filings, funds should consider affecting and potentially causing stress this core feature by potentially limiting discussing present circumstances as to the fund.1297 This information may the redeemability of money market fund well as any potential future risks and also permit investors to confirm that the shares under certain conditions,1301 we contingencies to the extent the board board is, as our rule requires, acting in believe the decision whether to impose took them into account. We also note the best interests of the fund.1298 And those measures is sufficiently different that we provided a non-exhaustive list given that under our final rules a board in kind from most other significant of possible factors that a board may have can impose a fee or gate as soon as the decisions a board could make that the considered in imposing a liquidity fee fund’s weekly liquid assets fall below disclosures required by the rule would or gate in section III.A.2.b above.1305 the 30% regulatory minimum (and thus not be a precedent for broadly requiring Another commenter argued that the different boards may impose fees or the disclosure of boards’ rationales in board disclosures themselves might gates at different times), investors’ other contexts. incite widespread redemptions, interest in understanding the board’s In addition, we have amended this particularly where the board considered reasoning is likely to be even more disclosure requirement to address some but chose not to impose a liquidity of the commenters’ concerns, while still fee.1306 As discussed in section III.A.1.c is otherwise memorialized in fund minutes is eliciting useful information for the above, we acknowledge the possibility unique, outside of advisory contract approval. We Commission and investors. More that the prospect of a liquidity fee or oppose setting a precedent that could imply that specifically, we are revising Form N–CR gate may cause pre-emptive board analysis must be publicly disclosed for each important decision made for a fund.’’); MFDF to require disclosure of a brief redemptions, but we believe that several Comment Letter; Dreyfus Comment Letter. discussion of the ‘‘primary aspects of our final reforms both make 1294 Our conclusion that the imposition of a fee considerations or factors taken in pre-emptive runs less likely and or gate may often be a significant event for a money account by the board of directors in its substantially mitigate their broader market fund is supported by the view of many effects if they occur. In addition, we commenters that the imposition of a fee or gate decision’’ to impose or not impose a could have significant implications for a fund that liquidity fee or gate.1302 One commenter believe disclosure of a board’s reasoning takes this step and that investors may engage in suggested we make a similar change, is particularly important in times of heavy redemptions after a fee is imposed or a gate requiring disclosure of ‘‘a list of material stress in order to mitigate against is lifted. See, e.g., supra notes 189 and 190 and investor flight to transparency that accompanying text. factors considered by the board in 1303 might otherwise occur.1307 1295 We note that disclosure of board reasoning is making its determination.’’ Rather not uncommon in context where shareholders may than just a list of material factors, Finally, we received comments be evaluating their investment decision, such as however, we believe it important that discussing concerns about potentially when a fund engages in a merger or acquisition. In funds provide a more substantive, but those circumstances, a fund board usually provides 1304 brief, discussion of the primary Cf., e.g., SIFMA Comment Letter (stating that a recommendation to shareholders and the reasons the discussion of the board’s analysis ‘‘will likely for their recommendation. C.f., e.g., Independent considerations or factors taken in be tailored to preempt shareholder plaintiffs’ Directors Council, Board Consideration of Fund account by the board, so that our staff counsel who might target boards for liability in Mergers, (June 2006), available at http:// and investors better understand why the connection with their decisions.’’ which ‘‘. . . may www.idc.org/pdf/ppr_idc_fund_mergers.pdf encourage lengthy, but not necessarily useful, (‘‘Directors typically explain the reasons for their board determined they were important. disclosure.’’). decision to recommend that shareholders approve This report would not need to include 1305 See supra section III.A.2.b. a merger in the fund’s proxy statement.’’). We note every factor considered by the board, 1306 See Federated V Comment Letter. But cf., e.g., that can also be the only the most important or primary ones American Bankers Ass’n Comment Letter (arguing subject of litigation and nevertheless board that shaped the determination of the that the disclosures of Form N–CR more generally disclosure of their primary reasons for their will decrease redemption risk by heightening self- recommendation is commonplace. board’s action. This should help discipline at funds). 1296 See Proposing Release, supra note 25, at alleviate commenters’ concerns that 1307 Moreover, with respect to a fund whose section III.G.2. funds would need to provide lists of all weekly liquid assets have dropped below 10%, we 1297 Cf., e.g., MFDF Comment Letter might be concerned that such a fund may (acknowledging that ‘‘[d]epending on the situation, imminently become unable to meet redemptions. 1299 See supra section III.A.1.b.iii. fund investors may well have an interest in better Such a relative lack of liquidity at one fund could 1300 understanding the circumstances that led to the See discussion of SIFMA Comment Letter at also be an indicator of larger effects that might imposition of redemption fees or gates.’’). supra note 1293. spread to other funds. Either scenario may raise 1298 See, e.g., ABA Business Law Section 1301 See supra section III.A.1.b.iii. See also supra concerns that further action by the Commission is Comment Letter (with respect to the liquidity fees notes 196–199 and the accompanying text for a warranted. However, if the particular fund’s board and gates proposal, stating that the ‘‘Commission discussion of commenters’ concerns of the waived the liquidity fee, the related disclosure would assign the money market fund’s board of potentially detrimental effects of a liquidity fee or thereof (e.g., because the drop in liquidity is directors substantial new responsibilities over ‘life gate. temporary and only related to the particular fund) and death’ decisions in the event of a run on the 1302 See Form N–CR Part E.6 and Part F.4. could inform our determination that no further fund.’’). 1303 See NYC Bar Committee Comment Letter. action by the Commission would be required.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47847

duplicative disclosures, in particular the under the revised reporting standard, disclose the size of the liquidity fee, if possible redundancy of the board Parts E and/or F of Form N–CR must be one is imposed.1316 In particular, we disclosures on a fund’s Web site as well filed: (i) When a fund, at the end of a expect the particular size of the as Form N–CR.1308 However, as already business day, has invested less than liquidity fee to be highly relevant to an discussed with respect to the various 10% of its portfolio in weekly liquid investor determining whether to redeem concurrent disclosures of financial assets and is required to impose a fund shares, as it has a direct impact on support in section III.F.3 above, while liquidity fee (unless the board the particular costs that such a we are sensitive to commenters’ determines otherwise), or (ii) when a shareholder would have to bear for concerns about duplication, we believe fund voluntarily imposes a liquidity fee redeeming fund shares. These changes it appropriate given the different or redemption gate any time it has are closely tailored to our final audiences and uses for such invested less than 30% of its portfolio amendments to the liquidity fees and information.1309 in weekly liquid assets.1314 gate requirement, which we expect will In addition, revised Form N–CR enhance the quality and usefulness of b. Conforming and Related Changes includes a new requirement that funds Form N–CR to the Commission and As discussed earlier, the final report their level of weekly liquid assets investors. amendments lower the weekly liquid at the time of the imposition of fees or asset threshold for triggering the default gates.1315 We believe this new 6. Part H: Optional Disclosure liquidity fee from 15% to 10% of total requirement will allow the Commission We are also adopting a new Part H in assets, and accordingly, we are making and investors to better track and Form N–CR which allows money market corresponding changes that would understand funds’ liquidity levels when funds the option to discuss any other require reporting under Form N–CR at boards impose a fee or gate using their events or information that they may the lower weekly liquid asset discretion, which we expect will wish to disclose. We intend new Part H threshold.1310 In addition, in a change enhance the Commission’s and to clarify and expand the scope and from the proposal, the final investors’ ability to evaluate the extent range of formats of any additional amendments permit money market fund to which a fund is experiencing stress information that a fund may wish to boards to institute a liquidity fee or as well as the context in which the provide. In particular, we are adopting impose a gate at any time once weekly board made its decision. Similarly, Part H to address commenter concerns liquid assets fall below 30% if they find because we are revising the default that the information provided in the that doing so is in the best interests of liquidity fee from the proposed 2% to other parts of Form N–CR may become the fund.1311 We are therefore amending 1%, and thus we expect that there may outdated or lack context.1317 We believe Form N–CR to reflect these changes.1312 be instances where liquidity fees are that this new optional disclosure could We are making certain additional above or below the default fee (rather address some of these concerns. changes to Form N–CR for clarity and to than just lower as permitted under the This optional disclosure is intended be consistent with our final proposal), we are requiring that funds to provide money market funds with amendments to the liquidity fees and additional flexibility to discuss any gates requirement.1313 Accordingly, G. However, in the Proposing Release, the other information not required by Form introduction to Part G contained a parenthesis N–CR, or to supplement and clarify 1308 See Dreyfus Comment Letter. See also, specifying that certain exempt funds are not subject other required disclosures.1318 This to Part G. See proposed (FNAV) Form N–CR Part generally, SIFMA Comment Letter (noting that the optional disclosure does not impose on ‘‘fund’s actions and the triggering event for the G; proposed (Fees & Gates) Form N–CR Part G. Form N–CR filing may require prospectus Because we no longer consider this parenthesis to money market funds any affirmative disclosure or notification to the Commission under be necessary, we have deleted it in the final obligation. Rather, this is solely other rule provisions, so that in many cases the amendments to enhance the clarity of the intended as a discretionary forum where instructions of Part G. Form N–CR filing will be duplicative of existing funds, if they so choose, can disclose disclosure and notice requirements.’’). 1314 See Form N–CR Part E, clauses (i) and (ii) of 1309 See discussion following supra notes 1248 the Introduction (generally triggering disclosure any other information they deem and 1249 and accompanying text. under Part E of Form N–CR if a non-exempt fund helpful or relevant. In addition, (i) at the end of a business day, has invested less 1310 See supra section III.A.2.a.ii; see also, Form although we expect that funds would than 10% of its total assets in weekly liquid assets, N–CR Part E, (where applicable, now referencing or (ii) has invested less than 30% of its total assets typically file Part H along with a filing 10% instead of 15% of weekly liquid assets). in weekly liquid assets and imposes a liquidity fee under another part of Form N–CR, we 1311 See supra section III.A.2. pursuant to rule 2a–7(c). Correspondingly, we are are not imposing any particular 1312 See Form N–CR Parts E and F. also adding ‘‘if applicable’’ to Item E.1 (requiring deadline for these filings, and thus a 1313 In particular, for clarity, in the introduction disclosure of the initial date on which the fund to Part E we now define any affected fund as ‘‘a invested less than 10% of its total assets in weekly fund may file an optional disclosure on fund (except a government money market fund that liquid assets, if applicable), and amending Item E.5 Part H of Form N–CR at any time. is relying on the exemption in rule 2a–7(c)(2)(iii))’’ (requiring a brief description of the facts and as opposed to ‘‘a Fund (except any Fund that is circumstances leading to the fund’s investing in the 7. Timing of Form N–CR subject to the exemption provisions of rule 2a– amount of weekly liquid assets reported in Item 7(c)(2)(iii) and that has chosen to rely on the rule E.3). See Form N–CR Items E.1, E.3 and E.5. We are requiring initial filings of 2a–7(c)(2)(iii) exemption provisions’’ as proposed. 1315 Form N–CR Items E.3 and F.1. In the Form N–CR to be submitted within one See proposed (Fees & Gates) Form N–CR Part E, Proposing Release we did not explicitly require business day of the triggering event, and Introduction. Similarly, for clarity and because of funds to disclose their size of weekly liquid assets in some cases, requiring a follow-up fund’s additional flexibility under our final at the time of the imposition of fees or gates, given amendments to the liquidity fees and gates that as proposed funds could only impose a fee or 1316 requirement, in the introduction to Part F we now gate once they crossed the 15% weekly liquid asset See Form N–CR Item E.4. simply refer to ‘‘fund’’ as opposed to ‘‘a Fund threshold. Proposed (Fees & Gates) Form N–CR 1317 For example, one commenter cautioned ‘‘in a (except any Fund that is subject to the exemption Parts E and F. Item F.1 as originally proposed rapidly changing environment, the reasons for provisions of rule 2a–7(c)(2)(iii) and that has chosen required disclosure of the initial date on which the which the board acted may well change within a to rely on the rule 2a–7(c)(2)(iii) exemption fund invested less than 15% in weekly liquid period of four days or significant amounts of provisions) that has invested less than fifteen assets. See proposed (Fees and Gates) Form N–CR additional information may be available to the fund percent of its Total Assets in weekly liquid assets Item F.1. Today we are not requiring an analogous and its board. In this context, a filing requirement (as provided in rule 2a–7(c)(2)).’’ In addition, we disclosure of the initial date on which the fund focused on a prior decision risks inadvertently received no comments on Part G of Form N–CR invested less than 10% in weekly liquid assets, misleading fund investors and others about the state (requiring reporting when a liquidity fee or because this threshold does not have any impact on of the fund’s operations.’’ See MFDF Comment redemption gate is removed) and are adopting it the imposition of a gate and, in any event, would Letter. unchanged from the proposal. See Form N–CR Part be disclosed in Item E.1. 1318 See Form N–CR Item H.1, Instructions.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47848 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

amendment with additional detail to be changing the filing deadlines of Form on initially alerting the Commission and submitted four days after the event with N–CR. The Commission and shareholders about a particular event some modifications from the proposal. shareholders have a significant interest and other key quantitative data.1328 A number of commenters requested in knowing about the events reported on Reducing the number of items additional time for Form N–CR filings, Form N–CR as soon as possible, to be included in the initial filing and moving expressing concern over the timing able to effectively monitor events and to the more time consuming and requirements for specific items of Form respond as necessary. We believe the complicated disclosures to a second N–CR,1319 as well as objecting to the longer reporting periods or entirely filing is designed to help address timing requirements more generally.1320 alternative reporting format (such as commenters’ concerns about the one- For example, one commenter periodic reports, which might not be day deadline of the initial filing,1329 recommended that the filing deadline filed until significantly later) as while still ensuring that the for the initial filing be extended from proposed by commenters would Commission, shareholders and other one to three business days and the frustrate the intent of Form N–CR in market observers are provided with follow-up filing from four to seven alerting the Commission, investors and these critical alerts as quickly as business days.1321 Commenters argued other market observers about such possible. We expect the information that providing additional time would important events in a timely and filed on the initial report will be permit funds to ensure that filings are meaningful manner. sufficient to alert the Commission, prepared accurately and We appreciate commenters’ concerns, investors and other interested parties thoughtfully 1322 while also better however, and to help ease the filing about certain significant events. While enabling fund personnel to prioritize burden we are revising Form N–CR to important, we also believe that the Items other exigent matters during times of move certain disclosures in Items B, C we are moving to the follow-up filing of crisis.1323 They also argued that it may and D that may take longer to prepare Form N–CR may be of less immediate not be feasible or may be extremely from the initial filing due within a concern to the Commission and costly for a fund in times of crisis to single day to the follow-up filing due in shareholders. formulate within one business day the four business days.1325 In particular, the We are not, however, generally actions it may take in response to an items moved to the follow-up filing are changing the one-day deadline of the 1330 event of default and prepare a the description of actions the fund plans initial filing, nor are we extending corresponding description, as required to take, or has taken, in response to a the four-day deadline for the follow-up 1331 under the proposal.1324 We are not default (Item B.5), the explanation for filing of Form N–CR. We are the reasons and terms of any financial concerned that extending the initial 1319 See, e.g., Fidelity Comment Letter, Schwab support provided (Item C.8), the term of filing deadline beyond one business day Comment Letter. any financial support provided (Item could substantially diminish the 1320 Commenters proposed a range of alternative C.9), the brief description of any informational utility of Form N–CR. The deadlines. See, e.g., SSGA Comment Letter Commission and shareholders have a (generally extend time frame), Dechert Comment contractual restrictions relating to any Letter (extend one-day filing deadline from 5:30pm financial support (Item C.10), and the significant interest in knowing about the to 10pm on the next business day), Schwab principal reason or reasons for a decline events reported on Form N–CR as soon Comment Letter (four business days for filings in a fund’s shadow price (Item D.3).1326 as possible, to effectively monitor events related to a default or insolvency under Part B of and respond as necessary. We need this Form N–CR), Dreyfus Comment Letter (2–3 day We appreciate commenters’ concerns time frame), Stradley Ronon Comment Letter (seven that disclosures such as these may take information to be reported promptly to business days for certain items), SIFMA Comment additional time to prepare.1327 We effectively monitor money market funds Letter (three and seven business days respectively believe these specific disclosure items that have come under stress and for the initial and follow-up filings), IDC Comment respond as necessary. A longer reporting Letter (two weeks for the second filing). Others may be more labor intensive and take proposed moving parts of Form N–CR to other longer to prepare because they generally period would frustrate the intent of annual or periodic reports altogether. See, e.g., solicit qualitative and analytical Form N–CR in alerting the Commission, MFDF Comment Letter (move the discussion of the investors and other market observers circumstances that led to a fee or gate to a new information, whereas the other items in Parts B through D generally focus more about such important events in a timely annual management discussion of fund 1332 performance.), NYC Bar Committee Comment Letter and meaningful manner. (proposing to revise and move the discussion of the timeframe would come at an estimated cost of board’s analysis to the report to shareholders $300,000-$500,000 [. . .].’’). 1328 Cf. Fidelity Comment Letter. covering the relevant period). 1325 In particular, filers are required to respond to 1329 See, e.g., SIFMA Comment Letter, SSGA 1321 SIFMA Comment Letter. Items B.5, C.8, C.9, C.10, and D.3 in an amendment Comment Letter, Dreyfus Comment Letter. 1322 See, e.g., SIFMA Comment Letter; IDC to the initial report within four business days. All 1330 We have, however, revised the instructions Comment Letter, SSGA Comment Letter, Stradley other Items in Parts B, C, and D must be disclosed on timing of the one-day deadline of the initial Ronon Comment Letter, MFDF Comment Letter. in the initial report within one business day. We filing in each of Parts B through F to conform them 1323 See SIFMA Comment Letter. See also, e.g., have made corresponding changes to the to the wording used in the instruction on timing Dreyfus Comment Letter. instructions to the form. See Form N–CR Part B, C, generally in General Instruction A. See Form N–CR 1324 See, e.g., Schwab Comment Letter (noting D, Instructions. In addition, we have rearranged Part B, C, D, E, F, Instructions. that ‘‘[s]ome of the requested information can be what used to be proposed Item C.4 in the Proposing 1331 We proposed to allow the discussion of the provided in one business day, such as the securities Release to be new Item C.8 in order to better boards’ analysis related to imposing fees or gates be affected, the date or dates on which the default or streamline the disclosures required to be filed included in the follow-up filing, and we are event of insolvency occurred, the value of the within one business day (Items C.1 through C.7) adopting that requirement as proposed, as modified affected securities, and the percentage of the fund’s versus four business days (Items C.8 through C.10). by the amendments to the board reporting total assets represented by the affected security. But See Proposing Release, proposed (Fees & Gates) discussed above. See supra section III.F.5 (Board we believe it is unreasonable to require a fund’s Form N–CR Item C.4, Form N–CR Item C.8. Disclosures); Form N–CR Item E.5, E.6, F.3, F.4. board to determine in a single day what actions it 1326 See Fidelity Comment Letter (suggesting 1332 For example, if funds were permitted three should take in response to the event.’’). ‘‘that the SEC simplify the filing requirements for business days to prepare an initial filing, a fund that Commenters also noted that it may be extremely the first business day following the event to focus experienced a portfolio security default on a Friday costly to provide some of the reported information on shareholder notification of the event and key would not be required to make an initial filing in a single business day. See, e.g., Fidelity quantitative data,’’ while ‘‘providing the remaining under Part B of Form N–CR until just before the Comment Letter (stating that ‘‘[i]t would be difficult qualitative information (proposed Form N–CR Item close of business the following Wednesday. for MMFs to produce validated data ready for B.5, C.4, C.9, C.10, D.3, E.3, E.4, F.3, F.4) on the Depending on the circumstances, such a delay public dissemination within one business day second filing.’’ could prevent investors from taking into account .... Further, providing data within a short 1327 See supra note 1324. this disclosure when making an investment

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47849

We also remain unpersuaded that the 8. Economic Analysis formulate within one business day the benefits of extending the follow-up As discussed above and in our actions it may take in response to an filing beyond four business days is proposal,1337 we believe that the Form event of default and prepare a justified in light of the corresponding N–CR reporting requirements will corresponding description, as required 1341 reduction in the utility of the provide important transparency to under the proposal. As discussed in information reported on Form N–CR to investors and the Commission, and also section III.F.7 above, to help ease the the Commission, shareholders and other should help investors better understand filing burden we have revised Form N– market observers. Extending the follow- the risks associated with a particular CR to move certain disclosures that may up filing deadline could lead to a money market fund, or the money take longer to prepare from the initial prolonged lack of material information market fund industry generally. The filing due within one day to the follow- about the triggering event. Such a delay Form N–CR reporting requirements will up filing due in four business days. We could hinder investors’ ability to permit investors and the Commission to therefore believe that the final deadlines evaluate their investments and receive information about certain money adopted today for Form N–CR balance 1333 undermine investor confidence. market fund material events the exigency of the report with the time Furthermore, it could frustrate the consistently and relatively quickly. As and cost it will reasonably take a fund Commission’s ability to effectively discussed above, we believe that to compile the required information. monitor and take any appropriate investors and the Commission have a We believe that the proposed Form response with respect to money market N–CR reporting requirements may 1334 significant interest in receiving this funds that have come under stress. information in this format and with this complement the benefits of increased Because we expect that the timing because it will permit investors transparency of publicly available information required to be provided in and the Commission to monitor money market fund information that follow-up reports on Form N–CR should indicators of stress in specific funds or have resulted from the requirement that be readily accessible, we continue to fund groups, as well as the money money market funds report their believe four business days should be a market fund industry, and also to portfolio holdings and other key sufficient amount of time for funds to analyze the economic effects of certain information on Form N–MFP each prepare the report, even in light of the month. The DERA Study noted that the likely competing priorities on fund material events. The Form N–CR reporting requirements will give additional disclosures that money personnel during times of stress. We market funds are required to make on also recognize that some of the investors and the Commission a greater understanding of the circumstances Form N–MFP improve fund preparatory burdens faced by fund transparency (although funds file the personnel could (and likely will) 1335 be leading to stress events, and how a fund manages them. We believe that investors form on a monthly basis with no interim shifted to legal counsel to the extent a updates, and the Commission currently fund chooses to engage legal counsel to may find this information to be meaningful in determining whether to makes the information public with a 60- assist in the drafting of a Form N–CR 1342 purchase fund shares or remain invested day lag). The DERA Study also filing. Accordingly, we are adopting a noted that this ‘‘increased transparency, deadline of one business day for an in a fund. However, we recognize that the Form even if reported on a delayed basis, initial report and four business days for N–CR reporting requirements have might affect a fund manager’s a follow-up report under Form N– operational costs (discussed below), and willingness to hold securities whose CR.1336 also may result in opportunity costs, in ratings are at odds with the underlying that personnel of a fund that has risk, especially at times when credit decision until the next morning on Thursday (such conditions are deteriorating.’’ 1343 as with respect to potential investors evaluating experienced an event that requires Form whether to purchase fund shares). Similarly, such N–CR reporting may lose a certain Additionally, the availability of public, a long delay would hinder our ability to effectively amount of time that could be used to standardized, money market fund- monitor money market funds that have come under respond to that event because of the related data that has resulted from the stress and respond as necessary (in particular in Form N–MFP filing requirement has light of our elimination of rule 2a–7(c)(7)(iii)(A), need to comply with the reporting which currently requires money market funds to requirement.1338 For example, as assisted both the Commission and the report defaults or events of insolvency to the discussed with respect to timing in money market fund industry in various Commission by email. See supra note 1211). section III.F.7 above, commenters 1333 For example, a prolonged lack of material argued that providing additional time 1341 See, e.g., Schwab Comment Letter (noting information may undermine investors’ expectations that ‘‘[s]ome of the requested information can be that they are making investment decisions in a would permit funds to ensure that provided in one business day, such as the securities transparent market, which may lead to increased filings are prepared accurately and affected, the date or dates on which the default or market volatility in affected money market funds as thoughtfully 1339 while also better event of insolvency occurred, the value of the a result of the relative lack of accurate and timely enabling fund personnel to prioritize affected securities, and the percentage of the fund’s information. total assets represented by the affected security. But 1334 For example, the Commission has a strong other exigent matters during times of we believe it is unreasonable to require a fund’s interest in knowing why a fund imposed a fee or crisis.1340 They also argued that it may board to determine in a single day what actions it gate. Depending on whether the reasons for such a not be feasible or may be extremely should take in response to the event.’’). gate were unique to the particular fund or related costly for a fund in times of crisis to Commenters also noted that it may be extremely to broader market events, further action on the part costly to provide some of the reported information of the Commission may be required to protect other in a single business day. See, e.g., Fidelity investors and markets. Accordingly, given that the 1337 See Proposing Release, supra note 25, at Comment Letter (stating that ‘‘[i]t would be difficult Commission generally needs this information as section III.G.3. for MMFs to produce validated data ready for quickly as possible, we do not think the marginal 1338 Various commenters expressed concern that public dissemination within one business day benefits to funds of extending the deadline beyond preparing Form N–CR would likely compete with .... Further, providing data within a short what we believe to be reasonably required to other priorities that fund personnel would be timeframe would come at an estimated cost of prepare a follow-up filing is justified. handling during a crisis. See, e.g., SIFMA Comment $300,000–$500,000 [. . .].’’). 1335 See infra discussion containing note 1376. Letter, Dreyfus Comment Letter. 1342 See DERA Study, supra note 24, at 31; see 1336 See Form N–CR General Instruction, A; Form 1339 See, e.g., SIFMA Comment Letter; IDC also, infra note 1441 and accompanying text N–CR Part B, C, D, E, F, Instructions which specify Comment Letter, SSGA Comment Letter, Stradley (discussing the elimination of the 60-day delay in that responses to Items B.5, C.8, C.9, C.10, D.3, E.5, Ronon Comment Letter, MFDF Comment Letter. making Form N–MFP information publicly E.6, F.3 and F.4 may be filed within four business 1340 See SIFMA Comment Letter. See also, e.g., available). days. Dreyfus Comment Letter. 1343 See DERA Study, supra note 24, at 38.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47850 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

studies and analyses of money market securities whose issuers have never on Form N–CR if they feel the fund is fund operations and risks.1344 experienced a default as a more sufficiently addressing the cause of the The Form N–CR reporting attractive investment than another fund Form N–CR filing. For example, as requirement should enhance our that frequently files reports in response noted in section III.F.5, we believe understanding of the money market to Form N–CR Part B (‘‘Default or Event disclosure of a board’s reasoning is fund industry that the Commission has of Insolvency of portfolio security particularly important in times of stress gained from analyzing Form N–MFP issuer’’). However, it is also possible in order to mitigate against investor data by providing complementary data that investors may move their assets to flight to transparency that might and additional transparency about larger fund complexes if, based on Form otherwise occur. money market funds’ risks on a near N–CR disclosures, they determine that If money market fund investors real-time basis that is not currently such fund complexes are more likely decide to move all or a substantial available on Form N–MFP. This than smaller entities to provide portion of their money out of the requirement may, like Form N–MFP financial support to their funds. Also, if market, this could negatively affect disclosure, help impose market investors move their assets among capital formation.1349 On the other discipline on portfolio managers 1345 money market funds or decide to invest hand, capital formation could be and provide additional data that would in investment products other than positively affected if the Form N–CR allow investors to make investment money market funds as a result of the reporting requirements were to assist decisions, and allow the Commission Form N–CR reporting requirements, this the Commission in overseeing and and the money market fund industry to could negatively affect the competitive regulating the money market fund conduct risk- and operations-related stance of certain money market funds, industry, and the resulting regulatory analyses. or the money market fund industry framework would allow investors to We believe that the reporting generally. more efficiently or more effectively requirements we are adopting today The filing of Form N–CR could have invest in money market funds. may positively affect regulatory additional effects on capital formation. Additional effects of these filing efficiency because all money market The information filed on Form N–CR requirements on efficiency, competition, funds would be required to file could improve capital formation if and capital formation would vary information about certain material investors better understand that a fund according to the event precipitating the events on a standardized form. This will is not sufficiently addressing the cause Form N–CR filing, and they are improve the consistency of information that led to the Form N–CR filing. One substantially similar to the effects of disclosure and reporting, and assist the commenter 1346 suggested that certain other disclosure requirements, as Commission in overseeing individual Form N–CR disclosures would make discussed in more detail above.1350 funds, and the money market fund money market funds more susceptible to The Commission is unable to measure industry generally, more effectively. The heavy redemptions during times of the quantitative benefits of these requirements also could positively affect stress. While we acknowledge the requirements because of uncertainty informational efficiency. This should possibility of pre-emptive redemptions, about how increased transparency may assist investors in understanding as discussed in detail above, several affect different investors’ behavior, their various risks associated with certain aspects of today’s amendments are understanding of the risks associated funds, and risks associated with the designed to mitigate this risk. In with money market funds, and the money market fund industry generally, addition, the other reforms we are potential effects of the disclosure on which in turn should assist investors in adopting today (such as liquidity fees market discipline. choosing whether to purchase or redeem and redemption gates) will provide a. Alternatives Considered shares of certain funds. Currently, funds some fund managers additional tools for compete on information provided on a managing such redemptions, if they As a possible alternative, we could fund’s Web site and Form N–MFP, as were to occur.1347 Moreover, the have chosen to not adopt Form N–CR or well as on more traditional competitive additional information should assist any of its disclosures (as well as any of factors such as price and yield. investors in making a more informed the corresponding SAI or Web site Implicitly, investors have also relied on investment decision, which leads to disclosures). A variation of this sponsors to step in and support a fund improved efficiency and capital alternative would have been to when there is an adverse event. formation. Furthermore, commenters eliminate Form N–CR but adopt the However, as we observed with the have also argued that the proposed corresponding SAI and/or Web site disclosures. As discussed above, Reserve Primary Fund, this does not Form N–CR disclosures will actually commenters expressed concern about always happen. As such, the decrease redemption risk by heightening requirements should positively affect self-discipline at funds, which would 1349 competition because funds may 1348 For an analysis of the potential also increase capital formation. In macroeconomic effects of our main reforms, see compete with each other based on addition, it is possible that investors supra section III.K. information required to be disclosed on will react positively to the information 1350 We believe that the effects on efficiency, Form N–CR. For instance, investors competition, and capital formation of filing Form N–CR in response to Part B or C overlap might view a fund that invests in 1346 See, e.g., Federated V Comment Letter (‘‘The significantly with the effects of the disclosure goal of reform should be not to have the filing of requirements regarding the financial support 1344 See Money Market Mutual Funds, Risk, and a Form N–CR cause the widespread redemptions provided to money market funds. See discussion in Financial Stability in the Wake of the 2010 Reforms, the Reform Proposal seeks to avoid.’’); Federated supra section III.F. We believe that the effects of 19 ICI Research Perspective No. 1 (Jan. 2013), at VIII Comment Letter. filing Form N–CR in response to Part D overlap note 29 (noting that certain portfolio-related data 1347 In addition, as discussed in more detail in significantly with the effects of the disclosure points are often only available from the SEC’s Form sections III.F.4 and III.F.5 above, we note that some requirements regarding a money market fund’s N–MFP report). of our responses in section III.A.1.c.i to concerns daily market-based NAV per share. See discussion 1345 See American Bankers Ass’n Comment Letter over pre-emptive run risk related to the liquidity in supra section III.F.4. We believe that the effects (for example, stating that ‘‘[k]nowing that any form fees and gates requirement would similarly apply of filing Form N–CR in response to Parts E, F, and of sponsor support would be required to be to run risk concerns with respect to certain specific G overlap significantly with the effects of the disclosed within 24 hours, fund managers would disclosures in Form N–CR. disclosure requirements regarding current and likely do everything they could to avoid needing 1348 See, e.g., American Bankers Ass’n Comment historical instances of the imposition of liquidity sponsor support.’’). Letter. fees and/or gates. See supra section III.F.5.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47851

the potential redundancy of Form N–CR moving these disclosures to a later one of the particular disclosure items in or parts thereof in light of the periodic report or other filing could Form N–CR, such as commenters’ corresponding Web site and SAI lower the cost for funds since funds may proposal to increase the deviation in the disclosures.1351 If we did not adopt have additional cost due to the short NAV triggering a report on Part D of Form N–CR and/or any of the time period to prepare the initial filings Form N–CR from 0.25% to 0.5%.1361 We corresponding SAI and Web site within one day and the follow-up generally consider and address these disclosures, affected funds would not within four days. Such additional other suggestions in our discussion of incur the additional costs related to preparation time may also lower the final amendments above. Form N–CR that we discuss in more opportunity costs for the fund, in that detail below.1352 In addition, with personnel of a fund can spend the initial b. Operational Costs: Overview respect to the board disclosure time responding to the event that The operational costs of filing Form requirements in Parts E and F for Form requires Form N–CR reporting rather N–CR in response to the events N–CR, fund boards would not be than filing the Form N–CR. However, specified in Parts B though H of Form concerned about the loss of board we rejected this set of alternatives N–CR are discussed below.1362 Our confidentiality or the possibility of because, as discussed above, in times of estimates of operational costs below opportunistic shareholder litigation.1353 market stress the purpose of Form N–CR generally reflect the costs associated However, we rejected this set of is to alert the Commission, shareholders with an actual filing of Form N–CR. We alternatives for a number of reasons, and other market observers about continue to expect that the operational including the following. First, each of significant events that affect the costs to money market funds to report the disclosures in Form N–CR serves to fund.1358 If investors feel that they will the new information will generally be alert Commission staff, investors, and have the necessary information to make the same costs we discuss in the other market observers (such as news an informed decision in times of stress, Paperwork Reduction Act analysis in services, which in turn may alert then this may lead to additional capital section IV.D.2.a below.1363 investors) about important events in a for funds. Likewise, we also believe that We recognize that there could also be timely manner.1354 Second, as discussed having the initial filing within one some advance discussions and in more detail in section III.F.3 business day and the follow-up within preparation within the industry and at (Concerns over Potential Redundancy), four business days may lead to more money market funds about having the although we acknowledge there will be market discipline among funds, necessary monitoring systems and some textual overlap between these resulting in increased investor controls in place to detect relevant different forms, we believe each serves willingness to participate in this market, issues immediately, escalate them a distinct purpose.1355 Moreover, as which could also lead to additional quickly and get the form approved and discussed in section III.F.5 (Board capital for funds. filed. While we acknowledge these Disclosure) above, we have revised the We also considered making the potential additional costs, we are unable board disclosure requirements in a definition of financial support subject to to estimate them with any number of ways in order to minimize a specific threshold or general specificity,1364 largely because we do any concerns over board confidentiality materiality qualification, such as a not have the necessary information on or opportunistic litigation. specific drop in the NAV or how prepared funds may already be or Another alternative suggested by a liquidity.1359 For example, such a how much advance preparation is number of commenters is to extend the threshold might apply if a fund’s NAV needed in regards to filing a report in deadline for filing Form N–CR by up to drops by more than 1⁄4 of 1 percent and Form N–CR. For example, because two weeks. 1356 A variation of this the sponsor’s investment in the fund certain disclosures such as Part B and C alternative would have been to move all causes the fund’s NAV to recover. We of Form N–CR will in part replace or certain parts of Form N–CR to other rejected this alternative for several existing email notification (and typically later) periodic reports. reasons. First, some types of sponsor For example, one commenter support like a sponsor support 1361 See supra note 1276. recommended that the board disclosure agreement or a performance guarantee, 1362 These costs incorporate the costs of requirements under Parts E and F of which is included in the definition, responding to Part A (‘‘General information’’) of does not necessarily or immediately Form N–CR. We anticipate that the costs associated Form N–CR ‘‘be provided in the report with responding to Part A will be minimal, because to shareholders covering the relevant result in a change in NAV or liquidity. Part A requires a fund to submit only basic period.’’ 1357 Extending the deadline or Second, it is possible that sponsors identifying information. would provide financial support to their 1363 As discussed in more detail in infra section 1351 See supra note 1249 and accompanying funds before reaching the particular IV.D.2.a, we have revised our cost estimates discussion. threshold, thereby avoiding the associated with filing a report with respect to each Part of Form N–CR. The Proposing Release 1352 Similarly, if we also had not adopted the reporting requirement. As one originally estimated that a fund would spend on corresponding SAI or Web site disclosures, funds commenter stated, ‘‘[k]nowing that any average approximately 5 burden hours and total would further not incur their related costs time costs of $1,708 to prepare, review, and submit previously described. See supra sections III.E.8 and form of sponsor support would be a report under any Part of Form N–CR. See III.E.9.h. required to be disclosed within 24 Proposing Release, supra note 24, at nn.1203 and 1353 See our discussion about commenters’ hours, fund managers would likely do 1204 and accompanying text. This resulted in a concerns in supra note 1290 and accompanying everything they could to avoid the need total annual burden of approximately 301 burden discussion. for sponsor support.’’1360 hours and total annual time costs of approximately 1354 See also supra section III.F.8 for our We also considered various other $102,765 under the floating NAV alternative and discussion of the other economic benefits of Form refinements that specifically related to approximately 341 burden hours and total annual N–CR. time costs of approximately $116,429 under the 1355 See supra section III.F.3. (Concerns over liquidity fees and gates alternative. See Proposing Potential Redundancy). gate to a new annual management discussion of Release, supra note 25, at nn.1113 and 1205 and 1356 See supra note 1320 and accompanying text fund performance.). accompanying text. for a discussion of commenters who proposed 1358 For example, see also our related discussion 1364 No commenters provided concrete cost extending the filings deadlines. in supra notes 1329–1333 and the accompanying estimates specifically in regards to these potential 1357 NYC Bar Committee Comment Letter. See, text. preparatory costs. For a more general discussion of also, e.g., MFDF Comment Letter (move the 1359 See, e.g., T. Rowe Price Comment Letter. commenters’ comments on the burdens of Form N– discussion of the circumstances that led to a fee or 1360 See American Bankers Ass’n Comment Letter. CR, see, e.g., supra note 1363 and III.F.8.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47852 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

requirements,1365 we expect that many final amendments incorporate this c. Operational Costs of Part B: Default funds may already be prepared to detect commenter’s proposed solution by Events and respond to these particular items. shifting Items B.5, C.4, C.9, C.10, and 1378 Moreover, in particular with respect to D.3 from the initial filing to the follow- As noted in the Proposing Release, the disclosures about any liquidity fee up filing.1372 Because today’s we have estimated that the costs of or gate on Parts E through G of Form N– amendments permit funds to file a filing a report in response to an event CR, we question the extent to which any response to these Items within four specified on Part B of Form N–CR will advance preparation would be useful in business days instead of just one be higher than the costs that money light of the highly fact-specific nature of business day, we expect the costs of market funds currently incur in 1366 these disclosures. Accordingly, filing Form N–CR to be notably less than complying with the rule 2a–7 provision some funds may engage in very little or what this commenter originally which currently requires money market no advance preparation. In addition, we estimated.1373 Although we received no funds to report defaults or events of believe that most (if not all) other specific cost estimates from insolvency to the Director of Investment preparational costs related to an event commenters with respect to Form N–CR, Management or the Director’s designee reportable on Parts E through G of Form we also took into account commenters’ by email.1379 N–CR, such as planning appropriate processes for the consideration of a general concerns and suggestions about In updating our estimates for Part B of liquidity fee or gate by the board, are the timing and various costs and Form N–CR, we estimate the costs of 1374 more directly attributable to the burdens of Form N–CR. For filing and amending the report in liquidity fees and gates requirement example, we noted that commenters response to an event specified on Part itself,1367 rather than the corresponding particularly cited the burdens and the B of Form N–CR to include time costs disclosure requirement on Form N– role of the board in drafting and of $4,830 and external costs of $1,000, CR.1368 reviewing the board disclosures in Parts for total costs of $5,830 for each set of As discussed in sections III.F.2–III.F.6 E and F.1375 initial and follow-up reports,1380 and we above, we are making a number of We also updated our estimates to expect, based on our estimate of the changes in our final amendments, a reflect the likelihood that some funds average number of notifications of number of which we expect to impact may engage legal counsel to assist with events of default or insolvency that the costs associated with filing a report the drafting and review of Form N–CR, money market funds currently file each 1369 on Form N-CR. For example, with by which they would incur additional year, that the Commission would respect to Parts B, C and D, we are now external costs. For example, as noted receive approximately 20 such filings permitting filers to split their response above, commenters cited the particular per year.1381 Therefore, we expect that into an initial and follow-up filing,1370 burdens and the role of various parties the annual costs relating to filing a similar to what we had already in drafting and reviewing the board proposed for Parts E and F in the report on Form N–CR in response to an disclosures in Parts E and F.1376 In Proposing Release. Accordingly, in event specified on Part B would be addition, given commenters’ concern 1382 addition to our new estimate for Part H, $116,600. about timing as noted in section III.F.7, we are updating and providing a more we take these various concerns to be an 1378 nuanced estimate of the costs associated See Proposing Release, supra note 25, at with filing a report with respect to each indicator that some funds may engage n.730 and accompanying text. 1379 The requirements of current rule 2a– of Parts B through G of Form N–CR. legal counsel. Accordingly, we estimate, in particular with respect to the follow- 7(c)(7)(iii)(A) and the requirement of Part B of Form In updating our estimates, we also N–CR are substantially similar, although Part B on considered comments about the up reports under Parts B through F as its face specifies more information to be reported operational costs related to Form N–CR. well as any reports on Part H, that than current rule 2a–7(c)(7)(iii)(A). However, we One commenter estimated that requiring certain funds will engage legal counsel understand that funds disclosing events of default to assist with the drafting and review of or insolvency pursuant to current rule 2a– disclosure of certain Items in Form N– 7(c)(7)(iii)(A) already have historically reported CR within one business day could cost Form N–CR, thereby incurring substantially the same information required by Part $300,000 to $500,000.1371 However, our additional external costs.1377 B. As noted, we are eliminating the existing email notification requirements in rule 2a–7 and are replacing it with the notification requirements of 1365 See supra notes 1211 and 1213. $300,000–$500,000, without factoring in the costs Form N–CR. See supra note 1211. We discuss the 1366 For similar reasons, our cost estimates in the of ongoing compliance and filing, all of which impact on costs of this elimination in sections PRA analysis in infra section IV.D.2 generally greatly exceeds the SEC’s estimated cost of $1,700 III.F.8 and III.N.3. and five hours to prepare and review presume no particular advance preparation when 1380 The costs associated with filing Form N–CR information.’’). preparing a filing on Form N–CR. in response to an event specified on Part B of Form 1372 1367 See, e.g., SIFMA Comment Letter (estimating See supra note 1326 and accompanying text. N–CR are paperwork-related costs and are costs of implementing the ability to impose 1373 We are generally unable, however, to fully discussed in more detail in infra section IV.D.2.b. liquidity fees and gates). evaluate the basis or validity of this commenter’s 1381 The Commission estimates this figure based 1368 See supra section III.A.1. cost estimate, as we do not have all the data or in part by reference to our current estimate of an 1369 See supra sections III.F.2–III.F.6 for a more assumptions on which this commenter’s estimate is average of 20 notifications to the Commission of an detailed discussion of each of our final based. See supra note 1324 and accompanying text; event of default or insolvency that we previously amendments. Fidelity Comment Letter. estimated money market funds to file pursuant to 1370 See supra section III.F.7. 1374 See, e.g., Dreyfus Comment Letter, Federated current rule 2a–7(c)(7)(iii) each year. See 1371 See Fidelity Comment Letter (stating that ‘‘[i]t VIII Comment Letter, Legg Mason & Western Asset Submission for OMB Review, Comment Request, would be difficult for MMFs to produce validated Comment Letter, MFDF Comment Letter. Extension: Rule 2a–7, OMB Control No. 3235–0268, data ready for public dissemination within one 1375 See, e.g., IDC Comment Letter (‘‘Any public Securities and Exchange Commission 77 FR 236 business day, particularly for items such as B.5, C.4, disclosure about a board’s decision-making process (Dec. 7, 2012). We believe that this estimate is likely C.9, and C.10. Providing quantitative data within would require careful and thoughtful drafting and to be high, in particular when markets are not in one business day would not only call for the multiple layers of review (by board counsel, fund crisis as they were during 2008 or 2011. However, coordination of information and its sources, but counsel, and the directors, among others).’’); we are continuing to use this higher estimate to be also its review and verification to ensure accuracy Stradley Ronon Comment Letter; SIFMA Comment conservative in our analysis. and completeness. Accordingly, we do not believe Letter. 1382 These estimates are based on the following that this strict filing deadline is operationally 1376 See id. calculations: $5,830 (cost per complete filing) × 20 feasible. Further, providing data within a short 1377 See infra note 2386 and accompanying filings per year = $116,600 per year. See supra notes timeframe would come at an estimated cost of discussion. 1380 and 1381 and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47853

d. Operational Costs of Part C: Financial filings per year.1390 Therefore, we f. Operational Costs of Part E and F: Support expect that the annual costs relating to Imposition of Fees and Gates In addition to the general discussion filing a report on Form N–CR in In addition to the general discussion above, in updating our estimate for Part response to an event specified on Part above, in updating our estimates we also C we also considered certain changes C would be $241,800.1391 considered certain changes from the proposal specifically related to Parts E from the proposal specifically related to e. Operational Costs of Part D: Shadow 1383 and F of Form N–CR,1396 most notably Part C of Form N–CR, most notably Price Declines our changes to the definition of our changes to the board disclosure financial support,1384 which we In an event of filing, we continue to requirements 1397 and the weekly liquid estimate will impact the frequency of believe a fund’s particular asset thresholds permitting or triggering filings on Part C of Form N–CR. As we circumstances that gave rise to a board consideration of a liquidity fee or 1398 noted in the Proposing Release,1385 we reportable event under Part D would be gate. Moreover, in particular with have estimated the costs of filing a the predominant factor in determining respect to the board disclosures, we expect that most if not all funds may report in response to an event specified the time and costs associated with filing engage legal counsel to assist with the on Part C of Form N–CR in part by a report on Form N–CR, in particular drafting and review of Form N–CR, reference to the costs that money market with respect to the follow-up filing funds currently incur in complying with thereby incurring additional external amending the initial report.1392 the rule 2a–7 provision that requires costs. 1399 We have also revised our disclosure to the Director of Investment In updating our proposed estimates estimates of the frequency of filings Management or the Director’s designee for Part D of Form N–CR, we estimate under Parts E and F.1400 In an event of by email when a sponsor supports a the costs of filing and amending the filing, we continue to believe a fund’s money market fund by purchasing a report in response to an event specified particular circumstances that gave rise security in reliance on rule 17a–9.1386 on Part D of Form N–CR to include time to a reportable event under Parts E or F However, because Part C of Form N–CR costs of $4,830 and external costs of would be the predominant factor in is more extensive and defines ‘‘financial $1,000, for total costs of $5,830 for each determining the time and costs support’’ more broadly than the current set of initial and follow-up reports,1393 associated with filing a report on Form requirements, we expect that the costs and we expect, based in part by N–CR, in particular with respect to the associated with filing a report in reference to our estimate of the average follow-up filing amending the initial 1401 response to a Part C event would be number of instances in which the report. higher than the current estimated costs shadow price for a non-institutional In revising our estimates for Part E of Form N–CR,1402 we estimate the costs of of compliance with the current money market fund has deviated 1387 filing and amending the report in notification requirement. downward by more than 1⁄4 of 1 percent In updating our proposed estimates response to an event specified on Part from its stable per share NAV price each E of Form N–CR to include time costs for Part C of Form N–CR, we estimate year, that we will receive approximately the costs of filing and amending the of $10,910 and external costs of $3,600, 0.3 such filings per year.1394 Therefore, report in response to an event specified for total costs of $14,510 for each set of we expect that the annual costs relating on Part C of Form N–CR to include time initial and follow-up reports.1403 The costs of $6,660 and external costs of to filing a report on Form N–CR in Proposing Release and the DERA Study $1,400, for total costs of $8,060 for each response to an event specified on Part analyzed the distribution of weekly 1395 set of initial and follow-up reports,1388 D would be $1,749. liquid assets to determine how often a and we expect, based in part by prime fund’s weekly liquid asset reference to our estimate of the average reduction in instances that meet the definition as percentage fell below the 30% and 10% amended today, we predict an estimated 30 filings thresholds. The analysis found that on number of notifications of security per year under Part C of Form N–CR. purchases in reliance on rule 17a–9 that 1390 See Submission for OMB Review, Comment 1396 See supra section III.F.5. money market funds currently file each Request, Extension: Rule 2a–7, OMB Control No. 1397 year, that the Commission would 3235–0268, Securities and Exchange Commission See supra section III.F.5. (Board Disclosures). 1398 1389 [77 FR 236 (Dec. 7, 2012)]. See supra section III.F.5. (Conforming and receive approximately 30 such Related Changes). 1391 These estimates are based on the following 1399 calculations: $8,060 (cost per complete filing) × 30 For example, commenters cited the particular 1383 See supra section III.F.3. (Definition of burdens and the role of the board in drafting and Financial Support). filings per year = $241,800 per year. See supra note 1388–1390 and accompanying text. reviewing the board disclosures in Parts E and F. 1384 See supra section III.F.3 and note 1242. 1392 See, e.g., IDC Comment Letter (‘‘Any public 1385 See Proposing Release, supra note 25, at See Proposing Release, supra note 25, at disclosure about a board’s decision-making process paragraph following n.733. paragraph following n.736. would require careful and thoughtful drafting and 1393 1386 Current rule 2a–7(c)(7)(iii)(B). The costs associated with filing Form N–CR multiple layers of review (by board counsel, fund 1387 As previously noted, we are eliminating the in response to an event specified on Part D of Form counsel, and the directors, among others).’’); existing email notification requirements in rule 2a– N–CR are paperwork-related costs and are Stradley Ronon Comment Letter; SIFMA Comment 7 and are replacing it with the notification discussed in more detail in infra section IV.D.2.d. Letter. requirements of Form N–CR. See supra note 1213. 1394 Our staff has analyzed form N–MFP data from 1400 See infra notes 1410–1414 and accompanying We discuss the impact on costs of this elimination November 2010 to February 2014 and found that text. in sections III.F.8 and III.N.3. only one non-institutional fund had a 1⁄4 of 1 1401 See Proposing Release, supra note 25, at 1388 The costs associated with filing Form N–CR percent deviation from the stable $1.00 per share paragraph following n.736. in response to an event specified on Part C of Form NAV. 1 fund in over 39 months is equivalent to less 1402 The Proposing Release estimated that a fund × ÷ N–CR are paperwork-related costs and are than 1 (1 12 39 = 0.31) funds per year. In the would spend on average approximately 5 burden discussed in more detail in infra section IV.D.2.c. Proposing Release, we had estimated 0.167 reports hours and total time costs of $1,708 to prepare, 1389 In the Proposing Release, we originally filed per year in respect of Part D. See Proposing review, and submit a report under any Part of Form estimated 40 filings per year under Part C of Form Release, supra note 25, at n.1205. We revised this N–CR, including Part E. See Proposing Release, N–CR. See Proposing Release, supra note 25, at estimate to reflect more accurate accounting and supra note 25, at nn.1203 and 1204 and n.735 and accompanying text. As discussed in updated data. accompanying text. supra section III.F.3, today we are adopting certain 1395 These estimates are based on the following 1403 The costs associated with filing Form N–CR exclusions from the definition of financial support calculations: $5,830 (cost per complete filing) × 0.3 in response to an event specified on Part E of Form that will narrow the definition to a certain degree. filings per year = $1,749 per year. See supra note N–CR are paperwork-related costs and are Correspondingly, in anticipation of a slight 1393 and 1394 and accompanying text. discussed in more detail in infra section IV.D.2.e.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47854 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

average 6.9 out of 253 prime funds, or fee,1411 for a total average of 1.2 Therefore, we expect that the annual 2.7% of the funds, had their monthly instances per year. Therefore, we expect costs relating to filing a report on Form weekly liquid assets percentages fall that the annual costs relating to filing a N–CR in response to an event specified below 30%.1404 This corresponds to 83 report on Form N–CR in response to an on Part F would be $8,706. 1418 1405 event specified on Part E will be funds per year. The analysis also g. Operational Costs of Part G: Lifting of $17,412.1412 found that on average 0.05 out of 253 Fees and Gates prime funds, or 0.02% of the funds, had In revising our estimates for Part F of 1413 their monthly weekly liquid assets Form N–CR, we estimate the costs of As discussed in the Proposing Release, we continue to believe the percentages fall below 10%.1406 This filing and amending the report in frequency of filings under Part G on corresponds to 0.6 funds per year.1407 response to an event specified on Part F of Form N–CR of Form N–CR to Form N–CR to be closely correlated to As a result of the new reporting the frequency of filings under Parts E requirements, we believe that funds will include time costs of $10,910 and external costs of $3,600, for total costs and F.1419 Given our revised estimates in general try to avoid having to file of $14,510 for each set of initial and of the number of filings under Parts E Form N–CR by keeping their weekly 1420 follow-up reports.1414 As stated above, and F, we are correspondingly liquid asset percentages above 10%.1408 the DERA study found that 83 prime revising our estimate of the number of In addition, of the 83 funds per year that funds per year had their weekly liquid filings under Part G.1421 We are further reported a weekly liquid assets value asset percentages fall below 30%.1415 Of revising our estimates for Part G, below 30%, it is unclear how many these 83 funds, it is unclear how many because we expect the cost per filing would have decided to impose a fee, but would have decided to impose a gate, associated with responding to Part G to we expect it to be lower than 83 funds but we expect it to be lower than 83 be lower than for Parts E or F.1422 given that not all boards would have funds given that not all boards would Unlike Parts B through F and H, for likely imposed such a discretionary fee. have likely imposed such a which we have included estimated As such, we expect, based on our discretionary gate. Thus, we expect, external costs to account for the calculation of the average number of based on our calculation of the average possibility that funds may engage legal instances in which a fund would breach number of instances in which a fund counsel to assist in the preparation and 1423 the 10% and 30% weekly liquid asset would breach the 30% weekly liquid review of Form N–CR, we have not threshold each year, that the asset threshold each year, that the done so here because of the relative Commission would receive between 0.6 Commission would receive between simplicity of Part G. and 83 such filings per year. For In revising our estimates for Part G of zero and 83 such sets of initial and 1424 purposes of the Paperwork Reduction follow-up reports per year. For purposes Form N–CR, we estimate the costs of Act section below,1409 we estimate that of the Paperwork Reduction Act section 1416 the 30% weekly liquid asset threshold and its board 0.6 funds per year would file a report below, we conservatively estimate determined to impose a voluntary gate to be equal triggered by the 10% weekly liquid asset that 0.6 funds per year would file a to the number of instances in which a fund threshold1410 and an additional 0.6 report because they breached the 30% breached the 30% weekly liquid asset threshold funds per year would file a report weekly liquid asset threshold and their and its board determined to impose a voluntary fee, 1417 or 0.6 instances per year. because they crossed the 30% weekly board determined to impose a gate. 1418 These estimates are based on the following liquid asset threshold and their board calculations: $14,510 (cost per complete filing) × 0.6 determined to impose a liquidity 1411 As discussed in section IV.D.2.e, we estimate filings per year = $8,706 per year. See supra notes that funds will voluntarily impose a liquidity fee at 1414–1417. most as often as they will be required to consider 1419 See, e.g., Proposing Release, supra note 25, at 1404 See the table in the Proposing Release, supra a liquidity fee based on the 10% weekly liquid asset n.1202 and accompanying discussion. We expect note 25, referencing n.384; DERA Study, supra note trigger. Accordingly, the Commission there to be a close correlation because Part G 24, at 22. conservatively estimates that 0.6 additional funds requires disclosure of the lifting of any liquidity fee 1405 We estimate 83 funds per year as follows: 6.9 per year would file a report in response to Part E or gate imposed in connection with Part E or F. funds per month × 12 months = 83 funds per year. because it breached the 30% weekly liquid asset 1420 See supra notes 1410 and 1417 and 1406 See the table in the Proposing Release, supra threshold and their board determined to impose accompanying discussions. note 25, referencing n.384; DERA Study, supra note such a discretionary liquidity fee. 1421 See infra section IV.D.2.g. The Proposing 24, at 22. 1412 These estimates are based on the following Release estimated a total of 4 reports in response × 1407 We estimate 0.6 funds per year as follows: calculations: $14,510 (cost per complete filing) to Part G. See Proposing Release, supra note 25, at 0.05 funds per month × 12 months = 0.6 funds per [0.6 + 0.6] filings per year = $17,412 per year. See n.1202. For a more detailed discussion of the year. supra notes 1403–1410 and accompanying text. reasons for our revised estimates, see also infra 1408 See generally, e.g., SIFMA Comment Letter 1413 The Proposing Release estimated that a fund notes 2433–2437 and accompanying text. (‘‘[Some members] believe the existence of the would spend on average approximately 5 burden 1422 In the Proposing Release, our staff originally liquidity trigger for the fee and gate will motivate hours and total time costs of $1,708 to prepare, estimated that a fund would spend on average fund managers to maintain fund liquidity well in review, and submit a report under any Part of Form approximately 5 burden hours and total time costs excess of the trigger level, to avoid triggering the fee N–CR, including Part F. See Proposing Release, of $1,708 to prepare, review, and submit a report or gate.’’); supra note 25, at nn.1203 and 1204 and under any Part of Form N–CR. See Proposing 1409 See infra section IV.D.2.e. In the Proposing accompanying text. Release, supra note 25, at nn.1203 and 1204 and Release, we had previously estimated a total of 4 1414 The costs associated with filing Form N–CR accompanying text. However, we expect a response reports in response to Parts E and F based on the in response to an event specified on Part F of Form to Part G to be shorter than under Parts E or G, given previously proposed 15% weekly liquid asset N–CR are paperwork-related costs and are that Part G only requires disclosure of the date on trigger. See Proposing Release, supra note 25, at discussed in more detail in infra section IV.D.2.f. which a fund removed a liquidity fee and/or n.1202. For a more detailed discussion of the 1415 See DERA Study, supra note 24, at 22. resumed Fund redemptions. See Form N–CR Item reasons for our changed estimates, see also infra 1416 See infra section IV.D.2.f. In the Proposing G.1. In addition, unlike Part E or F, Part G would note 2408. Release, we had previously estimated a total of 4 not require any follow-up report. 1410 As noted above, as a result of the new reports in response to Parts E and F based on the 1423 See supra sections IV.D.2.b—IV.d.2.f; see also reporting requirements, we believe that funds will previously proposed 15% weekly liquid asset infra section IV.D.2.h. in general try to avoid having to file Form N–CR trigger. See Proposing Release, supra note 25, at 1424 The Proposing Release estimated that a fund by keeping their weekly liquid asset percentages n.1202. For a more detailed discussion of the would spend on average approximately 5 burden above 10%. Accordingly, we believe our estimates reasons for our changed estimates, see also infra hours and total time costs of $1,708 to prepare, of the frequency of filings in response to Part E of note 2421. review, and submit a report under any Part of Form Form N–CR are likely to be high. However, we are 1417 As discussed and estimated in more detail in N–CR, including Part F. See Proposing Release, using these higher estimates to be conservative in infra section IV.D.2.f, we conservatively estimate supra note 25, at nn.1203 and 1204 and our analysis. the number of instances in which a fund breached accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47855

filing a report in response to an event we expect that the annual costs relating filings submitted to us. Most specified on Part G of Form N–CR to to filing a report on Form N–CR in commenters generally supported the include time costs of $695 per filing,1425 response to an event specified on Part proposed amendments to Form N–MFP, and we expect, based in part by H will be $32,850.1432 agreeing that the improved reporting reference to our estimate of how often would be useful to the Commission and i. Aggregate Operational Costs funds would file Form N–CR under Part investors.1439 Although these E or F each year, that the Commission In the aggregate, we estimate that commenters generally supported the would receive between zero and 83 such compliance with new rule 30b1–8 and proposed amendments, many of them filings per year.1426 For purposes of the Form N–CR would result in total annual raised concerns with certain specific Paperwork Reduction Act section time costs of approximately changes and additional reporting below, we estimate that 1.8 funds per $339,5881433 and total external costs of items.1440 We did not receive any year would file a report because they $80,780.1434 Given an estimated 559 comment on a number of the proposed lifted a liquidity fee or gate.1427 money market funds that would be amendments, and are generally adopting Therefore, we expect that the annual required to comply with new rule 30b1– those amendments as proposed. costs relating to filing a report on Form 8 and Form N–CR,1435 this would result To respond to comments we received, N–CR in response to an event specified in average annual time costs of the final form amendments differ in on Part G would be $1,251.1428 approximately $607 and average annual some respects from what we proposed, external costs of $145 on a per-fund such as not adopting the lot level h. Operational Costs of Part H: Optional basis.1436 security and shareholder concentration Disclosure G. Amendments to Form N–MFP reporting requirements, as well as Given the broad scope and voluntary Reporting Requirements certain other refinements which are nature of the optional disclosure under discussed below. We are adopting many Part H of Form N–CR, we believe that, The Commission is today adopting of the other proposed amendments in an event of filing, a fund’s particular amendments to Form N–MFP, the form unchanged, including eliminating the circumstances that led it to decide to that money market funds use to report 60-day delay on public availability of make such a voluntary disclosure would their portfolio holdings and other key the data. As proposed, we are not be the predominant factor in information to us each month. We use changing the requirement that funds determining the time and costs the information to monitor money continue to file reports on Form N–MFP associated with filing a report on Form market funds and support our once each month (as they do today), but N–CR. In estimating costs, we expect examination and regulatory programs. are adopting a requirement that certain that some funds may engage legal Each fund must file the required limited information (such as the NAV counsel to assist with the drafting and information on Form N–MFP per share, liquidity levels, and review of Form N–CR, thereby incurring electronically within five business days shareholder flow) be reported on a additional external costs.1429 after the end of each month. Currently, weekly basis within the monthly Accordingly, we estimate the costs of we make the information public 60 days filing.1441 1437 a filing in response to an event specified after the end of the month. Money We are adopting these changes to on Part H of Form N–CR to include time market funds began reporting this Form N–MFP because they further 1438 costs of $1,390 and external costs of information to us in November 2010. support the Commission’s efforts to $800, for a total cost of $2,190 per Today we are amending Form N–MFP oversee the stability of money market 1430 filing, and we expect that the to reflect the amendments to rule 2a–7 funds and compliance with rule discussed above. In addition, we are Commission will receive approximately 2a–7,1442 and should assist money 18 such filings per year.1431 Therefore, requiring the reporting of certain new information that will be useful for our 1439 See, e.g., Wells Fargo Comment Letter; ICI 1425 The costs associated with filing Form N–CR oversight of money market funds, and Comment Letter (‘‘We generally support the in response to an event specified on Part G of Form making other improvements to the form proposed amendments. . .’’); Boston Federal N–CR are paperwork-related costs and are based on our previous experience with Reserve Comment Letter. One commenter opposed discussed in more detail in infra section IV.D.2.g. the amendments generally, suggesting that Form N– 1426 For purposes of this estimate of filings under MFP is a tool for the Commission, not investors, with respect to a quarter of all filings under Part G. Part G, we conservatively assume that there would and argued that the cost of the greater reporting Because of the timing constraints, we generally be a filing under Part G for every filing under either requirements is not justified by the usefulness of would not expect funds would to make a Part H Parts E or F. Given that some affected funds may the information to the Commission. See Dreyfus disclosure in an initial filing. We also would not liquidate instead of ever lifting the respective Comment Letter. We discuss the usefulness of the generally expect funds to make a Form N–CR filing liquidity fee or gate, we therefore expect this information reported on Form N–MFP to investors under Part H alone. However, given the possibility estimate of the frequency of Part G filings may be throughout this section, and similarly discuss the that funds might make a Part H disclosure in the high. costs of compliance in section III.G.5. below. initial filing or on a stand-alone basis, we 1427 See infra section IV.D.2.g. 1440 conservatively estimate one additional Part H filing See, e.g., Wells Fargo Comment Letter 1428 These estimates are based on the following per year under each scenario. As calculated in in (objecting to shareholder flow reporting); Fidelity calculations: $695 (cost per complete filing) × 1.8 section IV.D.2.h below, we therefore estimate an Comment Letter (objecting to lot level purchase and filings per year = $1,251 per year. See supra notes annual total of 15 filings in response to Part H. sale data); SIFMA Comment Letter (objecting to 1425–1427 and accompanying text. shareholder concentration reporting). 1432 These estimates are based on the following 1429 In particular, we expect that funds are more 1441 calculations: $2,190 (cost per complete filing) × 15 We requested comment on potentially likely to file a report on Part H when there are more filings per year = $32,850 per year. See supra notes requiring filing of Form N–MFP on a weekly, rather complex events that need to be addressed, which 1430 and 1431 and accompanying text. than a monthly basis. Commenters generally we believe will make it correspondingly more likely opposed such an increase in frequency of filing of 1433 See infra note 2446. that funds will engage legal counsel. the form, and we are retaining the requirement to 1434 1430 The costs associated with filing Form N–CR See infra note 2447. file the form on a monthly basis at this time. See, in response to an event specified on Part H of Form 1435 See supra note 2448. e.g., Dreyfus Comment Letter; SIFMA Comment N–CR are paperwork-related costs and are 1436 See infra note 2449. Letter. discussed in more detail in infra section IV.D.2.h. 1437 See current rule 30b1–7(b). 1442 References to amended Form N–MFP will be 1431 For purposes of our estimate in section 1438 On average, 575 money market funds to ‘‘Form N–MFP Item’’ or to ‘‘Item’’ and references IV.D.2.h below, we conservatively estimate that (excluding feeder funds) filed Form N–MFP with us to Form N–MFP as it was proposed to be amended funds would include a disclosure under Part H in each month throughout 2013. Funds reported in 2013 will be to ‘‘Proposed Form N–MFP Item.’’ about a quarter of the instances they submit a information on approximately 67,000 securities on We are not amending items in Form N–MFP that follow-up filing under Parts B through F, as well as average each month. reference credit ratings at this time.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47856 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

market fund shareholders in better Because we proposed to eliminate disagree. Form N–MFP and Web site understanding the risks of their amortized cost valuation (which would disclosure have different purposes. investments. As proposed, in have required all money market funds to Under our final disclosure amendments, connection with these amendments, we value their shares at market-based as discussed above funds will be are renumbering the items of Form N– values even if they transacted at a dollar required to report market-based NAV MFP to separate the items into four through penny rounding), we had per share information daily on their separate sections and are making other correspondingly proposed to eliminate Web sites (as well as the liquidity and minor reformatting changes.1443 These the reporting requirements related to shareholder flow information), so the amendments will apply to all money money market fund ‘‘shadow prices’’ weekly information should be readily market funds, with both stable value from Form N–MFP and instead require available at little additional cost. and floating NAV money market funds funds to report their market-based NAV. Including this weekly information on reporting on Form N–MFP as amended. As a result of the final amendments to the fund’s filing will allow Commission rule 2a–7 permitting the continued use staff to better monitor risks and trends 1. Amendments Related to Rule 2a–7 of amortized cost for certain money in fund valuation (as well as liquidity Reforms market funds, the final amendments to and shareholder flow) in an efficient We proposed a number of changes to Form N–MFP also continue to require and more precise manner without Form N–MFP designed to conform it reporting of fund shadow prices (on a requiring frequent visits to the Web sites with the general reforms of rule series and class level) for funds that use of many different funds, and will be a 2a–7.1444 Commenters generally did not the amortized cost method of useful resource for investors and others object to these proposed amendments, valuation.1447 This requirement would as well. Because it will be housed in a and we are adopting them largely as be part of the requirement to report the central repository of data, this proposed, with some revisions to reflect fund’s NAV on a class and series level. information can be aggregated and the revised approach we are taking to analyzed across the fund industry and the primary reforms. b. Weekly Reporting Within Monthly can be used in a standardized manner Filing 1451 a. Amortized Cost to enhance comparability. The The final rules also require reporting additional data points we collect will As part of the primary reforms to rule of a money market fund’s NAV per enable us to better monitor trends and 2a–7, we proposed to eliminate the use share (and shadow price), daily and risks on a more granular time level for of the amortized cost valuation method weekly liquid assets, and shareholder individual funds and money market for stable value money market funds, flows on a weekly basis within the funds as a whole. In contrast, the Web and to correspond with that elimination, monthly filing of the form, as we site disclosures are intended to be more we also proposed to remove references proposed.1448 Two commenters accessible and ‘‘user-friendly’’ than to amortized cost and shadow prices generally objected to the proposed Form N–MFP for individual investors from Form N–MFP. However, as requirements for weekly reporting trying to research particular funds. We discussed previously in section II.B.5, within a monthly form.1449 These have required other such parallel the final amendments will permit the commenters argued that weekly reporting for similar reasons.1452 continued use of the amortized cost information gathering will increase fund c. NAV Per Share (and Shadow Price) valuation method for stable value costs and suggested that the benefits are 1445 Reporting to Fourth Decimal Place money market funds. Accordingly, speculative. They also noted that this to conform the changes to Form N–MFP weekly reported information would be Today on Form N–MFP, funds report, to the final amendments to rule 2a–7, available on the fund’s Web site, both for each series and each class, we are not adopting the Form N–MFP resulting in redundant disclosure.1450 shadow price of their NAV, rounded to amendments that would have removed We appreciate these concerns, but the fourth decimal place for a fund with references to the amortized cost of a $1.00 share price (or an equivalent securities in certain existing items, available market quotations, both with and without level of accuracy for funds with a although we are moving and rephrasing the value of any capital support agreement. Form different share price).1453 Under the the references where appropriate to be N–MFP Item C.18 would require that money market proposed amendments to the Form, we funds report portfolio security market values both consistent with the final amendments to including and excluding the value of any sponsor proposed to keep this reporting 1446 rule 2a–7. support. As we proposed, to improve transparency requirement (although in a different of MMF’s risks, we are also clarifying that money place within the Form consistent with 1443 See Form N–MFP: (i) General information market funds must disclose the value of ‘‘any the general reformatting). This reporting (Items 1–8); (ii) information about each series of the sponsor support’’ applicable to a particular is consistent with the rounding fund (Items A.1–A.21; (iii) information about each portfolio security, rather than ‘‘capital support class of the fund (Items B.1–B.8); and (iv) agreements’’ as stated in current Form N–MFP convention that was proposed for information about portfolio securities (Items C.1– Items 45 and 46. We are also continuing to require, floating NAV money market funds to C.25). Our renumbering of the items will enable us as proposed, reporting of the amortized cost value price and transact in our rule proposal. to add or delete items in the future without having of money market funds that use that method to No commenters specifically addressed to re-number all subsequent items in the form. value securities for all or any portion of their 1444 See Proposing Release supra note 25, at portfolio. See Form N–MFP Item A.14.b.i . this current Form N–MFP requirement, section III.H.1. 1447 See Form N–MFP Items A.20 and B.5. These or its reformatting. As discussed in 1445 See supra section II.B.5. requirements are moved and reformatted from the section III.B.3.c above we are adopting 1446 Form N–MFP currently requires that each existing form as part of the overall renumbering and a requirement for floating NAV funds to re-organizing of the form. series of a fund disclose the total amortized cost of transact at this ‘‘basis point rounding’’ its portfolio securities (Item 13) and the amortized 1448 Form N–MFP Items A.13, A.20, B.5 and B.6. cost for each portfolio security (Item 41). As we As discussed in section IV.A.6.c funds would also proposed, we are amending Items 13 and 41 by be required to report their NAV per share and 1451 See also supra section III.F. replacing amortized cost with ‘‘value’’ as defined in shadow price on a daily basis on their Web site. 1452 For example, money market funds are section 2(a)(41) of the Act (generally the market- 1449 Dreyfus Comment Letter; SIFMA Comment currently required to disclose much of the portfolio based value). See Form N–MFP Items A.14.b and Letter. These commenters objected to all of the holdings information they disclose on Form N–MFP C.18, and Form N–MFP General Instructions, E. proposed weekly items, including reporting on the on the fund’s Web site as well. See current rule 2a– Definitions. As a result, we are removing current funds’ NAV per share, levels of daily and weekly 7(c)(12)(ii); Form N–MFP General Instruction A. Form N–MFP Items 45 and 46, which require that liquid assets, and shareholder flows. 1453 Form N–MFP Items 18 and 25. See also a fund disclose the value of each security using 1450 Id. Proposing Release supra note 25, at section III.H.1.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47857

level of accuracy. As when we originally our amendments that require money amendment requires reporting of adopted this requirement in 2010, we market funds to disclose NAV, liquidity additional information that should be continue to believe that information and shareholder flow daily on fund Web readily available to the fund and, in about a fund’s NAV priced to a basis sites.1459 Accordingly, we do not believe many cases, should infrequently change point rounding level of accuracy will be that the proposed amendments would from report to report. relevant and useful for the Commission impose other costs not discussed in that and investors when monitoring money section on money market funds other a. Security Identifiers market fund risks and trends.1454 This than those required to modify systems Certain of the final amendments we information will be used by the used to aggregate data and file reports are adopting today are designed to help Commission and others to identify on Form N–MFP, as discussed below. us and investors better identify fund money market funds that continue to We expect, as discussed previously in portfolio securities.1460 To facilitate seek to maintain a stable price per this section, that the revised forms will monitoring and analysis of the risks share 1455 and help us better evaluate benefit investors by enhancing their posed by funds, it is important for any potential deviations in their understanding of money market funds, Commission staff to be able to identify unrounded share price. Reporting the and will enhance our monitoring and individual portfolio securities. Fund NAV per share to the fourth decimal regulatory programs. shareholders and potential investors place on Form N–MFP is also consistent We believe that the revised form will that are evaluating the risks of a fund’s with the precision of NAV reporting that be easier for investors to understand portfolio will similarly benefit from the funds would be required to provide on because the amendments will allow clear identification of a fund’s portfolio their Web sites under our final investors to better focus on a single securities. Currently, the form requests amendments. Accordingly, the Form market-based valuation for individual information about the CUSIP number of continues to require reporting of a portfolio securities and the fund’s a security, which the staff uses as a money market fund’s NAV to the fourth overall NAV per share. Accordingly, we search reference. The staff has found decimal place, as is required today and expect that the overall effects will be to that some securities reported by money under the proposal.1456 increase efficiency for investors. market funds lack a CUSIP number, and Because we believe that investors are d. Category Reporting this absence has reduced the usefulness likely to make at least incremental of other information reported.1461 To As we proposed, we are also changes to their trading patterns in address this issue, we are adopting as amending the category options at the money market funds due to the changes proposed the requirement that funds series level that money market funds to Form N–MFP, it is likely that the also report the LEI that corresponds to use to identify themselves to include changes will affect competition and the security, if available.1462 We are also exempt government fund as an capital formation. Although it is option.1457 We are also adding a sub difficult to quantify the size of these 1460 We also are also adopting, as proposed, a question, new from the proposal, asking effects without better knowledge about requirement that a fund provide the name, email if the fund is an exempt retail fund how investors will respond, we believe address, and telephone number of the person 1458 that the effects from the changes to authorized to receive information and respond to under rule 2a–7. This new questions about Form N–MFP from Commission subsection is necessary to help identify Form N–MFP will be small relative to staff. We will exclude this information from Form whether a fund is exempt because it is the effects of the underlying reforms. N–MFP information that is made publicly available a government fund or if it is exempt through EDGAR. See Form N–MFP Item 8. 2. New Reporting Requirements 1461 because it is a retail fund which will be Our inability to identify specific securities, We are also adopting several new for example, limits our ability to compare important in our ongoing monitoring ownership of the security across multiple funds and efforts. These new categories will allow items to Form N–MFP that we believe monitor issuer exposure. As discussed in the us to better identify the types of funds will improve our (and investors’) ability proposal, during the month of February 2013, funds operating. to monitor money market funds. As reported 6,821 securities without CUSIPs discussed further below, these final (approximately 10% of all securities reported on the e. Economic Analysis amendments include some, but not all form). 1462 See Form N–MFP Item C.4; Form N–MFP Consistent with the proposal, any of the new reporting requirements that General Instructions, E. Definitions (defining effect resulting from these amendments we had proposed. For example, as ‘‘LEI’’). To ensure accurate identification of Form (except as noted below), including the proposed, the final amendments include N–MFP filers and update the Form for pending additional information about fair value industry-wide changes, we are also requiring, as requirement that each monthly report proposed, that each registrant provide its LEI, if include information on a weekly basis, categorization and LEIs (if available). available. See Form N–MFP Item 3. The Legal is included in our economic analysis of We are also adopting, with some Entity Identifier is a unique identifier associated changes from the proposal, revisions to with a single corporate entity and is intended to provide a uniform international standard for 1454 See 2010 Adopting Release, supra note 81, at several other items, including revised identifying counterparties to a transaction. The section II.E.2. We note that many large fund investment categories for portfolio Commission has begun to require disclosure of the complexes already disclose on their Web sites the securities and LEI, once available. See, e.g., Form PF, Reporting daily money market fund market valuations (i.e., Form for Investment Advisers to Private Funds and shadow prices) of at least some of their money collateral. However, we are not adopting Certain Pool Operators and funds, rounded to four decimal places the lot level portfolio security Trading Advisors, available at http://www.sec.gov/ (‘‘basis point’’ rounding), for example, BlackRock, disclosure, top 20 shareholder rules/final/2011/ia-3308-formpf.pdf. A global LEI Fidelity Investments, and J.P. Morgan. See, e.g., information, and security identifier standard is currently in the implementation stage. Money Funds’ New Openness Unlikely to Stop See Frequently Asked Questions: Global Legal Regulation, Wall St. J. (Jan. 30, 2013). See also level reporting on repo collateral that Entity Identifier (LEI) (Feb. 2013), U.S. Treasury sections III.B and IV.A.6. we had proposed. These amendments Dept., available at http://www.treasury.gov/ 1455 We are also adopting, as proposed, a new we are adopting should help address initiatives/ofr/data/Documents/LEI_FAQs_ item requiring reporting for funds that seek to gaps in data that have become apparent February2013_FINAL.pdf. Consistent with staff maintain a stable price per share to state the price from analysis of Form N–MFP filings guidance provided in a Form PF Frequently Asked that the fund seeks to maintain. See Form N–MFP that we have received to date. As Questions, available at http://www.sec.gov/ Item A.18. divisions/investment/pfrd/pfrdfaq.shtml, funds that 1456 Form N–MFP Items A.20 and B.5. discussed further below, each have been issued a CFTC Interim Compliant 1457 See Form N–MFP, Item A.10. Identifier (‘‘CICI’’) by the Commodity Futures 1458 See Form N–MFP, Item A.10.a. 1459 See supra section III.E.9.h. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47858 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

adopting as proposed final amendments about any such securities would enable the purchase price.1472 This information that require that funds report at least our staff to identify individual securities would have been required to be reported one other security identifier, if that may be more susceptible to wide separately for each lot purchased.1473 In available.1463 One commenter suggested variations in pricing.1467 We also addition, we proposed to require that that the proposed requirement to discussed how Commission staff could money market funds disclose the same include multiple securities identifiers use this information to monitor for information for any security sold during might not be possible for certain increased valuation risk in these the reporting period.1474 In the securities, such as municipal securities, securities, and to the extent there is a Proposing Release, we suggested that which may only have a single identifier concentration in the security across the because money market funds often hold available.1464 We note that the industry, identify potential outliers that multiple maturities of a single issuer, requirement to include multiple warrant additional monitoring or each time a security is purchased or identifiers is only required if such investigation. One commenter objected sold, price discovery occurs and an 1465 identifiers are actually available. to the requirement to report the fair issuer yield curve could be updated and used for revaluing all holdings of that b. Fair Value Categorization value level of portfolio securities, particular security. Therefore, our We are also adopting, with certain arguing that because most money market fund securities are categorized as proposed amendments, if adopted, modifications from the proposal could have had the incidental benefit of level 2, a more efficient approach would described below, amendments that are facilitating price discovery and would be to only require disclosure if a designed to help the staff and investors have enabled the Commission, security is categorized as level 3.1468 We better identify certain risk investors, and others to evaluate pricing characteristics that the form currently agree that because most money market consistency across funds (and identify does not capture. Responses to these fund securities are categorized as level potential outliers).1475 new items, together with other 2, the relevant information for us and A number of commenters strongly information reported, would improve investors is whether the security is opposed this proposed new lot level the staff and investors’ understanding of categorized as level 3, and that it would reporting requirement.1476 They noted a fund and its potential risks by be simpler and less costly for funds to that the number of reporting line items providing information about how the report whether a security is categorized could go up tenfold under this fund is valuing its investments. as level 3, rather than the level used for requirement, and that costly new We proposed to require funds to each security in the fund’s portfolio. systems would need to be built to report whether a security is categorized Accordingly, the final amendments effectively report this information on an as a level 1, level 2, or level 3 require funds to disclose whether a ongoing basis.1477 Commenters also measurement in the fair value hierarchy security is categorized at level 3, not the under U.S. GAAP.1466 We noted in the fair value level of each security.1469 We 1472 See proposed N–MFP Item C.17. Because Proposing Release that we understood believe that most funds directly evaluate yield at purchase would be disclosed in a separate that most money market fund portfolio item, we proposed to delete the reference to the fair value level measurement ‘‘(including coupon or yield)’’ from current Form securities are categorized as level 2, and categorization when they acquire the N–MFP Item 27 (Form N–MFP Item C.2). Because that although we understood that very security and reassess the categorization as discussed below, we are not adopting the lot few of a money market fund’s portfolio when they perform portfolio level reporting requirements we proposed, we are securities are currently valued using retaining the reference to coupon in the title of the valuations.1470 Accordingly, we issue. However, to facilitate use of the data significant unobservable inputs, and continue to believe that funds should collected and to clarify the time that the yield of thus categorized as level 3, information have ready access to the nature of the the security must be calculated (as of the Form N– MFP reporting date), we are moving the question portfolio security valuation inputs used. about yield out of the title question and adopting Trading Commission may provide this identifier in it as a standalone response. See proposed N–MFP lieu of the LEI until a global LEI standard is c. Lot Level Reporting Item C.17. When disclosing a security’s coupon or established. yield (as required in proposed Form N–MFP Items 1463 See Form N–MFP Item C.5 (requiring that, in We proposed to require funds to C.2 or C.8.e), funds generally should report (i) the addition to the CUSIP and LEI, a fund provide at report additional information about stated coupon rate, where the security is issued least one additional security identifier, if available). with a stated coupon, and (ii) the coupon rate as Security identifiers should be readily available to each portfolio security, including, in of the Form N–MFP reporting date, if the security funds. See, e.g., http://www.sec.gov/edgar/ addition to the total principal amount, is floating or variable rate. Because we not adopting searchedgar/cik.htm (providing a CIK lookup that is the purchase date, the yield at purchase, the lot level reporting requirement, funds would not searchable by company name). We are also the yield as of the Form N–MFP need to report, as discussed in the proposal, the requiring that a fund provide the LEI (if available) interest rate at purchase. Finally, funds generally for a security subject to a repurchase agreement (but reporting date (for floating and variable should disclose the name of the collateral issuer unlike under the proposal, not the CUSIP). See rate securities, if applicable),1471 and (and not the name of the issuer of the repurchase Form N–MFP Items C.8. agreement). 1464 See Vanguard Comment Letter. 1473 See proposed Form N–MFP Item C.17. 1467 For a discussion of some of the challenges 1465 Form N–MFP Items C.4 and C.5. 1474 See proposed Form N–MFP Item C.25. regulators may face with respect to Level 3 1466 See Accounting Standards Codification 820, 1475 accounting, see, e.g., Konstantin Milbradt, Level 3 See Comment Letter of the Presidents of the ‘‘Fair Value Measurement’’; Proposed Form N–MFP Assets: Booking Profits and Concealing Losses, 25 12 Federal Reserve Banks (Feb. 12, 2013) (available Item C.20. Level 1 categorized measurements Rev. Fin. Stud. 55,95 (2011). in File No. FSOC–2012–0003) (‘‘Federal Reserve include quoted prices for identical securities in an 1468 Bank Presidents FSOC Comment Letter’’), supra active market. Level 2 categorized measurements See Federated VIII Comment Letter. note 48 (suggesting that more frequent reporting on include: (i) Quoted prices for similar securities in 1469 Form N–MFP Item C.20. Form N–MFP might increase price discovery for active markets; (ii) quoted prices for identical or 1470 Funds should regularly evaluate the pricing market-based NAV calculations). similar securities in non-active markets; and (iii) methodologies used and test the accuracy of fair 1476 See, e.g., ICI Comment Letter; Federated II pricing models whose inputs are observable or value prices (if used). See Accounting Series Comment Letter; Wells Fargo Comment Letter. derived principally from or corroborated by Release No. 118, Financial Reporting Codification 1477 See, e.g., Dreyfus Comment Letter; Fidelity observable market data through correlation or other (CCH) section 404.03 (Dec. 23, 1970). Comment Letter (noting that for one fund, one means for substantially the full term of the security. 1471 We understand that the yields on variable month’s reporting included 336 lines at the CUSIP Security measurements categorized as level 3 are rate demand notes, for example, may vary daily, level, and under the proposed lot level requirement, those whose value cannot be determined by using weekly, or monthly. Our amendments would have that fund would have contained over 2100 reporting observable measures (such as market quotes and provided Commission staff and others with a way lines, and that of those lots, only 15 were purchased prices of comparable instruments) and often involve to monitor the market’s response to changes in at different yields, and 11 of those were Treasury estimates based on certain assumptions. credit quality, as well as identify potential outliers. securities).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47859

noted that the lot level security items of disclosure on Form N–MFP that We agree that shareholder flows do information is proprietary, and could be must be disclosed on a monthly basis, not necessarily indicate stress in a fund, used to the disadvantage of funds and as discussed previously, we are but they can be informative in shareholders.1478 They also questioned requiring that funds report their Daily monitoring fund activity and evaluating the value of this information to the Liquid Assets and Weekly Liquid Assets the potential risks. We believe gross Commission, noting the high costs of on a weekly basis.1484 One commenter rather than net flow data is more useful providing it.1479 We appreciate the suggested that we align reporting of for us and investors because it allows concerns of commenters, and are fund liquid assets on Form N–MFP more transparency into the particular modifying the final amendments to (which is dollar based) with the redemption and purchase patterns at a eliminate the proposed lot level security reporting of liquid assets on fund Web fund. We do not believe this additional reporting requirement. Although sites (which is percentage based).1485 information would confuse investors, collecting data on the purchase and sale We agree that such alignment would because they can compare the gross of money market fund securities could provide better consistency and inflows to the gross outflows if they improve pricing transparency, and comparability of information between believe that the net data is the relevant allow us to better monitor risks and information on fund’s Web site and the information in their decision making valuation issues, we are persuaded by information reported on Form N–MFP. process. We continue to believe that commenters that reporting this Accordingly, the final amendments to these amendments would provide information at the lot level may be Form N–MFP require reporting of fund Commission staff and others with costly and could disclose proprietary daily and weekly liquid assets on both additional relevant data to efficiently information about security purchase a dollar and percentage basis.1486 monitor fund risk (such as monitoring prices that could harm funds, and Because the percentages are already the risk that a fund might cross the 10% therefore their shareholders. We also reported on fund Web sites, this liquidity-based fee threshold under the believe that this data might be more information should be readily available. liquidity fee amendments we are useful if collected on a systematic, The information should help us and adopting today), and correlated risk market-wide basis which may both others to better understand the relative shifts in liquidity across the provide more comprehensive and liquidity of fund portfolios. industry.1490 Increased periodic consistent coverage and mitigate the disclosure of the daily and weekly concerns about proprietary data Similarly, we are adopting the liquid assets on Form N–MFP would disclosure.1480 Accordingly, we are not proposed amendments to require that provide increased transparency into adopting the lot level purchase and sale money market funds disclose the how funds manage their liquidity, and data reporting requirements that we weekly gross subscriptions (including it may also impose market discipline on proposed. dividend reinvestments) and weekly gross redemptions for each share class, portfolio managers. In addition, d. Liquidity and Shareholder Flow Data once each week during the month increased disclosure of weekly gross We are also adopting amendments, reported.1487 As discussed earlier, subscriptions and gross redemptions with certain modifications from the money market funds would continue to (reported weekly, in addition to proposal as described below, that file reports on Form N–MFP once each monthly) would improve the ability of require funds to report the amount of month, but certain information the Commission, investors, and others cash they hold,1481 the fund’s daily (including disclosure of daily and to better understand the significance of liquid assets and weekly liquid weekly liquid assets) would be reported other liquidity disclosures required by assets,1482 and whether each security is weekly within the form. Several our proposals (e.g., daily and weekly considered a daily liquid asset or commenters objected to the requirement liquid assets). It will also allow the weekly liquid asset.1483 Unlike the other to disclose shareholder flow data, Commission to better understand arguing that such disclosure could be patterns of shareholder flows over time 1478 See, e.g., Vanguard Comment Letter; confusing to shareholders, and is not and how funds respond to those BlackRock II Comment Letter. necessarily indicative of stress.1488 One shareholder flows, and compare those 1479 See, e.g., ICI Comment Letter (‘‘Indeed, our commenter also suggested that if flows to funds’ liquid assets, and we members have expressed concern that the reporting may use them in connection with our of this type of confidential trading information shareholder flow data was reported, it could compromise management of their should be on a net rather than gross examination and regulatory efforts. portfolios.’’); Fidelity Comment Letter. basis.1489 Accordingly, we are adopting the 1480 One commenter discussed a similar amendments to disclose weekly gross approach, suggesting that ‘‘price discovery might be subscriptions and weekly gross enhanced through other methods, such as 1484 See supra note 1448. increasing the categories of securities reported 1485 Fidelity Comment Letter. Requiring both the redemptions as proposed. through the Financial Industry Regulatory total value and percentage of total assets of these e. Fee Waivers Authority’s Trade Reporting and Compliance data points parallels the information that is Engine (TRACE) system.’’ Wells Fargo Comment collected for each security in Items C.18 and C.19 Letter. (dollar value and percentage basis). We are today also adopting the 1481 See Form N–MFP Item A.14.a and Form N– 1486 Form N–MFP Items A.13.a–A.13.d. As proposed requirement that each fund MFP General Instructions, E. Definitions (requiring, discussed in section III.G.2.i, we are not requiring must disclose whether its adviser or a as proposed, disclosure of the amount of cash held disclosure of liquid assets on fund Web sites on a third party paid for or waived all or part and defining ‘‘cash’’ to mean demand deposits in dollar basis because we believe that the most insured depository institutions and cash holdings relevant information to investors is the percentage of its operating expenses or management 1491 in custodial accounts, respectively). We are also of fund assets that are liquid. fees during a given reporting period. amending, as proposed, Item 14 of Form N–MFP 1487 See Form N–MFP Item B.6. We also are (total value of other assets) to clarify that ‘‘other continuing to require that money market funds 1490 As discussed in section III.E.9.a, money assets’’ excludes the value of assets disclosed disclose the monthly gross subscriptions and market funds would also be required to disclose separately (e.g., cash and the value of portfolio monthly gross redemptions for the month reported. each day on its Web site the fund’s Daily Liquid securities). See Form N–MFP Item A.14.c. This See current Form N–MFP Item 23. Assets and Weekly Liquid Assets and shareholder amendment would ensure that reported amounts 1488 See, e.g., Legg Mason & Western Asset flows. are not double counted. Comment Letter; Dreyfus Comment Letter; Wells 1491 Form N–MFP Item B.8 (requiring that funds 1482 See Form N–MFP Item A.13. Fargo Comment Letter. provide the name of the person and describe the 1483 Form N–MFP Items C.21–C.22. 1489 SIFMA Comment Letter. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47860 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

One commenter objected to this also help us better monitor the overall of fund shares held by the top 20 proposed requirement, arguing that fee financial impact of fee waivers on shareholders. waivers are not necessarily indicative of money market fund advisers and the g. Investment Categories an adviser’s financial position, and that effect of such waivers on the industry as such information may confuse investors a whole. Accordingly, we are adopting We are also adopting, with some and leave an incorrect impression of the the fee waiver reporting requirement as changes in response to comments, health of the adviser because waivers proposed. certain amendments to Form N–MFP’s are just one aspect of the financial investment categories for portfolio f. Percentage of Shares Held by Top 20 ability of an adviser to support a securities. The new investment Shareholders fund.1492 categories should help Commission staff We agree that fee waivers are not We proposed to amend Form N–MFP identify particular exposures that necessarily dispositive information to require funds to disclose the total otherwise are often reported in other about an adviser’s financial position or percentage of shares outstanding held less descriptive categories (e.g., its willingness to potentially support a by the twenty largest shareholders of reporting sovereign debt as ‘‘treasury fund. We do not agree that this record. At the time, we noted that this debt’’ or reporting asset-backed information would confuse investors, in information could help us (and securities (that are not commercial part because fee waivers are already investors) identify funds with paper) as ‘‘other note’’ or ‘‘other disclosed in the fund’s prospectus (as significant potential redemption risk instrument’’).1498 Several commenters discussed below), and interested stemming from shareholder suggested revisions to the investment investors may wish to use this concentration, and evaluate the categories we proposed, noting that information in their investment decision likelihood that a significant market or these changes would better match making process, even if it is not the sole credit event might result in a run on the investment categories that are used or even most dispositive piece of fund or the imposition of a liquidity fee more broadly and consistently in the information used in evaluating the or gate.1495 industry.1499 After reviewing these financial health of the adviser or the A number of commenters objected to comments, we have revised the final ability of the adviser to support the fund this proposed reporting requirement, investment categories to better align the in times of stress. We continue to arguing that such data could be categories with typical industry believe, as stated in the proposal, that confusing to shareholders because categorizations and provide a more information about expense waivers is investments through omnibus accounts precise description of fund relevant and will help both investors would be counted as single shareholders investments.1500 We expect that the and the Commission better evaluate of record, potentially portraying a revised categories should not pose an money market fund performance and misleading portrait of the concentration 1496 risk and respond accordingly. To the level of the fund. A commenter also 1498 Currently N–MFP requires funds to categorize their investments from among the following extent that money market funds waive suggested that the appearance of higher shareholder concentration levels as a categories: ‘‘Treasury Debt; Government Agency fees to boost performance and attract Debt; Variable Rate Demand Note; Other Municipal assets, the new disclosure requirement result of omnibus accounts does not Debt; Financial Company Commercial Paper; Asset should help investors better understand necessarily correlate with higher run Backed Commercial Paper; Other Commercial 1497 Paper; ; Structured Investment the basis of fund performance so they risk and may mislead the public. We recognize this, and agree that because of Vehicle Note; Other Note; Treasury Repurchase can make more informed investment Agreement; Government Agency Repurchase choices.1493 In addition, the the prevalence of omnibus accounts, the Agreement; Other Repurchase Agreement; proposed shareholder concentration Insurance Company Funding Agreement; Commission will be better able to Investment Company; Other Instrument. If Other evaluate and respond to financial strains disclosure may not succeed in achieving its purpose as the information provided Instrument, include a brief description.’’ Current on fund advisers. In low interest rate Form N–MFP Item 31. We proposed to amend the environments, money market fund may portray an incorrect and misleading investment categories in proposed Form N–MFP picture of the level of shareholder Item C.6 to include new categories: ‘‘Non U.S. yields can become sufficiently small Sovereign Debt,’’ ‘‘Non-U.S. Sub-Sovereign Debt,’’ that advisers must waive fees to offer concentration in a fund. This disclosure may create confusion if certain funds ‘‘Other Asset-Backed Security,’’ ‘‘Non-Financial investors positive returns.1494 It may Company Commercial Paper’’ (instead of ‘‘Other appear more concentrated than they Commercial Paper’’), and ‘‘Collateralized Commercial Paper,’’ and amend ‘‘U.S. Government nature and amount the expense payment or fee actually are, as a result of those omnibus accounts appearing to be a single Agency Debt’’ and ‘‘Certificate of Deposit (including waiver, or both (reported in dollars)). Time Deposits and Euro Time Deposits).’’ 1492 Schwab Comment Letter. shareholder. For the same reasons, we 1499 See Wells Fargo Comment Letter; Fidelity 1493 We recognize fee waivers are also required to expect that the information would Comment Letter. be disclosed in a fund’s fee table, but believe it is similarly not be particularly useful for 1500 The final rules would amend the amend the useful to have them reported on Form N–MFP as investment categories in Form N–MFP Item C.6 to well, for the same reasons discussed in the section us in our monitoring efforts. Accordingly, upon further consideration include the following selections: ‘‘U.S. Treasury on weekly reporting within a monthly filing above, Debt; U.S. Government Agency Debt; Non-U.S. as each set of disclosures may reach different of these concerns, we are not adopting Sovereign, Sub-Sovereign and Supra-National Debt; audiences who may be seeking out the information the requirement to report the percentage Certificate of Deposit; Non-Negotiable Time for different purposes (i.e. an investor looking at fee Deposit; Variable Rate Demand Note; Other waivers in the fee table may be looking at them for Municipal Security; Asset Backed Commercial Management International Organization of purposes of whether fees on their investments may Paper; Other Asset Backed Securities; U.S. Treasury Securities Commissions,’’ Feb 7, 2012. Moreover, go up later, while investors looking in Form N–MFP Repurchase Agreement, if collateralized only by more money was forfeited in fee waivers from may be looking to help determine the potential U.S. Treasuries (including Strips) and cash; U.S. 2009–2011 ($13.3 billion) than was spent during the impact on the adviser). Government Agency Repurchase Agreement, financial crises from 2007–2009 by fund advisers on 1494 In some cases, fee waivers can have similar collateralized only by U.S. Government Agency capital support events ($12.0 billion) to stabilize the effects as capital support. Since 2009, MMFs have securities, U.S. Treasuries, and cash; Other NAVs of the largest 100 (US and European) prime dramatically increased fee waivers to keep yields Repurchase Agreement, if any collateral falls funds. See Moody’s Sponsor Support Report, supra positive in a low interest rate environment. In 2011, outside Treasury, Government Agency and cash; MMFs waived more fees ($5.2 billion) than they note 54. Insurance Company Funding Agreement; 1495 collected ($4.7 billion). See Investment Company Form N–MFP Item A.19. Investment Company; Financial Company Institute, ‘‘Submission by the Investment Company 1496 See, e.g., Schwab Comment Letter; Federated Commercial Paper; Non-Financial Company Institute Working Group on Money Market Fund VIII Comment Letter. Commercial Paper; or Tender Option Bond. If Other Reform Standing Committee on Investment 1497 Dreyfus Comment Letter. Instrument, include a brief description.’’

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47861

additional burden compared to the these other amendments and are happen with specificity and we do not categories we proposed, as they are very adopting them as proposed. know how the other underlying assets compare with those of money market similar, with minor changes to better i. Economic Analysis reflect our understanding of common funds. In addition, it is difficult to industry practice. As detailed above and discussed in establish the extent to which any such the proposal, these new reporting exchanges would be a result of the h. Other Amendments requirements are intended to address broader amendments we are making or gaps in the reporting regime that In addition, we are adopting, as we a marginal effect of the amendments we Commission staff has identified through are making to Form N–MFP. In addition, proposed, the amendments that would our experience with Form N–MFP and require funds to report the maturity date no commenters suggested ways for us to to enhance the ability of the quantify these exchanges with for each portfolio security using the Commission and investors to monitor maturity date used to calculate the specificity. Thus, we continue to remain funds. Although the benefits are unable to estimate the amount of such dollar-weighted average life maturity difficult to quantify, they will improve asset movements with specificity. (‘‘WAL’’) (i.e., without reference to the the ability of the Commission and Therefore, we are unable to estimate the exceptions in rule 2a–7(i) regarding investors to identify and analyze a overall net effect on capital formation or interest rate readjustments).1501 As we fund’s portfolio securities (e.g., by competition. Nevertheless, we believe discussed in our proposal, this requiring disclosure of LEIs and an that the net effect will be small, information will assist the Commission additional security identifier, if especially during normal market in monitoring and evaluating this risk, available, already required). In addition, conditions, in part because such asset at the security level, as well as help many of our new reporting requirements movements would generally be among evaluate compliance with rule 2a–7’s will enhance the ability of the investment alternatives, rather than maturity provisions.1502 In addition, our Commission and investors to evaluate a avoiding investment entirely. amendments would make clear that fund’s risk characteristics (by requiring funds must disclose for each security all that funds disclose, for example, the 3. Clarifying Amendments three maturity calculations as required following data: security categorizations, We are adopting, as proposed, several under rule 2a–7: WAM, WAL, and the whether a security is valued using level amendments to clarify current legal maturity date.1503 3 measurements; more detailed instructions and items of Form N–MFP. information about securities at the time We are also adopting, as proposed, a Revising the form to include these requirement that a fund disclose the of purchase; and liquidity metrics). We believe that the additional information clarifications should improve the ability number of shares outstanding, to the of fund managers to complete the form nearest hundredth, at both the series required is readily available to funds as a matter of general business practice and and improve the quality of the data they level and class level.1504 This 1506 therefore will not impose costs on submit to us. We believe that many information would permit us to verify or money market funds other than those of our clarifying amendments are detect errors in information provided on required to modify systems used to consistent with current filing Form N–MFP, such as NAV. We are also 1507 aggregate data and file reports on Form practices. adopting, as proposed, a requirement N–MFP. These costs are discussed in We understand that some fund that a fund disclose, where applicable, section IV.C.2 below. managers compile their funds’ portfolio the period remaining until the principal These new reporting requirements holdings information as of the last amount of a security may be recovered will improve informational efficiency by calendar day of the month, even if that through a demand feature and whether improving the transparency of potential day falls on a weekend or holiday. To a security demand feature is risks in money market funds and provide flexibility, we are amending, as conditional.1505 As we discussed in the promoting better-informed investment proposed, the instructions to Form N– proposal, these amendments will decisions, which, in turn, will lead to a MFP to clarify that, unless otherwise improve the Commission’s and better allocation of capital. Similarly, specified, a fund may report information (investors’) ability to evaluate and the increased transparency may promote on Form N–MFP as of the last business monitor a security’s credit and default competition among funds as fund day or any later calendar day of the risk. We did not receive comment on managers are exposed to external market month.1508 We are also revising, as discipline and better-informed investors proposed, the definition of ‘‘Master- 1501 Form N–MFP Item C.12. who may be more likely to select an Feeder Fund’’ to clarify that the 1502 We are also newly clarifying that the maturity alternative investment if they are not definition of ‘‘Feeder Fund’’ includes date required to be reported in current Form N– comfortable with the risk-return profile MFP Item 35 is the maturity date used to calculate unregistered funds (such as offshore WAM under rule 2a–7(d)(1)(ii) (see Form N–MFP of their fund. As we discussed in the Item C.11) and the maturity date required to be Proposing Release, the newly disclosed 1506 We are also adopting, as proposed, technical reported in current Form N–MFP Item 36 is the information may cause some money changes to the ‘‘General Information’’ section of the ultimate legal maturity date, i.e., the date on which, market fund investors to move their form that will clarify the circumstances under in accordance with the terms of the security which a money market fund must complete certain without regard to any interest rate readjustment or assets among different money market question sub-parts. See Form N–MFP Items 6 and demand feature, the principal amount must funds, but we do not have the 7. unconditionally be paid (see Form N–MFP Item information necessary to provide a 1507 As discussed below, the final amendments C.13). The ultimate legal maturity date, as clarified, reasonable estimate of this possibility. are consistent with written guidance our staff has will help us distinguish between debt securities In addition, some investors may move provided to money market fund managers and that are issued by the same issuer. service providers completing Form N–MFP. 1503 Form N–MFP Items C.11, C.12 and C.13. In assets among money market funds and 1508 See Form N–MFP General Instruction A (Rule a modification from the proposal, we have changed alternative investments (e.g., private as to Use of Form N–MFP); rule 30b1–7. Our the term ‘‘final legal maturity date’’ in Item C.13 of liquidity funds, separately managed approach is also consistent with a previous Form N–MFP to ‘‘ultimate legal maturity date’’ to accounts, or certificates of deposit) or interpretation provided by our staff. See Staff clarify the reporting date for securities that may Responses to Questions about Rule 30b1–7 and have varying maturity dates. other segments of the short-term Form N–MFP, Question I.B.1 (revised July 29, 1504 Form N–MFP Items A.17 and B.4. financing markets, but we are unable to 2011), available at http://www.sec.gov/divisions/ 1505 Form N–MFP Items C.14.e and C.14.f. estimate how frequently this will investment/guidance/formn-mfpqa.htm.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47862 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

funds).1509 Our final amendments also of these amendments, we proposed to As discussed above, and in the would clarify, as proposed, that funds amend form N–MFP to require reporting proposal, these clarifying amendments should calculate the WAM and WAL of a security identifier of collateral are intended to improve the quality of reported on Form N–MFP using the securities underlying repurchase the data we receive on Form N–MFP by same methods they use for purposes of agreements.1514 One commenter clarifying a number of reporting compliance with rule 2a–7.1510 We also objected to this revision, arguing that obligations so that all funds report are requiring, as proposed, that funds this level of detail would publicly information on Form N–MFP in a disclose in Part B (Class-Level disclose proprietary information about consistent manner. Accordingly, we do Information about the Fund) the broker-dealer inventories, which may not believe that these clarifying required information for each class of negatively affect allocations of amendments would impose any new the series, regardless of the number of repurchase agreements to money market costs on funds other than those required shares outstanding in the class.1511 funds.1515 We appreciate this concern to modify systems used to aggregate data We also are amending, with certain and are not adopting the requirement to and file reports on Form N–MFP, to the modifications from the proposal report a security identifier of the extent that funds in the past may have discussed below, the reporting collateral securities underlying reported this information differently. requirements for repurchase agreements repurchase agreements for that These costs are discussed in section by restating the item’s requirements as reason.1516 In addition, the same III.G.5 below. Because these clarifying 1512 two distinct questions. The commenter objected to the revised amendments will not change funds’ amendment would make clear that investment categories we proposed current reporting obligations, we believe information about the securities subject regarding this collateral, arguing that we there will be no effect on efficiency, to a repurchase agreement must be should instead use the categories used competition, or capital formation. disclosed regardless of how the fund to report tri-party repurchase agreement 4. Public Availability of Information treats the acquisition of the repurchase information to the Federal Reserve Bank As we proposed, we are today agreement for purposes of rule 2a–7’s of New York (‘‘NY Fed’’).1517 We agree 1513 eliminating the 60-day delay on public diversification requirements. As part that conforming these categories to availability of Form N–MFP data.1521 those used in other reporting contexts 1509 Currently, each money market fund See Form N–MFP General Instruction E will ease reporting burdens and enhance (defining ‘‘Master-Feeder Fund,’’ and defining must file information on Form N–MFP comparability, and accordingly have ‘‘Feeder Fund’’ to include a registered or electronically within five business days unregistered pooled investment vehicle). Form N– modified the proposed investment after the end of each month and that MFP requires that a master fund report the identity categories to conform them to the of any feeder fund. Our amendment is designed to 1518 information is made publicly available address inconsistencies in reporting of master- categories used by the NY Fed. 60 days after the end of the month for feeder fund data that we have observed in filings, Finally, we are amending, as which it is filed. and will help us determine the extent to which feeder funds, wherever located, hold a master proposed, the items in Form N–MFP Several commenters objected to our fund’s shares. The change will also reflect how we that require information about demand proposed elimination of the 60-day understand data from master-feeder funds is features, guarantors, or enhancement delay, particularly considering the collected by the ICI for its statistical reports. We are providers to make clear that funds sensitivity of the new lot level security also making grammatical and conforming amendments to Form N–MFP Items A.7 and A.8, as should disclose the identity of each reporting that we had proposed (but, as proposed. demand feature issuer, guarantor, or discussed above, are not adopting).1522 1510 See Form N–MFP Items A.11 and A.12 enhancement provider and the amount Other commenters supported shortening (defining ‘‘WAM’’ and ‘‘WAL’’ and cross- (i.e., percentage) of fractional support the delay to five or ten days (primarily referencing the maturity terms to rule 2a–7). We are also amending the 7-day gross yield to require that provided, which should help us monitor to permit amendments to fix problems the resulting yield figure be carried to (removing the funds diversification.1519 Our in the data if needed),1523 or eliminating words ‘‘at least’’) the nearest hundredth of one per amendments also clarify, as proposed, it entirely.1524 cent and clarify that master and feeder funds should that a fund is not required to provide This delay, which we instituted when report the 7-day gross yield (current Form N–MFP Item 17) at the master fund level. Form N–MFP Item additional information about a we adopted the form in 2010, responded A.19. These amendments are intended to achieve security’s demand feature(s) or to commenters’ concerns regarding consistency in reporting and remove potential guarantee(s) unless the fund is relying potential reactions of investors to the ambiguity for feeder funds when reporting the 7- on the demand feature or guarantee to extent of the additional disclosure of day gross yield. 1511 See text before Form N–MFP Item B.1. Our determine the quality, maturity, or funds’ portfolio information and 1525 staff has found that funds inconsistently report fund liquidity of the security.1520 shadow NAVs in the form. Although class information, for example, when a fund does we expected that, over time, investors not report a fund class registered on Form N–1A N–MFP Item 1 (amending the format of reporting and analysts would become more because the fund class has no shares outstanding. date provided by funds); and Form N–MFP Item accustomed to the information disclosed Our amendment is intended to clarify a fund’s A.10 (modifying, for consistency, the names of reporting obligations and provide Commission staff money market fund categories). about fund portfolios and thus there (and investors) with more complete information 1514 Proposed Form N–MFP Item C.8.c. may be less need in the future to keep about each fund’s . 1515 Wells Fargo Comment Letter. 1512 See Form N–MFP Item C.7 (requiring that a 1516 See Form N–MFP Item C.8. quality, maturity, or liquidity of the security. See fund disclose if it is treating the acquisition of a 1517 Wells Fargo Comment Letter. Form N–MFP Items C.14 and C.15. repurchase agreement as the acquisition of the 1521 underlying securities (i.e., collateral) for purposes 1518 See Form N–MFP Item C.8.h. See rule 30b1–7 (eliminating subsection (b), of portfolio diversification under rule 2a–7). See 1519 See Form N–MFP Items C.14—C.16. public availability). 1522 Form N–MFP Item C.8. (requiring that a fund 1520 Form N–MFP already requires that a fund See, e.g., BlackRock II Comment Letter; Legg describe the securities subject to the repurchase disclose only security enhancements on which the Mason & Western Asset Comment Letter. agreement). This information should be readily fund is relying to determine the quality, maturity, 1523 See, e.g., ICI Comment Letter; Federated II available to funds and would enhance the ability of or liquidity of the security. See current Form N– Comment Letter; Vanguard Comment Letter. Commission staff and others to evaluate the risks MFP Item 39. Similarly, we are amending, as 1524 See U.S. Bancorp Comment Letter (‘‘We are (e.g., rollover risk or the duration of the lending) proposed, current Form N–MFP Items 37 (demand in full support of immediate release of a monthly presented by investments in repurchase agreements. features) and 38 (guarantees) to make clear that Form N–MFP. . .’’). See Form N–MFP Item C.8.a. funds are required to disclose information relating 1525 See 2010 Adopting Release, supra note 17, at 1513 We are also making several other non- to demand features and guarantees only when the section II.E.2 (noting that there may be less need in substantive clarifications to other items. See Form fund is relying on these features to determine the the future to require a 60-day delay).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47863

the portfolio information private for 60 because it is more timely and amendments to Form N–MFP will result days, we believed then that the shadow informative. Because, as discussed in first-year aggregate additional 47,515 price data should not be made public above, shadow prices (which were a burden hours at a total time cost of immediately, at least initially.1526 primary reason why we adopted the 60- $12.3 million plus $356,256 in total However, with experience, we now day delay in making filings public) have external costs for all funds, and 33,540 believe that the immediate release of the been disclosed by a number of money burden hours at a total time cost of $8.7 shadow price data and other money market funds since February 2013 million plus $356,256 in total external market fund portfolio security data apparently without incident, we do not costs for all funds each year would not be harmful and that investors believe that eliminating the 60-day hereafter.1531 may benefit from more timely access to delay would affect capital formation. the data. This is based, in part, on our H. Amendments to Form PF Reporting understanding that many money market 5. Operational Implications of the N– Requirements funds now disclose their shadow prices MFP Amendments Today the Commission is also every business day on their Web sites, We anticipate that fund managers amending Form PF, the form that and frequently provide lists of holdings would incur costs relating to reporting certain investment advisers registered and information about liquidity to the the new items of information we are with the Commission use to report public as well. requiring on Form N–MFP. To reduce information regarding the private funds Several commenters requested that if costs, we have decided to make needed they manage. Among other things, Form we eliminated the public availability improvements to the form at the same delay that we lengthen the 5-day filing time we are making amendments PF requires advisers to report certain time period in light of the increased necessitated by the amendments to rule information about the ‘‘liquidity funds’’ reporting requirements under the 2a–7 we are adopting.1528 We note that they manage, which are private funds amended form, in order to provide the clarifying amendments should not that seek to maintain a stable NAV (or additional time to fix any potential affect, or should only minimally affect, minimize fluctuations in their NAVs) errors.1527 As discussed above, we are current filing obligations or the and thus can resemble money market 1532 not adopting some of the more extensive information content of the filings. funds. In the proposal, we noted a reporting requirements that we As we discussed in the proposal, we concern that some of the proposed proposed (such as lot level security expect that the operational costs to reforms could result in assets shifting reporting) and we have streamlined and money market funds to report the from registered money market funds to revised other requirements to better ease information required in proposed Form unregistered products such as liquidity the filing burden. In addition, the longer N–MFP would be the same costs we funds, and we proposed amendments to the filing period provided, the more it discuss in the Paperwork Reduction Act Form PF to, in part, help the increases the risk of staleness in the analysis in section IV of the Release, Commission and FSOC track any such reported data and thereby reduces its below, and we requested comment on potential shift in assets and better usefulness to the Commission and to the that belief.1529 No commenters provided understand the risks associated with 1533 public. We do not believe providing a specific data or estimates regarding the it. filing period of longer than 5 days is cost estimates we provided in the Most commenters who addressed the necessary, in part because we are not Proposing Release for the amendments proposed PF amendments supported adopting some of the more onerous to Form N–MFP, although some them, agreeing that they would help reporting requirements we proposed, suggested that the costs of some track such a potential shift,1534 and one and in part because in our experience, amendments could be significant.1530 commenter objected, urging the less than 0.5% of money market funds As discussed above, we have revised the Commission to consider the significant have needed to make amendments to final amendments from our proposal in costs, and questioning the potential Form N–MFP filings after the reporting a number of ways in order to reduce benefits.1535 As discussed in greater deadline to fix reporting issues in their costs to the extent feasible and still detail below, we have considered the filings. This leads us to believe that the achieve our goals of enhancing and costs of filing this information with us, value of immediate public access to the improving the monitoring of money and believe that they are justified by the data justifies the risk of needing to make market fund risks. Accordingly, we significant benefits to the Commission amendments. Accordingly, we are not continue to expect that the operational and FSOC in better enabling us to track changing the current 5-day reporting costs to money market funds to report and respond to potential shifts in assets period at this time. the information required in Form N– from registered money market funds Eliminating the 60-day delay will MFP would be the same costs we into unregistered alternatives. provide more timely information to the discuss in the Paperwork Reduction Act Accordingly, today we are adopting the public and greater transparency of analysis in section IV.C.3 of the Release, Form PF amendments largely as money market fund information, which below, which have been reduced to proposed, with some revisions to could promote efficiency. This account for the changes we are making respond to comments and correspond disclosure could also make the monthly from the proposal, as discussed in that the reporting as much as possible to the disclosure on Form N–MFP more section. As discussed in more detail in relevant to investors, financial analysts, that section, we estimate that our 1531 See infra section IV.C.3. and others by improving their ability to 1532 For purposes of Form PF, a ‘‘liquidity fund’’ more timely assess potential risks and 1528 One commenter noted the benefit of is any private fund that seeks to generate income make informed investment decisions. In consolidating changes to the form at a single time, by investing in a portfolio of short term obligations other words, investors may be more noting that each time they have to amend their in order to maintain a stable net asset value per unit systems to report new information to the or minimize principal volatility for investors. See likely to use the reported information Commission on Form N–MFP they incur significant Form PF: Glossary of Terms. technology related costs. See Dreyfus Comment 1533 See Proposing Release, supra note 25, at 1526 See 2010 Adopting Release, supra note 17, at Letter. section I. text accompanying nn.329–343. 1529 See Proposing Release supra note 25, at 1534 See, e.g., Goldman Sachs Comment Letter; ICI 1527 See, e.g., ICI Comment Letter; Dechert section III.H.6. Comment Letter; Oppenheimer Comment Letter. Comment Letter; Schwab Comment Letter. 1530 See, e.g., Fidelity Comment Letter. 1535 See SSGA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47864 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

amendments we are making to Form N– As discussed in the Proposing liquidity fund advisers today are MFP. Release, we share the concern expressed required to file information on Form PF We adopted Form PF, as required by by some commenters that, if the money quarterly, including certain information the Dodd-Frank Act,1536 to assist in the market fund reforms we are adopting about each liquidity fund they monitoring and assessment of systemic today cause investors to seek manage.1542 Under our final risk; to provide information for FSOC’s alternatives to money market funds, amendments, for each liquidity fund it use in determining whether and how to including private funds that seek to manages, a large liquidity fund adviser deploy its regulatory tools; and to maintain a stable NAV but that are not would be required to provide, quarterly collect data for use in our own registered with the Commission, this and with respect to each portfolio regulatory program.1537 As discussed in shift could increase risk by reducing security, the following information for more detail below, the Commission and transparency of the potential purchasers each month of the reporting period:1543 FSOC have recognized the potentially of short-term debt instruments.1540 We • The name of the issuer; increased significance of cash discuss in detail the potential for money • the title of the issue; management products other than money market fund investors to reallocate their • certain security identifiers; market funds, including liquidity funds, assets to alternative investments in • the category of investment 1544 (e.g., after the money market fund reforms we section III.A.1.c.iv above. Treasury debt, U.S. government agency are adopting today are effective.1538 The amendments that we are adopting debt, asset-backed commercial paper, Therefore, to enhance the ability to to Form PF today are designed to certificate of deposit, repurchase monitor and assess the short-term achieve two primary goals. First, they agreement 1545); financing markets and to facilitate our are designed to ensure to the extent • if the rating assigned by a credit oversight of those markets and their possible that any further money market rating agency played a substantial role participants, we are today requiring fund reforms do not decrease in the liquidity fund’s (or its adviser’s) large liquidity fund advisers—registered transparency in the short-term financing advisers with $1 billion or more in markets, which will better enable FSOC control with the investment adviser. See Form PF: to monitor and address any related Glossary of Terms (defining the term ‘‘related combined money market fund and person’’ by reference to Form ADV). Generally, a liquidity fund assets—to file virtually systemic risks and better enable us to person is separately operated from an investment the same information with respect to develop effective regulatory policy adviser if the adviser: (1) Has no business dealings their liquidity funds’ portfolio holdings responses to any shift in investor assets. with the related person in connection with advisory Second, the amendments to Form PF are services the adviser provides to its clients; (2) does on Form PF as money market funds are not conduct shared operations with the related 1539 required to file on Form N–MFP. designed to enable more effective person; (3) does not refer clients or business to the administration of relevant regulatory related person, and the related person does not refer 1536 See Reporting by Investment Advisers to programs even if investors do not shift prospective clients or business to the adviser; (4) Private Funds and Certain their assets as a result the amendments does not share supervised persons or premises with Operators and Commodity Trading Advisors on the related person; and (5) has no reason to believe Form PF, Investment Advisers Act Release No. 3308 we are adopting today, as the increased that its relationship with the related person (Oct. 31, 2011) [76 FR 71128 (Nov. 16, 2011)] transparency concerning liquidity otherwise creates a conflict of interest with the (‘‘Form PF Adopting Release’’) at section I. Form PF funds, combined with information we adviser’s clients. See Form PF: Glossary of Terms is a joint form between the Commission and the already collect on Form N–MFP, will (defining the term by reference to Form ADV). CFTC only with respect to sections 1 and 2 of the 1542 See Form PF Instruction 3 and section 3. This Form; section 3, which we are amending today, and provide a more complete picture of the in contrast to Form N–MFP, which is filed on a section 4 were adopted only by the Commission. Id. short-term financing markets in which monthly basis. As discussed below, we currently 1537 Although Form PF is primarily intended to liquidity funds and money market funds believe that quarterly filing of this information most assist FSOC in its monitoring obligations under the both invest. appropriately balances our need for this Dodd-Frank Act, we also may use information information with the burdens of filing the data, collected on Form PF in our regulatory program, 1. Overview of Proposed Amendments especially considering that large liquidity fund including examinations, investigations, and to Form PF advisers file information quarterly already about the investor protection efforts relating to private fund funds they advise, but do not currently file portfolio advisers. See Form PF Adopting Release, supra note Our Form PF amendments apply only information about those funds. 1536, at sections II and VI.A. to large liquidity fund advisers, which 1543 See Form PF Question 63. Advisers will be 1538 See infra note 1565 and accompanying text. generally are SEC-registered investment required to file this information with their quarterly 1539 liquidity fund filings with data for the quarter As we proposed, we are incorporating in a advisers that advise at least one new Question 63 in section 3 of Form PF the broken down by month. Advisers will not be substance of virtually all of the questions on Part liquidity fund and manage, collectively required to file information on Form PF more C of Form N–MFP as amended, except that we have with their related persons, at least $1 frequently as a result of today’s proposal because modified the questions where appropriate to reflect billion in combined liquidity fund and large liquidity fund advisers already are required to file information each quarter on Form PF. See Form that liquidity funds are not subject to rule 2a–7 money market fund assets.1541 Large (although some liquidity funds have a policy of PF Instruction 9. complying with rule 2a–7’s risk-limiting 1544 As under amended Form N–MFP, we are conditions) and have not added questions that liquidity funds, and we believe the additional revising the investment categories form the would parallel Items C.7 and C.9 of amended Form questions on Form PF would provide sufficient proposal in the same way to more accurately reflect N–MFP. As we proposed, we are not including a information about a portfolio security’s credit the investment categories commonly used today. question that would parallel Item C.7 because that quality and the large liquidity fund adviser’s use of See supra section III.G.2.g. item relates to whether a money market fund is credit ratings. 1545 For repurchase agreements we are also treating the acquisition of a repurchase agreement 1540 See Proposing Release, supra note 25, n.803. requiring large liquidity fund advisers to provide as the acquisition of the collateral for purposes of 1541 An adviser is a large liquidity fund adviser additional information regarding the underlying rule 2a–7’s diversification testing; liquidity funds, if it has at least $1 billion combined liquidity fund collateral and whether the repurchase agreement is in contrast, are not subject to rule 2a–7’s and money market fund assets under management ‘‘open’’ (i.e., whether the repurchase agreement has diversification limitations, and the information on as of the last day of any month in the fiscal quarter no specified end date and, by its terms, will be repurchase agreement collateral we are collecting immediately preceding its most recently completed extended or ‘‘rolled’’ each business day (or at through new Question 63(g) on Form PF would fiscal quarter. See Form PF: Instruction 3 and another specified period) unless the investor allow us to better understand liquidity funds’ use Section 3. This $1 billion threshold includes assets chooses to terminate it). As under amended Form of repurchase agreements and their collateral. Item managed by the adviser’s related persons, except N–MFP, we are not adopting the proposed CUSIP C.9 asks whether a portfolio security is a rated first that an adviser is not required to include the assets reporting requirement, and we are amending the tier security, rated second tier security, or no longer managed by a related person that is separately proposed repurchase agreement collateral an eligible security. As we proposed, we are not operated from the adviser. Id. An adviser’s related investment categories to better align with the including a parallel question in Form PF because persons include persons directly or indirectly categories used by the NY Fed. See supra section these concepts would not necessarily apply to controlling, controlled by, or under common III.G.3.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47865

evaluation of the quality, maturity or the same positions as a liquidity fund of such reporting do not justify the liquidity of the security, the name of the adviser reports on Form PF.1549 potential benefits at this time, and that each and the rating After considering the comments the data may be better collected on a each credit rating agency assigned to the received and the importance and utility more systematic market wide basis. security; of the information that would be Accordingly, we are not today adopting • the maturity date used to calculate reported on amended Form PF (as the proposed lot level reporting for weighted average maturity; discussed further below), we are today Form PF.1555 • the maturity date used to calculate adopting the Form PF amendments One commenter suggested that Form weighted average life; substantially as proposed. As noted PF be filed monthly like N–MFP, rather • 1546 above, most commenters who discussed than on a quarterly basis, to better align the ultimate legal maturity date; 1556 • the Form PF amendments generally the information in the two forms, whether the instrument is subject to supported them,1550 although one although another comment opposed a demand feature, guarantee, or other commenter objected, suggesting that the such a monthly filing requirement.1557 enhancements, and information about costs of compliance would outweigh the We are not requiring monthly filing of any of these features and their benefits.1551 We have made a number of Form PF at this time because we believe providers; modifications to the Form PF reporting the ongoing costs and system changes • the value of the fund’s position in requirement, such as removing lot level necessary for large liquidity funds to the security and, if the fund uses the purchase and sale reporting, that should make such a monthly filing would not amortized cost method of valuation, the help minimize costs and ease the be justified by the utility of more amortized cost value, in both cases with burden. Nonetheless, we recognize that frequent filing, especially in light of the and without any sponsor support; there are costs to filing this information fact that these funds currently file Form • the percentage of the liquidity with us which are discussed in detail PF on a quarterly basis and these fund’s assets invested in the security; below, and believe that they are justified amendments are an enhancement to that • whether the security is categorized by the significant benefits to FSOC and filing. To require large liquidity advisers as a level 3 asset or liability on Form the Commission in better enabling to move to a monthly reporting schedule PF; 1547 tracking and responding to potential would impose significant new costs, • whether the security is an illiquid shifts in assets from registered money over and above the costs associated with security, a daily liquid asset, and/or a market funds into unregistered the Form PF amendments we are weekly liquid asset, as defined in rule alternatives. adopting today, requiring these advisers 2a–7; and Another commenter suggested that we to change systems and processes • any explanatory notes.1548 reorganize and consolidate the designed for quarterly reporting to a questions in the proposed form monthly schedule. As noted above, These amended reporting amendments to minimize the system several reporting requirements do ask requirements are largely the same as the changes necessary to file the form.1552 for information on a monthly basis reporting requirements for registered We agree with this commenter and the within the quarterly filed Form PF, money market funds under amended final amendments have been organized which should allow an effective Form N–MFP, with some modifications to minimize system changes and costs comparison of the data to the to better tailor the reporting to private as much as possible.1553 information collected on Form N–MFP liquidity funds. As we proposed, the Consistent with our proposed and will allow for effective oversight of final amendments will also remove amendments to Form N–MFP, we investment activities of large liquidity current Questions 56 and 57 on Form proposed to require large liquidity fund advisers. PF. These questions generally require advisers to provide lot level information Another commenter asked that we large liquidity fund advisers to provide about any securities purchased or sold exempt unregistered money market information about their liquidity funds’ by their liquidity funds during the funds from filing the Form PF portfolio holdings broken out by asset reporting period, including sale and amendments if the unregistered money class (rather than security by security). purchase prices.1554 As discussed in market fund is exclusively owned by We will be able to derive the section III.G.2.c above, we have been registered funds investing in an information currently reported in persuaded by commenters that the costs unregistered fund pursuant to rule response to those questions from the 12d1–1 under the Investment Company new portfolio holdings information we 1549 See Form PF Question 64. This question is propose to require advisers to provide. based on the current definition of a ‘‘parallel fund 1555 See supra note 1476 and accompanying text. The amendments will also require, as structure’’ in Form PF. See Form PF: Glossary of Although as discussed above, we are not adopting Terms (defining a ‘‘parallel fund structure’’ as ‘‘[a] the lot level reporting requirements generally, we proposed, large liquidity fund advisers structure in which one or more private funds (each, to identify any money market fund are adopting a requirement to report the coupon or a ‘parallel fund’) pursues substantially the same yield of the security as of the reporting date. We advised by the adviser or its related investment objective and strategy and invests side proposed to include this reporting requirement with persons that pursues substantially the by side in substantially the same positions as the other lot level reporting questions. See proposed same investment objective and strategy another private fund’’). Form PF Question 63(o). Reporting this information 1550 See, e.g., Goldman Sachs Comment Letter; ICI and invests side by side in substantially would not require the use of lot level data, and thus Comment Letter; Oppenheimer Comment Letter. should not pose the same difficulties as the other 1551 SSGA Comment Letter. reporting requirements we are not adopting. Much 1546 We are changing this from ‘‘final’’ as 1552 Comment Letter of Axiom SL (Aug. 28, 2013) like under the final amendments to Form N–MFP, proposed to ‘‘ultimate’’ for the same reasons we are (‘‘Axiom Comment Letter’’). the final Form PF amendments would include making this change in Form N–MFP. See supra note 1553 By eliminating lot level sale data reporting reporting of the coupon in the title of the issue but 1503. (proposed question 64 of Form PF) and accordingly information about yield would be in a standalone 1547 See Form PF Question 14. See also infra renumbering proposed question 65 (parallel funds) question. See proposed Form PF Questions 63(c) notes 1466–1470 and accompanying and following as question 64, we have restructured the and 63(o). As a result of not adopting question 64 text. amendments to Form PF so that the amendments about lot level sales, we are also renumbering 1548 We are also defining the following terms in keep the same numbering range as the current form proposed question 65 on parallel funds as question Form PF, as proposed: conditional demand feature; like the commenter suggested. See Form PF 64 and relabeling the Item as F rather than Item G. credit rating agency; demand feature; guarantee; Question 64. See Form PF Item F, Question 64. guarantor; and illiquid security. See Form PF: 1554 See proposed Form PF Question 64. See also 1556 ICI Comment Letter. Glossary of Terms. supra notes 1474–1475 and accompanying text. 1557 Oppenheimer Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47866 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Act.1558 Rule 12d1–1 permits a registered money market funds that dissimilar standards.’’1563 We expect, registered fund to invest in an might mitigate their likelihood of posing therefore, that requiring advisers to unregistered money market fund in systemic risk. provide additional information on Form excess of the limits of section 12(d)(1) We believe, based on our staff’s PF will enhance the ability to monitor of the Act, provided, among other consultations with staff representing the and assess risk in the short-term things, that the unregistered fund financing markets. members of FSOC, that the additional operates in compliance with rule 2a–7 We are requiring only large liquidity information we are requiring advisers to of the Act. The commenter argued that fund advisers to report this additional because these funds are exclusively report on Form PF will assist FSOC in information for the same reason that we owned by registered funds, any shift in carrying out these responsibilities. previously determined to require only assets to these unregistered money Several commenters agreed that the larger private fund advisers to provide market funds would not represent the Form PF amendments will assist FSOC more comprehensive information on kind of shift that the Form PF and the Commission in these their respective industries on Form PF: amendments are designed to monitor, responsibilities.1561 FSOC and the because a relatively small group of and thus such 12d1–1 funds should not Commission have recognized the risks advisers represents a substantial portion be required to bear the burdens of filing that may be posed by cash management of the assets.1564 Based on information the Form PF amendments. Our products other than money market filed on Form PF and Form ADV, as of amendments to Form PF are designed, funds, including liquidity funds, and the end of 2013, we estimate that there in part, to allow better monitoring of the potentially increased significance of were approximately 24 large liquidity risks associated with investments in such products after we adopt the money fund advisers (out of 43 total advisers money market instruments and to market fund reforms we are making that advise at least one liquidity fund), generally track and monitor money today.1562 FSOC has also stated that it with their aggregate liquidity fund market asset flows. Exempting such and its members ‘‘intend to use their assets under management representing funds from filing amended Form PF authorities, where appropriate and approximately 91% of liquidity fund would not be consistent with this goal, within their jurisdictions, to address assets managed by all advisers and could leave a significant gap in our any risks to financial stability that may registered with the Commission. ability to monitor and track money arise from various products within the This threshold also should minimize market instrument holdings. In the cash management industry in a the costs of our amendments because absence of the Form PF portfolio consistent manner,’’ as ‘‘[s]uch large liquidity fund advisers already are security reporting requirements, if there consistency would be designed to required to make quarterly reports on was a shift in assets from registered reduce or eliminate any regulatory gaps Form PF and, as of the end of 2013, money market funds that file portfolio that could result in risks to financial virtually all either advise a money holdings reports under Form N–MFP to stability if cash management products market fund or have a related person that advises a money market fund. unregistered 12d1–1 funds that do not with similar risks are subject to file such information about their Requiring large liquidity fund advisers to provide substantially the same holdings, we and FSOC would lose 1561 See Goldman Sachs Comment Letter (the PF significant transparency and monitoring amendments will ‘‘. . . assist the Financial information required by Form N–MFP ability. Accordingly, we are not Stability Oversight Council in fulfilling its therefore may reduce the burdens adopting such an exemption. responsibilities and better enable the Commission associated with our amendments, which to develop effective regulatory policy responses to we discuss below, because large 2. Utility of New Information, Including any shift in investor assets from money funds to liquidity fund advisers generally already Benefits, Costs, and Economic private liquidity funds.’’); ICI Comment Letter. 1562 See Proposed Recommendations Regarding have (or may be able to readily obtain Implications Money Market Mutual Fund Reform, Financial access to) the systems, service As discussed in the 2013 Proposing Stability Oversight Council [77 FR 69455 (Nov. 19, providers, and/or staff necessary to 2012)] (the ‘‘FSOC Proposed Recommendations’’), capture and report the same types of Release, the information that advisers at 7 (‘‘The Council recognizes that regulated and must report on Form PF (both currently unregulated or less-regulated cash management information for reporting on Form N– and under the final amendments) products (such as unregistered private liquidity MFP. These same systems, service concerning their liquidity funds is funds) other than MMFs may pose risks that are providers, and/or staff may allow large designed to assist FSOC in assessing the similar to those posed by MMFs, and that further liquidity fund advisers to comply with MMF reforms could increase demand for non-MMF our changes to Form PF more efficiently risks undertaken by liquidity funds, cash management products. The Council seeks their susceptibility to runs, and how comment on other possible reforms that would and at a reduced cost than if we were their investments might pose systemic address risks that might arise from a migration to to require advisers to report information risks either among liquidity funds or non-MMF cash management products.’’) We, too, that differed materially from that which have recognized that ‘‘[l]iquidity funds and the advisers must file on Form N–MFP. through contagion to registered money registered money market funds often pursue similar market funds.1559 The information that strategies, invest in the same securities and present advisers must report is intended to aid similar risks.’’ See Form PF Adopting Release, 1563 See FSOC Proposed Recommendations, supra supra note 1536, at section II.A.4. See also note 1562, at 7. The President’s Working Group on FSOC in its determination of whether Reporting by Investment Advisers to Private Funds Financial Markets reached a similar conclusion, and how address issues related to and Certain Commodity Pool Operators and noting that because vehicles such as liquidity funds systemic risk.1560 Finally, the Commodity Trading Advisors on Form PF, ‘‘can take on more risks than MMFs, but such risks information that advisers must report is Investment Advisers Act Release No. 3145 (Jan. 26, are not necessarily transparent to investors . . ., 2011) [76 FR 8068 (Feb. 11, 2011)] (‘‘Form PF unregistered funds may pose even greater systemic designed to assist FSOC and the Proposing Release’’), at note 68 and accompanying risks than MMFs, particularly if new restrictions on Commission in assessing the extent to text (explaining that, ‘‘[d]uring the financial crisis, MMFs prompt substantial growth in unregistered which a liquidity fund is being managed several sponsors of ‘enhanced cash funds,’ a type funds.’’ See PWG Report, supra note 506, at 21. The consistent with restrictions imposed on of liquidity fund, committed capital to those funds potentially increased risks posed by liquidity funds to prevent investors from realizing losses in the were of further concern because these risks ‘‘are funds,’’ and noting that ‘‘[t]he fact that sponsors of difficult to monitor, since [unregistered cash 1558 See Wells Fargo Comment Letter. certain liquidity funds felt the need to support the management products like liquidity funds] provide 1559 See Form PF Adopting Release, supra note stable value of those funds suggests that they may far less market transparency than MMFs.’’ Id. at 35. 1536, at section II.C.3. be susceptible to runs like registered money market 1564 See Form PF Adopting Release, supra note 1560 Id. funds’’). 1536, at n.88 and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47867

In addition to our concerns about the defining large liquidity fund advisers which liquidity funds were exposed to ability to assess risks associated with subject to more comprehensive the ; lacking this money market fund investments, we reporting requirements as advisers with information, neither we nor our staff also are concerned about losing $1 billion in combined money market would be able as effectively to assess the transparency regarding money market fund and liquidity fund assets under risks across the liquidity fund industry fund investments that may shift into management today reflects the and, by extension, the short-term liquidity funds as a result of the other similarities between money market financing markets. reforms we are adopting today and our funds and liquidity funds and the need Position level information for ability effectively to formulate policy for comprehensive information liquidity funds managed by large responses to such a shift in investor concerning advisers’ management of liquidity fund advisers also will allow assets.1565 We noted in the proposal that large amounts of short-term assets our staff more efficiently and effectively a run on liquidity funds could spread to through either type of fund. The need to identify longer-term trends in the money market funds because, for for this comprehensive data will be industry and at particular liquidity example, both types of funds often heightened if money market fund funds or advisers. The aggregated invest in the same securities as noted investors shift their assets to liquidity position information that advisers above.1566 Our ability to formulate a funds in response to the amendments provide today may obscure the level of policy response to address this risk we are adopting today. risk in the industry or at particular could be diminished if we had less Finally, this increased information on advisers or liquidity funds that, if more transparency concerning the portfolio liquidity funds managed by large fully understood by our staff, could holdings of liquidity funds as compared liquidity fund advisers also will be allow the staff to more efficiently and to money market funds, and thus were useful even absent a shift in money effectively target our examinations not able as effectively to assess the market fund investor assets resulting efforts of these advisers, and could degree of correlation between various from these reforms. Collecting this better inform the staff’s policy funds or groups of funds that invest in information about these liquidity funds recommendations. the short-term financing markets, or if will, when combined with information As we discussed in the proposal, our we were unable proactively to identify collected on Form N–MFP, provides a experience with the portfolio funds that own . more complete picture of the short-term information money market funds report Several commenters agreed that the financing markets, allowing the SEC and on Form N–MFP—which was limited at Form PF amendments would reduce the FSOC to more effectively fulfill our the time we adopted Form PF—has chance that these reforms will diminish respective statutory mandates. For proved useful in our regulation of transparency in the short-term financing example, we discuss the contagion risk money market funds in these and other markets.1567 Indeed, Form PF, by above. But it may be difficult to assess ways and has informed the amendments this risk fully today without more we are adopting today.1569 During the 1565 See, e.g., DERA Study, supra note 24, at detailed information about the portfolio 2011 Eurozone debt crisis, for example, section 4.C (analysis of investment alternatives to holdings of the liquidity funds managed we and our staff benefitted from the money market funds, considering, among other by advisers who manage substantial issues, the potential for investors to shift their ability to determine which money assets to money market fund alternatives, including amounts of short-term investments and market funds had exposure to specific liquidity funds, in response to further money the ability to combine that data with the financial institutions (and other market fund reforms and certain implications of a information we collect on Form N–MFP. positions) and from the ability to see shift in investor assets). For example, if a particular security or how funds changed their holdings as the 1566 Liquidity funds may generally have a higher issuer were to come under stress, percentage of institutional shareholders than money crisis unfolded. This information was market funds because liquidity funds rely on without these amendments, our staff useful in assessing risk across the exclusions from the Investment Company Act’s would be unable to determine which industry and at particular money market definition of ‘‘investment company’’ provided by liquidity funds, if any, held that funds. Given the similarities between section 3(c)(1) or 3(c)(7) of that Act. See section security, much like before we adopted 202(a)(29) of the Advisers Act (defining the term money market funds and liquidity funds ‘‘private fund’’ to mean an issuer that would be an Form N–MFP for registered money and the possibility for risk to spread investment company, as defined in section 3, but market funds. This is because advisers between the types of funds, our for section 3(c)(1) or 3(c)(7) of that Act). Funds currently are required only to provide experience with portfolio information relying on those exclusions sell their shares in information about the types of assets private offerings which in many cases are restricted filed on Form N–MFP suggests that to investors who are ‘‘accredited investors’’ as their liquidity funds hold, rather than receiving virtually the same information defined in rule 501(a) under the Securities Act. the individual positions.1568 Our staff for liquidity funds managed by large Investors in funds relying on section 3(c)(7), in could see the aggregate value of all of a liquidity fund advisers will provide addition, generally must be ‘‘qualified purchasers’’ liquidity fund’s positions in unsecured as defined in section 2(a)(51) of the Investment significant benefits to oversight efforts. Company Act. Having a larger institutional commercial paper issued by non-U.S. For all of these reasons and as shareholder base may increase the potential for a financial institutions, for example, but discussed above, we expect that run to develop at a liquidity fund. As discussed in could not tell whether the fund owned requiring large liquidity fund advisers to greater detail in section II.C of this Release, commercial paper issued by any redemption data from the financial crisis suggest report their liquidity funds’ portfolio that some institutional money market fund particular non-U.S. financial institution. information on Form PF as we are investors are likely to redeem from distressed If a particular institution were to come requiring today will provide substantial money market funds more quickly than other under stress, the aggregated information benefits for us and FSOC, including investors and to redeem a greater percentage of their available today would not allow us or holdings. This may be indicative of the way positive effects on efficiency and capital institutional investors in liquidity funds would our staff to determine the extent to behave, particularly liquidity funds that more 1569 Money market funds were required to begin closely resemble money market funds. 1568 See Form PF Question 56 (requiring advisers filing information on Form N–MFP by December 7, 1567 See, e.g., Goldman Sachs Comment Letter to provide exposures and maturity information, by 2010. See 2010 Adopting Release, supra note 17 at (‘‘Finally, GSAM generally supports the asset class, for liquidity fund assets under n.340 and accompanying text. Form PF was amendments to Form PF, which will ensure that management); Form PF Question 57 (requiring proposed shortly thereafter on January 26, 2011, further money market fund reforms do not decrease advisers to provide the asset class and percent of and adopted on October 31, 2011. See Form PF transparency in the short-term financing markets the fund’s NAV for each open position that Proposing Release, supra note 1562; Form PF . . .’); ICI Comment Letter. represents 5% or more of the fund’s NAV). Adopting Release, supra note 1536.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47868 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

formation. As we explained in more proprietary. As we discussed in the activities of large liquidity fund advisers detail when we initially adopted Form Form PF Adopting Release, we do not and their liquidity funds than would be PF, requiring advisers to report on Form intend to make public Form PF possible with the higher level, aggregate PF is intended to positively affect information identifiable to any information that advisers file today on efficiency and capital formation, in part particular adviser or private fund, and Form PF (e.g., the ability to determine by enhancing our ability to evaluate and indeed, the Dodd-Frank Act amended which liquidity funds own a distressed develop regulatory policies and to more the Advisers Act to preclude us from security). effectively and efficiently protect being compelled to reveal this For the reasons discussed above we investors and maintain fair, orderly, and information except in very limited also considered, but ultimately chose efficient markets.1570 circumstances.1572 not to adopt, changes requiring advisers The additional information on Form We note that although the increased to file portfolio information about their PF should better inform our transparency to regulators provided by liquidity funds that differs from the understanding of the activities of our amendments could positively affect information money market funds are liquidity funds and their advisers and capital formation as discussed above, required to file on Form N–MFP. the operation of the short-term financing increased transparency, as we observed Generally, given our experience with markets, including risks that may arise when adopting Form PF, also may have Form N–MFP data, we believe that not in liquidity funds and harm other a negative effect on capital formation if only could different portfolio holdings participants in those markets or those it increases advisers’ aversion to risk information be less useful than that who rely on them—including money and, as a result, reduces investment in required by Form N–MFP, it also could market funds and their shareholders and enterprises that may expose the fund to be more difficult to combine with Form the companies and governments that more risk but be beneficial to the N–MFP data. Requiring advisers to file seek financing in the short-term economy as a whole.1573 Nevertheless, on Form PF virtually the same financing markets. The additional the information collected generally will information money market funds file on information that advisers will report on be non-public, it should not affect large Form N–MFP also should be more Form PF, particularly when combined liquidity fund advisers’ ability to raise efficient for advisers and reduce the with similar data reported on Form N– capital. To the extent that our costs of reporting from a systems MFP, therefore should enhance our amendments were to cause changes in standpoint, because many large ability to evaluate and develop investment allocations that lead to liquidity advisers also manage money regulatory policies and enable us to reduced economic outcomes in the market funds and already have the more effectively and efficiently protect aggregate, our amendments may result systems in place to report the data. investors and maintain fair, orderly, and in a negative effect on capital available Finally, we considered whether to efficient markets. for investment. require large liquidity fund advisers to We also do not believe that our As discussed in detail in the proposal, provide their liquidity funds’ portfolio amendments to Form PF will have a we recognize that large liquidity fund information more frequently than significant effect on competition advisers may have concerns about quarterly, but as discussed in greater because the information that advisers reporting information about their detail above, chose not to adopt this report on Form PF, including the new 1576 liquidity funds’ portfolio holdings and requirement. Monthly filings, for information we are requiring, generally may regard this as commercially example, would provide more current will be non-public and similar types of sensitive information, but noted that data and could facilitate our combining advisers will have comparable burdens such data may be not be as sensitive in the new information with the under the form as we propose to amend this context when compared to other information money market funds file on it.1574 We do not believe the Form N–MFP (which money market private funds, largely because of the amendments’ effect on capital formation types of securities that liquidity funds funds file each month). We balanced the discussed above will be significant, potential benefits of more frequent invest in.1571 No commenters on the again because the information collected reporting against the costs it would proposed Form PF amendments generally will be non-public and, impose and believe, at this time, that objected to the amendments on the basis therefore, should not affect large quarterly reporting is more of the information being sensitive or liquidity fund advisers’ ability to raise appropriate.1577 capital.1575 1570 See generally Form PF Adopting Release, k. Operational Costs supra note 1536, at section V.A (explaining that, in j. Alternatives Considered addition to assisting FSOC fulfill its mission, ‘‘we We recognize, however, that our expect this information to enhance [our] ability to We considered whether we and FSOC amendments to Form PF, while limited evaluate and develop regulatory policies and would be able as effectively to carry out to large liquidity fund advisers, will improve the efficiency and effectiveness of our our respective missions as discussed efforts to protect investors and maintain fair, create some costs for those advisers, and orderly, and efficient markets’’). We explained, for above using the information large also could affect competition, efficiency, example, that Form PF data was designed to allow liquidity fund advisers currently must and capital formation. We continue to us to more efficiently and effectively target our file on Form PF. But as we discuss expect that the operational costs to examination programs and, with the benefit of Form above, we expect that requiring large PF data, to better anticipate regulatory problems advisers to report the new information and the implications of our regulatory actions, and liquidity funds advisers to provide will be the same costs we discuss in the thereby to increase investor protection. See id. We portfolio holdings information will Paperwork Reduction Act analysis in also explained that Form PF data could have a provide a number of benefits and will section IV.H.3 below, as reduced by the positive effect on capital formation because, as a allow better understanding of the result of the increased transparency to regulators lower costs associated with the changes made possible by Form PF, private fund advisers might assess more carefully the risks associated 1572 See Form PF Adopting Release, supra note 1576 See supra note 1556. with particular investments and, in the aggregate, 1536, at section II.D. 1577 Large liquidity fund advisers already are allocate capital to investments with a higher value 1573 See id. at text accompanying and following required to make quarterly filings on Form PF. See to the economy as a whole. See id. at text n.537. Form PF Instruction 9. Requiring large liquidity accompanying and following n.494. 1574 See id. at text accompanying and following fund advisers to provide the new portfolio holdings 1571 See Proposing Release, supra note 25, at n.535. information on a quarterly basis should therefore be Section I.2. 1575 See id. more cost effective for the advisers.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47869

we are making from the proposal diversification amendments, we are issuers.1584 As discussed in the discussed in that section. As discussed requiring that money market funds treat Proposing Release, financial distress at in more detail in that section, we certain entities that are affiliated with an issuer can quickly spread to affiliates estimate that our amendments to Form each other as single issuers when and the valuations and creditworthiness PF would result in an annual aggregate applying rule 2a–7’s 5% issuer of the issuer may depend, in large part, additional burden per large liquidity diversification limit.1581 As discussed on the financial well-being of other fund adviser of 298 burden hours, at a further below, the amended firms within the same corporate total time cost of $79,566, and external diversification provisions exclude family.1585 By requiring diversification costs of $17,104. This will result in certain majority equity owners of asset- of exposure to entities that are affiliated increased aggregate burden hours across backed commercial paper (‘‘ABCP’’) with each other, the rule mitigates credit all large liquidity fund advisers of 8,344 conduits from the requirement to risk to a money market fund by limiting burden hours,1578 at a time cost of aggregate affiliates for purposes of the the fund from assuming a concentrated $2,227,848, and $478,912 in external 5% issuer diversification limit. The amount of risk in a single economic costs.1579 diversification provisions that we are enterprise. Commenters generally These estimates are based on our adopting today also require that a supported the proposal to treat certain estimates of the paperwork burdens money market fund treat the sponsors of entities that are affiliated with each associated with our final amendments to asset-backed securities (‘‘ABS’’) as other as single issuers when applying Form N–MFP because advisers will be guarantors subject to rule 2a–7’s 10% rule 2a–7’s 5% issuer diversification 1586 required to file on Form PF virtually the diversification limit applicable to limit. Commenters also confirmed same information about their large guarantees and demand features, unless our understanding that money market liquidity funds as money market funds the fund’s board makes certain funds today generally attempt to will be required to file on Form N–MFP findings.1582 Lastly, we have decided to identify and measure their exposure to as we are amending it. We therefore adopt (i) as proposed, the removal of the entities that are affiliated with each expect that the paperwork burdens other as part of their risk management twenty-five percent basket, under which associated with Form N–MFP (as we are processes.1587 Based on the comments as much as 25% of the value of amending it) are representative of the we received, we continue to believe that securities held in a money market costs that large liquidity fund advisers requiring diversification of exposure to fund’s portfolio may be subject to will incur as a result of our amendments affiliated entities will mitigate a money guarantees or demand features from a to Form PF. We note, however, that this market fund’s credit risk. is a conservative approach for several single institution for money market reasons. Large liquidity fund advisers funds other than tax-exempt money a. Definition of Control may experience economies of scale market funds, and (ii) the reduction to We are adopting as proposed that, for because, as discussed above, virtually 15%, rather than the elimination of, the purposes of applying the amended rule, all of them advise a money market fund twenty-five percent basket for tax- entities are affiliated with one another or have a related person that advises a exempt money market funds, including if one controls the other entity or is money market fund. Large liquidity single state money market funds. Under controlled by it or is under common fund advisers therefore likely will pay a our amendments, up to 15% (as control with it.1588 For this purpose combined licensing fee or fee to retain compared to 10%, which was proposed) only, control is defined to mean the services of a third party that covers of the value of securities held in a tax- ownership of more than 50% of an filings on both Forms PF and Form N– exempt money market fund’s portfolio entity’s voting securities.1589 By using a MFP. We expect that this combined fee may be subject to guarantees or demand more than 50% test (i.e., majority likely will be less than the combined features from a single institution.1583 ownership), we continue to believe the alignment of economic interests and estimated Paperwork Reduction Act 1. Treatment of Certain Affiliates for risks of the affiliated entities is costs associated with Forms PF and Purposes of Rule 2a–7’s Five Percent sufficient to justify aggregating their Form N–MFP. Issuer Diversification Requirement I. Diversification As noted above, today we are 1584 As discussed below, entities are ‘‘affiliated’’ We are amending the rule 2a–7 amending rule 2a–7’s diversification with one another if one controls the other entity or diversification provisions as proposed, is controlled by it or is under common control with provisions to provide that money it. ‘‘Control’’ for this purpose, is defined to mean with certain modifications as discussed market funds limit their exposure to ownership of more than 50% of an entity’s voting below. Under the current rule, money affiliated groups, rather than to discrete securities. Rule 2a–7(d)(3)(ii)(F)(1). We note that we market funds generally must limit their are not amending rule 2a–7’s diversification requirements to require that money market funds investments in: (i) The securities of any percent basket,’’ under which as much as 25% of treat affiliates as a single entity for purposes of the one issuer of a first tier security (other the value of securities held in a fund’s portfolio 10% diversification limit on investments in than with respect to government may be subject to guarantees or demand features securities subject to a demand feature or guarantee. securities and securities subject to a from a single institution. See current rule 2a– 1585 See Proposing Release supra note 25, at guarantee issued by a non-controlled 7(c)(4)(iii). A money market fund may currently use section III.J.1. a twenty-five percent basket to invest in demand 1586 See, e.g., ICI Comment Letter; U.S. Bancorp person) to no more than 5% of fund features or guarantees that are first tier securities Comment Letter; Goldman Sachs Comment Letter; assets; and (ii) securities subject to a issued by non-controlled persons. See id. Dreyfus Comment Letter; Wells Fargo Comment demand feature or a guarantee to no 1581 See rule 2a–7(d)(3)(ii)(F). Letter; Vanguard Comment Letter. more than 10% of fund assets from any 1582 See rule 2a–7(a)(18)(ii) (definition of 1587 See, e.g., ICI Comment Letter; U.S. Bancorp one provider.1580 Under our guarantee). Comment Letter; Goldman Sachs Comment Letter; 1583 See rule 2a–7(d)(3)(iii)(B). We note that Dreyfus Comment Letter; Vanguard Comment amended rule 2a–7(d)(3)(iii)(B), which provides a Letter; Federated II Comment Letter. 1578 This estimate is based on the following basket for tax–exempt money market funds, has 1588 See rule 2a–7(d)(3)(ii)(F). calculation: 298 estimated additional burden hours been revised from current rule 2a–7(c)(4)(iii). The 1589 See id. We note that the definition of control × per large liquidity fund adviser 28 large liquidity revised rule text is intended to be a clarifying we are adopting today with respect to the treatment fund advisers = 8,344. change from the current rule text and is not of affiliates for purposes of issuer diversification 1579 See infra section IV.H.3. designed to have any substantive effect other than under rule 2a–7 is not the same as the definition 1580 See current rules 2a–7(c)(4)(i) and (c)(4)(iii). to reduce the twenty-five percent basket to a fifteen of control in section 2(a)(9) of the Investment The current rule also provides a ‘‘twenty-five percent basket for tax-exempt funds. Company Act.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47870 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

exposures for purposes of rule 2a–7’s consolidated because they represent purposes of the 5% issuer 5% issuer diversification limit. As exposure to a single economic entity. diversification limit. One commenter discussed in the Proposing Release, we We continue to believe that the argued that we should exclude equity considered several alternative approach we are adopting today is owners of ABCP conduits from the approaches to delineating a group of preferable because it is consistent with proposed affiliate aggregation rule to affiliates. We requested comment as to various circumstances under which allow money market funds to treat each whether we should use any of these affiliated entities must be consolidated special purpose entity (‘‘SPE’’) issuing alternative approaches or whether there on financial statements prepared in ABCP as a separate issuer for purposes are other approaches we should accordance with GAAP, under which a of issuer diversification, even if the consider. A number of commenters parent generally must consolidate its same entity or affiliate group controls supported the proposed majority majority-owned subsidiaries.1594 These the voting equity of multiple ABCP ownership test.1590 Some commenters majority-owned subsidiaries generally conduits.1597 This commenter noted also agreed with us that other must be consolidated under GAAP that voting equity of an ABCP conduit approaches to defining control could because the operations of the group are is typically almost entirely owned by an limit a money market fund’s investment sufficiently related such that they are otherwise unaffiliated third party that is flexibility unnecessarily.1591 One presented under GAAP as if they ‘‘were in the business of owning such entities commenter noted that while the a single economic entity.’’ and providing management and proposed definition of control would administrative services, and not by the b. Majority Equity Owners of Asset- not generally limit money market funds’ ABCP conduit sponsor, and that Backed Commercial Paper Conduits investment flexibility or be difficult to requiring money market funds to apply, incorporating the definition of a We requested comment as to whether aggregate conduits on the basis of ‘‘majority-owned subsidiary’’ from the exposures to risks of issuers that common equity ownership would section 2(a)(24) of the Investment would be treated as affiliated under our unnecessarily restrict the amount of Company Act, rather than introducing a proposal would be highly correlated and ABCP available for purchase by money new definition of control, would be whether our proposed approach to market funds.1598 We agree that if more desirable.1592 Under the section delineating affiliates was too broad or certain independent equity owners are 2(a)(24) definition, a ‘‘majority-owned too narrow.1595 After further simply providing services in a subsidiary’’ of a person means a consideration, based on the comments management and administrative company 50% or more of the we received in response to our proposal, capacity and are concentrated in the outstanding voting securities of which we recognize that the majority ABCP industry, failure to provide an are owned by such person, or by a ownership definition of control that we exception to those equity owners could company which is a majority-owned proposed may encompass certain unnecessarily limit ABCP investment or subsidiary of such person.1593 We note affiliated parties that are not part of the reduce economies of scale in ABCP however, that the section 2(a)(24) same economic enterprise and therefore administration with no diversification definition is not in itself a definition of should be excluded from the definition. benefit to money market funds. control and only includes the Accordingly, as discussed further The purpose of treating affiliated circumstances in which an entity is a below, the majority ownership parties as a single issuer when applying majority-owned subsidiary of another definition of control that we are the diversification limit is to mitigate entity. Although we requested comment adopting today excludes certain equity risk to a money market fund by limiting as to whether we should incorporate the owners of ABCP conduits from the the fund from assuming a concentrated section 2(a)(24) definition of majority- requirement to aggregate affiliates for amount of risk in a single economic owned subsidiaries into our definition purposes of the 5% issuer enterprise, not to limit the exposure to of control, we believe that a more than diversification limit.1596 entities that might fall under the 50% test is indicative of circumstances Without an exclusion from the definition of ‘‘affiliated’’ but are in which an entity controls another amended rule, money market funds otherwise independent and not part of entity or is controlled by it as opposed would be required to aggregate their the same economic enterprise. In light to circumstances in which an entity exposure to the ABCP conduits and to of these considerations, we have owns half of another entity’s voting the equity owners of ABCP conduits for decided to provide an exception from securities. The definition of control we the amended rule for certain are adopting today is used to define 1594 See, e.g., FASB ASC, supra note 425, at independent equity owners of ABCP entities that are required to be paragraph 810–10–15–8 (‘‘The usual condition for conduits. The commenter that argued consolidated for purposes of our a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general we should exclude equity owners of diversification requirements. Therefore, rule ownership by one reporting entity, directly or ABCP conduits recommended that we we believe it is appropriate to look at indirectly, of more than 50 percent of the provide that money market funds need the circumstances in which entities outstanding voting shares of another entity is a not aggregate an ABCP conduit and its generally are required to be condition pointing toward consolidation.’’). 1595 See Proposing Release, supra note 25, at independent equity owners if owning section III.J.1. equity interests in SPEs is a primary line 1590 See, e.g., ABA Business Law Section 1596 One commenter suggested that we also of business of such owner.1599 This Comment Letter; Wells Fargo Comment Letter. exclude TOBs from the amended rule, noting that commenter also noted that the voting 1591 See ICI Comment Letter (stating that a under certain circumstances liquidity providers definition of control that would include more may own more than 50 percent of the securities equity of an ABCP conduit is typically attenuated relationships or lower ownership levels issued by a TOB but may not be part of the same owned by an unaffiliated third party could limit a money market fund’s investment corporate family. See SIFMA Comment Letter. We that provides certain management opportunities to issuers whose risks are not believe that excluding TOBs from the amended rule services to the ABCP conduit. In necessarily correlated to the issuer’s parents). See is unnecessary in light of the fact that an owner of also Wells Fargo Comment Letter (supporting the TOB-issued securities would not likely have voting decision to not require money market funds to treat rights in a TOB trust and therefore would not fall 1597 Comment Letter of as affiliates all entities that must be consolidated on under the definition of affiliate for purposes of the Industry Group (Sept. 17, 2013) (‘‘SFIG Comment a balance sheet). 5% issuer diversification limit. We note that the Letter’’). 1592 See ICI Comment Letter. Volcker Rule may likely have an impact on TOB 1598 Id. 1593 See Section 2(a)(24). program structures. 1599 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47871

addition, this commenter suggested obligor.1605 The commenter expressed Under our proposed rule 2a–7 limiting the exception to those equity concern that, if the proposed treatment amendments, non-ABS that are subject owners that are not originating of affiliates is made applicable to the ten to a guarantee by a non-controlled qualifying assets to the ABCP percent obligor, it is likely that some of person would be subject to rule 2a–7’s conduits.1600 We agree with the the ABS held by an ABCP conduit will 10% diversification limit applicable to commenter’s statements above and we need to be aggregated, resulting in ten guarantees and demand features but 1606 are providing an exception, which we percent obligors. This commenter would continue to have no issuer expect addresses the concerns regarding argued that such a result may create diversification limit. However, we the current marketplace organization of legal and practical issues for sponsors, proposed that a presumed guarantee given confidentiality restrictions that ABCP conduits. Accordingly, under the issued by a sponsor of an SPE with may prevent funds from determining exception, money market funds will be respect to ABS would no longer qualify subject to the 5% issuer diversification which obligors are affiliated, and may not reflect actual risks if such obligors as a guarantee issued by a non- limit on the ABCP conduit and any ten controlled person, thereby creating a percent obligors,1601 but need not are not part of the same economic enterprise.1607 In addition, this disparity between treatment because aggregate an ABCP conduit and its ABS and non-ABS would be treated independent equity owners for purposes commenter noted that conduits may differently under the proposal.1611 of the 5% issuer diversification limit restructure their programs to avoid Therefore, as proposed, ABS would be provided that a primary line of business having consolidated affiliate ten percent subject to both a 5% issuer of those independent equity owners is obligors, which would potentially diversification limit on the SPE and any owning equity interests in SPEs and reduce funding capacity to those 1608 providing services to SPEs, the obligors. ten percent obligors, and a 10% limit on We acknowledge that the application independent equity owners’ activities the sponsor as the presumed guarantor. of our diversification amendments on with respect to the SPEs are limited to One commenter mentioned this the treatment of ten percent obligors providing management or potential discrepancy and argued that may cause certain sponsors to conduct administrative services, and no the portion of ABS presumed to be additional due diligence and also may qualifying assets of the ABCP conduit guaranteed by the sponsor should not be mean that some conduits would have to were originated by the equity subject to the issuer diversification restructure their programs, which could owners.1602 Subject to the exception for limitations and thus treated parallel result in reduced funding capacity from with other money market fund portfolio certain majority equity owners of ABCP money market funds. However, we securities subject to a guarantee issued conduits, we continue to believe that understand that these affiliated obligors by a non-controlled person.1612 After the majority ownership test generally represent exposure to the appropriately requires a money market same economic enterprise. Therefore, further consideration of this disparity in fund to limit its exposure to particular after further consideration, we continue treatment, we preliminarily believe that economic enterprises without to believe that requiring aggregation of the approach that most advances our unnecessarily limiting a fund’s obligors in determining whether an diversification reform goal of limiting investments. obligor is a ten percent obligor reflects concentrated exposure of money market c. Treatment of Affiliates for Ten our objective.1609 We continue to funds to particular economic enterprises Percent Obligor Determinations believe that by using a more than 50% is to eliminate the exclusion from the test, the alignment of economic interests 5% issuer diversification requirement One commenter expressed concern and risks of affiliated obligors is for both ABS and non-ABS that are regarding the impact of the proposed sufficient to justify aggregating their subject to a guarantee by a non- diversification amendments on the exposures for purposes of applying rule controlled person. Therefore, instead of treatment of ten percent obligors 1603 for 2a–7’s 5% issuer diversification limit. creating a disparity in treatment ABS.1604 The commenter noted that Requiring aggregation of obligors in between ABS and non-ABS by adopting currently each ABS issued by a separate determining ten percent obligors will the proposed definition of a guarantee entity is analyzed separately, and an require diversification of exposure to issued by a non-controlled person, we ABCP conduit typically represents to obligors that are affiliated with each are retaining the current definition of a money market funds that it does not other, thereby mitigating the credit risk guarantee issued by a non-controlled intend to purchase any ABS which to a money market fund when taking a person, and we are proposing in our would result in a ten percent highly concentrated position in ABS Release issued today regarding with affiliated obligors. removing references to credit ratings in 1600 Id. d. Issuers of Securities Subject to a rule 2a–7 that the 5% issuer 1601 See infra note 1603 (definition of ten percent Guarantee Issued by a Non-Controlled obligor). diversification limit be imposed on all 1602 See rule 2a–7(d)(3)(ii)(F)(2). Person 1603 Generally, ABS acquired by a money market Under current rule 2a–7, a money does not control, and is not controlled by or under fund (‘‘primary ABS’’) are deemed to be issued by market fund is not required to be common control with the issuer of the security the SPE that issued the ABS (e.g., the trust, subject to the guarantee (control for these purposes corporation, entity organized for sole purpose of diversified with respect to issuers of means ‘‘control’’ as defined in section 2(a)(9); or (ii) issuing the ABS). See rule 2a–7(d)(3)(ii)(D)(1). securities that are subject to a guarantee a sponsor of an SPE with respect to ABS. Current However, if obligations of any issuer constitute 10% issued by a non-controlled person.1610 rule 2a–7(a)(18)(i) and (ii). or more of the qualifying assets of the primary ABS, 1611 See proposed (Fees and Gates) rule 2a– that issuer will be deemed to be the issuer of that 7(a)(17). Under the proposed rule, ABS that are 1605 Id. portion of the primary ABS that is comprised of its subject to a guarantee by a non-controlled person 1606 obligations (‘‘ten percent obligor’’). See rule 2a– Id. that meets the definition in current rule 2a– 7(d)(3)(ii)(D)(1)(i). 1607 Id. 7(a)(18)(i) would continue to have no issuer 1604 See SFIG Comment Letter. See also 1608 Id. diversification limit. Memorandum from the Division of Investment 1609 See rule 2a–7(d)(3)(ii)(F)(3). 1612 Memorandum from the Division of Management regarding a September 10, 2013 1610 Current rule 2a–7(a)(18). A guarantee issued Investment Management regarding a September 10, meeting with representatives of the Structured by a non-controlled person means a guarantee 2013 meeting with representatives of the Structured Finance Industry Group. issued by: (i) a person that, directly or indirectly, Finance Industry Group.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47872 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

securities with a guarantee by a non- securities.’’ 1614 Requiring funds to issuers).1617 We requested comment on controlled person.1613 purchase ‘‘a number of securities’’ how the amendment would affect rather than a smaller number of competition, efficiency and capital e. Additional Economic Analysis concentrated investments will only formation, and the ways in which As discussed in the Proposing ‘‘spread . . . the risk of loss’’ if the money market funds may invest in Release, these amendments are intended performance of those securities is not response to the amendment. One to more efficiently achieve the highly correlated. That is, a fund’s commenter stated that the requirement diversification of risk contemplated by investments in Issuers A, B and C are no to treat affiliates as a single issuer for the rule’s current 5% issuer less risky (or only marginally so) than a purposes of the 5% issuer diversification limit. The treatment of single investment in Issuer A if Issuers diversification limit could impede a affiliates for purposes of rule 2a–7’s 5% A, B, and C are likely to experience money market fund’s ability to purchase issuer diversification limit, and our declines in value simultaneously and to high quality securities, and that, as a diversification amendments approximately the same extent. This result, money market funds could be collectively, are designed to diversify may indeed be likely if Issuers A, B and forced to purchase securities of issuers the risks to which money market funds C are affiliated with each other. In with credit ratings lower than those of may be exposed and thereby reduce the addition, if Issuers A, B and C are the affiliated issuers.1618 As noted above impact of any single issuer’s (or affiliated with each other, they likely and discussed further below, we believe guarantor’s or demand feature would share financial resources in the that any effect caused by a money provider’s) financial distress on a fund. event of a crisis, which would make it market fund investing in securities with Except to the extent that money market more likely that they would experience higher credit risk will be minimal due funds choose to reinvest some or all of declines in value simultaneously and to to the substantial risk-limiting their excess exposure in securities of approximately the same extent. Prime provisions of rule 2a–7.1619 higher risk, requiring money market money market funds’ concentrated As discussed above, we acknowledge funds to more broadly diversify against exposures to financial institutions that the application of our credit risk should reduce the volatility increase these concerns because prime diversification amendments on the of fund returns (and hence NAVs) and money market funds’ portfolios already treatment of ten percent obligors may limit the impact of an issuer’s distress appear correlated to some extent.1615 cause certain sponsors to conduct on fund liquidity, which should additional due diligence and also may As discussed in the Proposing mean that some conduits would have to mitigate the risk of heavy shareholder Release, we recognize, however, that the redemptions from money market funds restructure their programs, particularly amendments could impose costs on if information regarding the identity of in times of financial distress and may money market funds and could affect promote capital formation by making obligors is unavailable, which could competition, efficiency, and capital result in reduced funding capacity from money market funds a more stable formation. We expect that the source of financing for issuers of short- money market funds. To the extent requirement to aggregate affiliates for ABCP conduits may decide to term credit instruments. Reducing purposes of the 5% issuer money market funds’ volatility and restructure their programs, we expect diversification limit will increase the that the ABCP conduits might incur making their liquidity levels more diversification of at least some money resilient also could cause money market costs associated with the restructuring, market funds.1616 A money market fund although we are unable to quantify any funds to attract further investments, that had invested more than 5% of its increasing their role as a source of such costs as we do not know to what assets in a parent or corporate group extent ABCP conduits will decide to capital in the short-term financing would, when those investments markets for issuers. We are not able to restructure, and we also did not receive matured, have to reinvest some of the any comments regarding costs that quantify these benefits (although we do proceeds in a different parent or provide quantitative information ABCP conduits may incur. corporate group (or in unrelated We acknowledge that, as a result of concerning certain impacts), primarily our amendments, it is possible that because we continue to believe it is 1614 See Proposing Release, supra note 25, at some money market funds may impractical, if not impossible, to section III.J.1. purchase securities of issuers with identify with sufficient precision the 1615 See Proposing Release, supra note 25, nn.66– lower credit quality, although we note marginal decrease in risk and increase 67 and accompanying text. that money market funds will continue in stability we expect these 1616 See The Exposure Money Market Funds Have to be required to meet the minimum diversification amendments to provide. to the Parents of Issuers (‘‘DERA Diversification Memo’’) (July 10, 2013), available at http:// credit risk standards set forth in rule 2a– We received no comments providing www.sec.gov/comments/s7-03-13/s70313-20.pdf. 7.1620 It also seems reasonable to expect quantification of benefits. The Division of Risk, Strategy, and Financial that a by one money market More fundamentally, as discussed in Innovation (‘‘RSFI’’) is now known as the Division fund (because its exposure to a the Proposing Release, these of Economic and Risk Analysis (‘‘DERA’’), and accordingly we are no longer referring to this study particular group of affiliates is too great) amendments are designed to more as the ‘‘RSFI Diversification Memo’’ as we did in might become a purchasing opportunity effectively achieve the diversification of the Proposing Release, but instead as the ‘‘DERA Diversification Memo.’’ The DERA Diversification risk contemplated by the rule’s current 1617 Money market funds will not be required to 5% issuer diversification limit. As Memo shows, among other things, that some money market funds invested more than 5% of their assets sell any of their portfolio securities as a result of discussed in the Proposing Release, we in the issuances of specific corporate groups, or any of our diversification amendments because rule explained that ‘‘[d]iversification limits ‘‘parents’’ (as defined in the DERA Diversification 2a–7’s diversification limits are measured at investment risk to a fund by spreading Memo) between November 2010 and November acquisition. 1618 Schwab Comment Letter. See also Dechert the risk of loss among a number of 2012. For example, our staff’s analysis shows that 30 money market funds, on average, invest at least Comment Letter (arguing that our diversification 5% of their portfolios in the issuances of the largest amendments, in combination, may have the effect 1613 See Removal of Certain References to Credit parent. Our staff’s analysis also shows that the of reducing a money market fund’s ability to invest Ratings and Amendment to the Issuer largest fund-level exposure of at least 7% to the in high quality securities). Diversification Requirement in the Money Market issuances of one parent is 14 while the largest 1619 See supra notes 10 and 11 and accompanying Fund Rule, Investment Company Act Release average fund-level exposure of at least 10% of the text. No. _____ (July 23, 2014). issuances of one parent is 3. 1620 See rule 2a–7(d)(2) (portfolio quality).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47873

for another money market fund whose may shift their funds’ remaining required to identify alternative holdings in that affiliated group does portfolio assets, within rule 2a–7’s investments under our amendments and not constrain it. If the credit qualities of minimal credit risk requirements,1621 to larger money market funds are better the investments were similar, there higher risk assets. If so, portfolio risk, positioned to expend this additional should be no net effect on fund risk and although more diversified, would effort or to do so at a lower marginal yield, although we discuss below how increase (or remain constant), and we cost than smaller money market funds. fund risk and yield may be affected if would expect portfolio yields to rise (or These factors also could affect capital money market funds choose to invest in to remain constant). If yields were to formation in other ways, in that money securities of higher or lower credit risk rise, money market funds might be able market funds could choose to invest in than they do currently. In the Proposing to compete more favorably with other lower quality securities under our Release we discussed ways in which a short-term investment products (to the proposal if they are not able to identify money market fund may reallocate its extent the increased yield is not alternative investments with levels of investments under our amendments to outweighed by any increased volatility). risk equivalent to the funds’ current the diversification provisions of rule 2a– We continue to be unable to predict investments. or quantify the precise effects this 7 as well as possible ways in which the As discussed in the Proposing amendment might affect capital amendment will have on competition, Release, the amendments could require formation. We discuss above that efficiency, or capital formation and did money market funds to update the requiring money market funds to more not receive comments addressing the systems they use to monitor their broadly diversify against credit risk may precise effects. The effects depend on compliance with rule 2a–7’s 5% issuer promote capital formation by making how money market funds, their diversification limit in order to money market funds a more stable investors, and companies that issue aggregate exposures to affiliates. source of financing for issuers of short- securities to money market funds will Although we understand, as discussed term investments. However, the rule adjust on a long-term basis to our above, that most money market funds amendment could also reduce capital amendment. The ways in which these today consider their exposures to formation if money market funds choose groups could adjust, and the associated entities that are affiliated with each to reinvest some or all of their excess effects, are too complex and interrelated exposure in securities of higher risk. In to allow us to predict them with other for risk management purposes, these instances, a money market fund’s specificity or to quantify them. For any systems money market funds portfolio risk would increase, its NAV example, if a money market fund must currently have in place for this purpose and fund liquidity may become more reallocate its investments under our may not be suitable for monitoring volatile and yields would rise. Money amendment, whether that will affect compliance with a diversification market funds in this scenario could capital formation depends on whether requirement, as opposed to a risk become less stable than they are today, there are available alternative management evaluation (which may investor demand for the funds could fall investments the money market fund entail less regular or episodic (to the extent increased volatility in could choose and the nature of any monitoring). money market funds is not outweighed alternatives. Assuming there are We requested comment as to whether by any increase in fund yield), and alternative investments, the effects on funds expect that they would incur capital formation could be reduced. capital formation will depend on the operational costs in addition to, or that Alternatively, money market funds amount of yield the issuers of the differ from the costs estimated in the alternative investments will be required might choose to reinvest excess Proposing Release. We did not receive to pay as compared to the amount they exposure in securities of lower risk. In comments regarding specific costs, would have paid absent our these instances, portfolio risk (e.g., although one commenter stated that it amendments. For example, our credit risk, counterparty risk) would did not believe that the amendments amendment could cause money market decrease, fund NAVs and liquidity would have a significant impact on the funds to seek alternative investments would likely become less volatile and operations of most money market and this increased demand could allow yields would fall. In this scenario, funds.1622 Another commenter stated their issuers to pay a lower yield than money market funds would become that additional time and data costs may they would absent this increase in more stable than they are today, investor be required to determine issuer demand. This would decrease issuers’ affiliations, but also stated that it did demand for the funds could rise (to the financing costs, enhancing capital extent increased stability in money not see a significant increase in costs formation. But it also could decrease the related to complying with our amended market funds is not outweighed by any yield the money market fund paid to its issuer diversification requirements.1623 decrease in fund yield), and capital shareholders, potentially making money formation might be enhanced. market funds less attractive and leading Based on the activities typically As stated in the Proposing Release, we to reduced aggregate investments by the involved in making systems cannot predict how money market funds money market fund which, in turn, modifications, and recognizing that will invest in response to our could increase financing costs for money market funds’ existing systems amendments and we thus do not have issuers of short-term debt. currently have varying degrees of a basis for determining money market The availability of alternative functionality, we estimated in the funds’ likely reinvestment strategies. We investments and the ease with which Proposing Release, and continue to also did not receive comment on this they could be identified could affect estimate, that the one-time systems issue. We note that money market efficiency, in that money market funds modifications costs (including funds’ current exposures in excess of might find their investment process less modifications to related procedures and what our amendments will permit may efficient if they were required to expend controls) for a money market fund reflect the overall risk preferences of additional effort identifying alternative associated with these amendments their managers. To the extent that these investments. These same factors could would range from approximately amendments reduce the concentration affect competition if more effort is of issuer risk, fund managers that have 1622 ICI Comment Letter. particular risk tolerances or preferences 1621 See id. 1623 State Street Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47874 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

$600,000 to $1,200,000.1624 As we comments on these particular estimates, 2. ABS—Sponsors Treated as stated in the Proposing Release, we do although we have updated our estimates Guarantors not expect that money market funds will based on more recent data, and now We are amending rule 2a–7, as incur material ongoing costs to maintain estimate that the costs of this minimal proposed, to require that money market and modify their systems as a result of additional time commitment to a money funds treat the sponsors of ABS as this amendment because we expect market fund, if it were to occur, will guarantors subject to rule 2a–7’s 10% modifications required by this range from approximately $6,700 to diversification limit applicable to amendment will be incremental changes $109,500 annually.1626 guarantees and demand features, unless to existing systems that already perform the money market fund’s board of similar functions (track exposures for instead evaluate each investment separately. We directors (or its delegate) determines purposes of monitoring compliance believe that the number of a money market fund’s that the fund is not relying on the with rule 2a–7’s 5% issuer investments also should be a rough proxy for the sponsor’s financial strength or its ability diversification limit). number of times such a money market fund would or willingness to provide liquidity, evaluate each investment. Such funds may be on Although we have estimated the costs credit or other support to determine the that a single money market fund could the higher end of the range, however, because the extent to which a fund’s average number of ABS’s quality or liquidity.1627 As incur as a result of this amendment, we investments reflects the number of times such a discussed in the Proposing Release, expect that these costs will be shared fund purchases securities would depend on the rate money market funds’ reliance on and among various money market funds in of the fund’s portfolio turnover. Whether any exposure to sponsors of ABCP, a type of additional analysis would be required as a result of a complex. As discussed in the ABS, specifically during 2007, suggests Proposing Release, we do not expect our amendments for such a fund also would depend on whether the fund invested proceeds from that current rule 2a–7 potentially that money market funds will be maturing securities in issuers for which a new permits money market funds to become required to spend additional time credit risk analysis was required or in issuers of overexposed to ABCP sponsors.1628 Our determining affiliations under our securities owned by the fund for which the analysis amendments today therefore provide amendments, or if an additional time may already have been done. 1626 that, subject to an exception, money commitment is required, we expect that In arriving at this estimate, we expect that any required additional work generally will be market funds investing in ABS rely on it would be minimal. We estimated in conducted each time a money market fund the sponsor’s financial strength or its the Proposing Release that the costs of determined whether to add a new issuer to the ability or willingness to provide this minimal additional time approved list of issuers in which the fund may liquidity, credit, or other support to the commitment to a money market fund, if invest. The frequency with which a money market fund will make these determinations would depend ABS, and require diversification against it were to occur, will range from on its size and investment strategy. To be such reliance and exposure to ABS approximately $5,000 to $105,000 conservative, and based on Form N–MFP data sponsors.1629 annually.1625 We did not receive concerning the number of securities held in money A number of commenters generally market funds’ portfolios, we estimate that a money supported the requirement to treat market fund could be required to make such a 1624 Staff estimates that these costs will be sponsors of ABS as guarantors.1630 For attributable to the following activities: (i) Planning, determination between 42 and 342 times each year. coding, testing, and installing system modifications; This is based on our staff’s review of data filed on (ii) drafting, integrating, and implementing related Form N–MFP as of February 28, 2014, which 1627 As a result, subject to an exception, a money procedures and controls; and (iii) preparing training showed that the 10 smallest money market funds market fund cannot invest in ABS, if immediately materials and administering training sessions for (not including government or Treasury funds) by after the investment it would have invested more staff in affected areas. See also supra section assets had an average of 42 investments and the 10 than 10% of its total assets in securities issued by III.A.5.a. largest money market funds (not including or subject to demand features or guarantees from government or Treasury funds) by assets had an the ABS sponsor. See rule 2a–7(a)(18)(ii) and rule 1625 In arriving at this estimate in the Proposing average of 342 investments. The number of a money 2a–7(d)(3)(iii). Current rule 2a–7 applies a 10% Release, we expected that any required additional diversification limitation on demand features and work generally would be conducted each time a market fund’s investments should be a rough proxy for the number of times each year that a money guarantees to 75% of money market funds’ total money market fund determined whether to add a assets. As discussed in infra section III.I.3, we are new issuer to the approved list of issuers in which market fund could add an issuer to its approved list, although this will overstate the frequency of amending rule 2a–7 to apply the 10% the fund may invest. The frequency with which a diversification limitation to 85% of a tax-exempt money market fund makes these determinations these determinations (e.g., a fund may have a number of separate investments in a single issuer). money market fund’s assets and to 100% of a fund’s would depend on its size and investment strategy. assets for money market funds other than tax- To be conservative, and based on Form N–MFP data We estimate that the additional time commitment imposed by our amendments, if any, will be an exempt funds. concerning the number of securities held in money 1628 additional 1–2 hours of an analyst’s time each time See Proposing Release, supra note 25, at market funds’ portfolios, we estimated that a money section III.J.2. market fund could be required to make such a the fund determined whether to add an issuer to its approved list. The estimated range of costs, 1629 Under the amended rule, the sponsor of an determination between 33 and 339 times each year. ABS will be deemed to guarantee the entire This was based on our staff’s review of data filed therefore, is calculated as follows: (42 Evaluations × principal amount of those ABS, except that the on Form N–MFP as of February 28, 2013, which 1 hour of a junior business analyst’s time at $160 × sponsor will not be deemed to have provided such showed that the 10 smallest money market funds per hour = $6,720) to (342 evaluations 2 hours of a junior business analyst’s time at $160 per hour = a guarantee for purposes of the following by assets had an average of 33 investments and the paragraphs of rule 2a–7: (a)(12)(iii) (Definition of $109,440). Finally, we recognize that some money 10 largest money market funds by assets had an eligible security); (d)(2)(iii) (credit substitution); market funds do not use an approved list, but average of 339 investments. The number of a money (d)(3)(iv)(A) (fractional guarantees); and (e) market fund’s investments should be a rough proxy instead evaluate each investment separately. We (guarantees not relied on). We also are adopting a for the number of times each year that a money believe that the number of a money market fund’s number of conforming amendments to other market fund could add an issuer to its approved investments also should be a rough proxy for the provisions of rule 2a–7 to implement the treatment list, although this will overstate the frequency of number of times such a money market fund would of ABS sponsors as guarantors. See rule 2a– these determinations (e.g., a fund may have a evaluate each investment. Such funds may be on 7(f)(4)(iii) (defining defaults for purposes of rule 2a– number of separate investments in a single issuer). the higher end of the range, however, because the 7(f)(2) and (3) as applied to guarantees issued by We estimated that the additional time commitment extent to which a fund’s average number of ABS sponsors); rule 2a–7(g)(7) (requiring periodic imposed by our amendments, if any, would be an investments reflects the number of times such a re-evaluations of any finding that the fund is not additional 1–2 hours of an analyst’s time each time fund purchases securities would depend on the rate relying on the sponsor’s financial strength or ability the fund determined whether to add an issuer to its of the fund’s portfolio turnover. Whether any or willingness to provide support in determining approved list. The estimated range of costs, additional analysis would be required as a result of the quality or liquidity of ABS); and rule 2a–7(h)(6) therefore, was calculated as follows: (33 Evaluations our amendments for such a fund also would depend (recordkeeping requirements for the periodic re- × 1 hour of a junior business analyst’s time at $155 on whether the fund invested proceeds from evaluations). per hour = $5,115) to (339 evaluations × 2 hours of maturing securities in issuers for which a new 1630 See, e.g., Goldman Sachs Comment Letter; a junior business analyst’s time at $155 per hour = credit risk analysis was required or in issuers of Schwab Comment Letter; U.S. Bancorp Comment $105,090). Finally, we recognize that some money securities owned by the fund for which the analysis Letter; Vanguard Comment Letter; BlackRock II market funds do not use an approved list, but may already have been done. Comment Letter; Wells Fargo Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47875

example, one commenter noted that that the requirement to treat the sponsor sponsor would be unable to support the ABS sponsors have provided explicit as of an SPE issuing ABS as a guarantor of value of the fund’s investments in times well as implicit credit and liquidity ABS would require money market funds of severe market stress because it support for the vehicles they have to expand diversification of ABS reduces the amount of a money market sponsored and that it is therefore sponsors at the same time many of these fund’s investments that would be appropriate that such support be sponsors are exiting the market.1638 impacted by the inability of the sponsor presumed for purposes of applying rule While we recognize that in many cases to support the value of those 2a–7 diversification limitations.1631 a money market fund is not basing its investments. Several commenters however, generally investment decision solely on the As discussed further below, we opposed the proposed requirement.1632 financial strength of the sponsor or on recognize that in certain cases an ABS Some of these commenters argued that an implicit guarantee by the sponsor, we sponsor should not be deemed to the requirement to treat sponsors of ABS understand, as discussed in the guarantee the ABS. An ABS sponsor as guarantors is not consistent with the Proposing Release, that money market therefore will not be deemed to current practice of money market funds often make investment decisions guarantee the ABS if the money market funds.1633 For example, one commenter based, at least in part, on the fund’s board of directors (or its delegate) stated that while money market funds presumption that the sponsor will take determines that the fund is not relying cannot usually review information steps to prevent the ABS from on the ABS sponsor’s financial strength about the particular assets underlying defaulting.1639 However, money market or its ability or willingness to provide ABS,1634 money market funds funds are generally not required to liquidity, credit, or other support to nevertheless base their credit decisions diversify against ABS sponsors because determine the ABS’s quality or on a multitude of factors other than the the support that ABS sponsors provide, liquidity. We also discuss below that an sponsor’s financial strength.1635 Some implicitly or explicitly, which money ABS sponsor will not be deemed to commenters also argued that money market funds often rely on, typically guarantee the full amount of ABS in market funds look to the legal does not meet the current rule’s cases of fractional guarantees. requirement for a sponsor to provide a definition of ‘‘guarantee’’ or ‘‘demand Commenters noted that under current guarantee rather than relying on an feature.’’ 1640 rule 2a–7, if a company guarantees or implicit guarantee by the sponsor,1636 We acknowledge that if sponsor provides a demand feature of a portion and that partial or incidental reliance on supply were to become limited, it may of the qualifying assets, only that the financial strength of an ABS sponsor be more difficult for money market portion of the ABS is counted towards should not require treatment of the funds to obtain ABS. However, after the diversification limit.1641 These sponsor as a 100% guarantor of the further consideration, we continue to commenters expressed concern that ABS.1637 Another commenter argued believe it is appropriate to amend rule amended rule 2a–7 would change this 2a–7 to require diversification against result by treating a company that 1631 Goldman Sachs Comment Letter. such support to limit a money market sponsors ABS as a guarantor of the 1632 See, e.g., SSGA Comment Letter; Federated II fund’s concentration in a single sponsor entire amount held by a fund, even if Comment Letter. See also ICI Comment Letter because a fund could seek to rely on the company’s guarantee or demand (arguing that the amendment could result in a reduction of the supply of securities to money liquidity or capital support from that feature is limited to a smaller 1642 market funds without any increase in investor sponsor, if necessary. When a money amount. As proposed, in cases protection). market fund is determining the ABS’s where a security is subject to a 1633 See, e.g., Federated VIII Comment Letter; quality or liquidity based, at least in fractional demand feature or guarantee SSGA Comment Letter; ICI Comment Letter. part, on the ABS sponsor’s financial by the sponsor, as defined in rule 2a– 1634 See Proposing Release, supra note 25, nn.870–872 and accompanying text (discussing that strength or its ability or willingness to 7, a money market fund may count the an asset-liability mismatch in ABCP conduits provide liquidity, credit or other fractional demand feature or guarantee causes ABCP investors to analyze the structure of support, limiting a money market fund’s in place of deeming the sponsor as a the ABCP conduits more so than underlying asset concentration in that sponsor mitigates guarantor of the entire principal amount level information). of the ABS.1643 However, in cases where 1635 Federated II Comment Letter (describing the risk that a money market fund information it reviews, including pool level would face in the case where such ABS a money market fund is partially or information about the underlying assets). See also incidentally relying on the financial Federated VIII Comment Letter (discussing its 1638 Invesco Comment Letter. strength of the ABS sponsor, but such evaluation of ABCP before investing, noting that 1639 Comment Letter of the American partial or incidental reliance does not only a portion of their analysis is based on the Forum (Aug. 2, 2010) (available in sponsor, and that significant emphasis is placed on File No. S7–08–10) (‘‘ASF August 2010 Comment fall under the definition of a fractional the qualifying assets); SSGA Comment Letter Letter’’). (‘‘[T]he liquidity and credit support for the guarantee, the money market fund will (stating that it believes credit analysis with regard vast majority of ABCP conduits are provided by be required to treat the sponsor as a to ABS should not solely rely upon sponsor their financial institution sponsors.’’). But see SFIG guarantor of the entire principal amount support). Comment Letter (describing that a subset of ABCP 1636 See, e.g., Federated II Comment Letter; ICI conduits are administered by entities that are not of the ABS. In this case, even though a Comment Letter (arguing that because the proposed financial institutions and that credit or liquidity sponsor may not be providing a full requirement would treat a sponsor as a guarantor support to the ABCP conduit is provided by guarantee, the fund would not be able of the entire amount of the ABS even when the financial institutions that are not affiliated with the sponsor has no legal obligation to support its ABS, administrator); ICI Comment Letter (suggesting that 1641 the amendment seems to endorse the practice of there is no reason to require diversification against See, e.g., ICI Comment Letter; Memorandum relying on an ‘‘implicit’’ guarantee when assessing sponsors as opposed to other service providers such from the Division of Investment Management the credit risk of ABS). See also Federated VIII as servicers and liquidity providers). Although regarding a September 10, 2013 meeting with (arguing that the amendment would encourage persons other than the sponsor, such as servicers representatives of the Structured Finance Industry investors that are assessing the credit risk of ABS and liquidity providers, could support ABS, we Group. to rely on an unproven assumption that a sponsor understand that, to the extent ABS have explicit 1642 Id. will voluntarily assume losses on its financial support, it typically is provided by the sponsor. We 1643 See rule 2a–7(d)(3)(iv)(A) (calculation of products, and that because such ‘‘implicit also understand that investors in ABS without fractional demand features or guarantees) and rule guarantees’’ are not reliable, endorsing this practice explicit support may view the sponsor as providing 2a–7(a)(18)(ii) (providing an exception from the would only increase risks to money market funds implicit support. See, e.g., Goldman Sachs requirement to deem a sponsor of an SPE as that invest in ABS.) Comment Letter. providing a guarantee with respect to the entire 1637 See, e.g., ICI Comment Letter; Federated VIII 1640 See Proposing Release, supra note 25, n.868 principal amount of ABS in the case of fractional Comment Letter. and accompanying text. guarantees).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00141 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47876 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

to readily determine the actual portion diversification requirements we are money market fund directors.1649 of assets for which the guarantor is adopting today aim to diversify against However, a board can, and likely will, providing structural support. Therefore, the risks of concentration of exposure to delegate this responsibility.1650 While except in cases of fractional guarantees entities that a fund may be relying on, we recognize that a board will, at a as discussed above, we continue to whether explicitly or implicitly, in minimum, need to provide oversight believe that, unless the board of determining the ABS’s quality or and establish procedures 1651 if it directors determines that the fund is not liquidity. Therefore, if a money market delegates its responsibility, we believe relying on the financial strength of the fund is relying on an entity’s financial that any incremental burden to make a sponsor, it is appropriate to require strength or its ability or willingness to determination (by the board or its diversification against such sponsor provide liquidity, credit, or other types delegate) regarding reliance on an ABS with respect to all the qualifying assets of support to determine the ABS’s sponsor should be minimal, as the in order to mitigate the risk that an ABS quality or liquidity, such entity would money market fund would already have sponsor would be unable to support the appropriately be defined as a sponsor analyzed the security’s credit quality value of a money market fund’s for purposes of our amended and liquidity when assessing whether investments in times of severe market diversification requirements. the security posed minimal credit risks stress. As proposed, our amended rule and whether the fund could purchase One commenter suggested that requires that, unless the board (or its the security consistent with rule 2a–7’s explicit support would not always be delegate) determines otherwise, all ABS limits on investments in ‘‘illiquid dispositive in determining the sponsor’s 1652 sponsors are deemed to guarantee their securities.’’ One commenter identity and that treating certain entities ABS. We are applying this requirement supported a board exception that as sponsors would not reflect actual to all ABS sponsors because we are applied when a money market fund economic risks to the fund.1644 This board (or its delegate) determines that a concerned that applying the commenter also recommended that we sponsor’s financial strength or its ability requirement only to sponsors of certain define the term sponsor in our final or willingness to provide liquidity, types of ABS could become obsolete as amendments, noting that otherwise it credit or other support did not play a new forms of ABS are introduced. may be difficult for certain money substantial role in the money market Because we recognize that it may not be market funds to determine the entity fund’s assessment of the ABS’s quality appropriate to require money market that is providing the deemed or liquidity.1653 On balance however, funds to treat ABS sponsors as guarantee.1645 Although providing a we believe that even when a money guarantors in all cases, under amended specific definition of ABS sponsor may market fund board of directors (or its rule 2a–7, an ABS sponsor would not be exclude certain entities that should delegate) determines that a sponsor’s otherwise be treated as a sponsor, and deemed to guarantee the ABS if the financial strength or its ability or may not allow for future flexibility with money market fund’s board of directors willingness to provide liquidity, credit regards to new types of ABS structures, (or its delegate) determines that the fund or other support plays a less than we understand that determining the is not relying on the ABS sponsor’s substantial role in the money market ABS sponsor in certain cases may financial strength or its ability or fund’s assessment of the ABS’s quality present difficulties. We recognize that in willingness to provide liquidity, credit, or liquidity, it is beneficial to require some cases where the administrator of or other support to determine the ABS’s diversification against such sponsor 1647 an ABCP conduit, which may otherwise quality or liquidity. In determining because it limits a money market fund’s be commonly thought of as the sponsor, whether a money market fund is relying concentration in a single sponsor on is not providing liquidity or credit on the ABS sponsor’s financial strength which the fund could still seek to rely. support, the administrator would not or its ability or willingness to provide In addition, requiring diversification appropriately be defined as a sponsor liquidity, credit, or other support, the against such sponsor also mitigates the for purposes of our amended money market fund board of directors possible effect of an ABS sponsor being diversification requirements. In this may want to consider, among other unable to support the value of the ABS case, requiring diversification against things, whether the fund considers the because a money market fund will be entities that do not, or could not, ABS sponsor’s financial strength or its required to diversify against its provide liquidity, credit or other ability or willingness to provide investments in ABS with such sponsor. support to the ABCP conduit would not liquidity, credit, or other support as a We are therefore adopting the board reflect the actual risks of a fund’s factor when determining the ABS’s exception as proposed. exposure to such an entity. For ABCP, quality or liquidity. Several commenters argued that a we believe that the sponsor will While one commenter specifically board should not have to make a finding typically be the financial institution that supported the exception to the ABS in certain situations where the ABS is provides explicit liquidity and/or credit sponsor designation through money fully supported by a guarantee or support and also provides market fund board of directors (or demand feature provided by a third administrative services to the ABCP delegate) action,1648 other commenters party.1654 One of these commenters conduit.1646 The amended expressed concern that overseeing argued that if an issuance of ABS has a determinations that a money market 1644 SFIG Comment Letter (recommending that we fund is not relying on ABS sponsors 1649 Federated VIII Comment Letter; ICI Comment define a provider of credit and liquidity support to would impose further burdens on Letter; Fidelity Comment Letter. an ABCP conduit that equals or exceeds fifty 1650 See rule 2a–7(j) (providing a money market percent of the outstanding face amount of the ABCP fund’s board of directors the ability to delegate to of such conduit as the sponsor). residual interest in the TOB trust, we believe the the fund’s adviser or officers the responsibility to 1645 Id. financial institution that sets up the TOB program, make certain determinations required to be made by 1646 For TOB programs in which the liquidity markets and remarkets the TOBs, transfers the the board of directors under rule 2a–7). provider for the TOB program or its affiliate holds municipal security into the TOB trust and/or 1651 See rule 2a–7(j)(1) and (2). the residual interest in the TOB trust, we believe provides liquidity typically will be the sponsor. 1652 Rule 2a–7(a)(12) (definition of ‘‘eligible the entity that provides both the liquidity support 1647 Rule 2a–7(a)(18)(ii). This determination must security’’) and rule 2a–7(d)(4) (portfolio liquidity). and holds the residual interest typically will be the be documented and retained by the money market 1653 Invesco Comment Letter. sponsor. For TOB programs in which the liquidity fund. See rule 2a–7(g)(7) and rule 2a–7(h)(6). 1654 See, e.g., ICI Comment Letter; Fidelity provider or its affiliate does not also own the 1648 Goldman Sachs Comment Letter. Comment Letter; Wells Fargo Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47877

contractual guarantee of support by a the proposed ABS sponsor rule, noting further consideration, and in light of the third party, we should require money that sponsors of non-ABCP ABS do not comments received, our final market funds to count the third-party typically provide explicit credit or amendments (i) remove the twenty-five guarantor, rather than the sponsor, for liquidity support.1659 We recognize that percent basket for money market funds purposes of the diversification limit.1655 in some cases diversification from non- other than tax-exempt money market This commenter noted that for ABS that ABCP ABS sponsors, including TOB funds, and (ii) reduce to 15%, rather carry contractual guarantees of support sponsors may be unnecessary if the fund than eliminate, the twenty-five percent by third parties, a fund manager often is not relying on the sponsor’s financial basket for tax-exempt money market looks to financial strength and strength or its ability or willingness to funds, including single state money creditworthiness of the third-party provide liquidity, credit or other market funds.1661 guarantor to evaluate the support to determine the ABS’s quality As discussed in the Proposing creditworthiness or liquidity of the or liquidity. Release, a number of recent events have ABS.1656 We recognize that in certain Although commenters suggested highlighted the risks to money market cases, ABS may be fully supported by a providing an exclusion from the funds caused by their substantial guarantee or demand feature provided amended rule, we believe that non- exposure to providers of demand by a third party where the board (or its ABCP ABS, including TOBs, are more features and guarantees.1662 For delegate) would determine that the appropriately addressed through the example, during the financial crisis, money market fund is not relying on the board exception to the diversification many funds were heavily exposed to ABS sponsor’s financial strength or its requirement. Because at least in some bond insurers and a few major financial ability or willingness to provide instances a fund may be looking to the institutions that served as liquidity liquidity, credit, or other support to sponsor’s financial strength or its ability providers. This concentration led to determine the ABS’ quality or liquidity. or willingness to provide liquidity, considerable stress in the municipal However, some money market funds credit or other support to determine the markets when some of these bond may view the third-party guarantee as a ABS’s quality or liquidity, we have insurers and financial institutions came ‘‘layered guarantee’’ on top of the decided to retain the presumption for under pressure during the financial sponsor’s guarantee, which today are ABS generally. In addition, we believe crisis. We continue to believe that both subject to a 10% diversification that it would be inefficient to attempt to tightening diversification requirements limit under rule 2a–7. We believe it is anticipate every type of ABS sponsor with respect to a money market fund’s appropriate to allow for instances of that should be excluded now or in the exposure to securities subject to layered guarantees when a third-party future, and designating particular guarantees or demand features from a guarantor is present, and therefore exclusions in the amended rule may not single guarantor or demand feature believe that in cases where a money provide for innovation of new types of provider will reduce this risk. However, market fund is relying only on the third- ABS over time. The rebuttable we are concerned that removing the party guarantor the board (or its presumption we are adopting today twenty-five percent basket entirely for delegate) can determine that it is not however, does allow for flexibility in tax-exempt money market funds would relying on the sponsor, and in cases instances where the fund is not looking inhibit the ability of these funds to be where a money market fund views the to the sponsor, irrespective of the actual third-party guarantor as providing a type of ABS, where the board of by, the institution that issued the security or layered guarantee, the amended rule directors determines that the fund is not provided the demand feature or guarantee. See rules relying on the sponsor to make 2a–7(d)(3)(i) and (iii). We believe this amendment will provide that the money market reflects funds’ current practices and is consistent fund treat the guarantee by the sponsor determinations about quality or with rule 2a–7’s current requirements. and the guarantee by the third-party liquidity. 1661 We note that Investment Company Act rule 12d3–1 also refers to a twenty-five percent basket. guarantor as layered guarantees. 3. The Twenty-Five Percent Basket Commenters also argued that the See rule 12d3–1(d)(7)(v). That rule generally board should not have to make the We proposed amending rule 2a–7 to permits investment companies to purchase certain securities issued by companies engaged in required findings for certain types of eliminate the ‘‘twenty-five percent securities-related activities notwithstanding section ABS, such as TOBs. Commenters argued basket,’’ under which as much as 25% 12(d)(3)’s limitations on these kinds of transactions. that diversification from TOB sponsors of the value of securities held in a Among other things, rule 12d3–1 provides that the is unnecessary because TOBs have money market fund’s portfolio may be acquisition of a demand feature or guarantee as subject to guarantees or demand features defined in rule 2a–7 will not be deemed to be an dedicated liquidity providers and acquisition of the securities of a securities-related 1660 frequently have credit enhancement, from a single institution. After business provided that ‘‘immediately after the and the TOB sponsor may not acquisition of any Demand Feature or Guarantee, necessarily be the provider of either.1657 1659 SFIG Comment Letter. the company will not, with respect to 75 percent 1660 of the total value of its assets, have invested more Commenters also stated that tax-exempt Current rule 2a–7 applies a 10% diversification limit on guarantees and demand than 10 percent of the total value of its assets in money market funds in particular would features only to 75% of a money market fund’s total securities underlying Demand Features or suffer if TOBs were not excluded assets. See current rule 2a–7(c)(4)(iii)(A). A money Guarantees from the same institution.’’ We because the amended diversification market fund, however, may only use the twenty-five requested comment as to whether we should revise requirements would further restrict a percent basket to invest in demand features or rule 12d3–1 to apply this diversification guarantees that are first tier securities issued by requirement with respect to all of an investment money market fund’s ability to hold non-controlled persons. See rules 2a–7(c)(4)(iii)(B) company’s total assets, rather than just 75% of TOBs.1658 One commenter and (C). Although we proposed to delete current assets, for consistency with the proposed recommended excluding sponsors of all rule 2a–7(a)(10) (definition of demand feature elimination of the twenty-five percent basket in rule types of ABS (other than ABCP) from issued by a non-controlled person) because the term 2a–7. We received no comments regarding rule is used only in connection with the twenty-five 12d3–1. At this time we are not amending rule percent basket, we are retaining the definition 12d3–1 to reflect our amendments to rule 2a–7’s 1655 Wells Fargo Comment Letter. because our amendments provide a fifteen percent diversification provisions because although rule 1656 Id. basket for tax-exempt money market funds. See rule 12d3–1 provides a twenty-five percent basket for 1657 See, e.g., Vanguard Comment Letter. See also 2a–7(a)(10). We also are adopting certain purposes of section 12(d)(3) limitations, this SIFMA Comment Letter. amendments to clarify that a fund must comply twenty-five percent basket is not directly associated 1658 See, e.g., Fidelity Comment Letter; SIFMA with this 10% diversification limit immediately with the twenty-five percent basket in rule 2a–7. Comment Letter (noting that TOBs already have a after it acquires a security directly issued by, or 1662 See Proposing Release, supra note 25, at limited number of sponsors). subject to guarantees or demand features provided section III.J.3.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47878 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

fully invested in securities subject to portfolio may be subject to guarantees or market funds have to guarantors, as guarantees or demand features or may demand features from a single described in detail in the DERA force them to invest in securities that institution.1664 Guarantor Diversification Memo.1665 As demonstrated below, DERA staff found have weaker credit than the securities a. Use of Twenty-Five Percent Basket by that the majority of money market funds they might otherwise purchase, due to Money Market Funds the more limited availability of do not use the twenty-five percent guarantors and demand feature i. Non-Tax-Exempt Money Market basket. providers for tax-exempt money market Funds As presented in the figure below, funds as compared to non-tax-exempt To help us evaluate the possible DERA staff examined the number of money market funds.1663 Accordingly, effects of removing the twenty-five money market funds for which under our amendments, as much as percent basket on non-tax-exempt guarantors compose more than 10%, 15% of the value of securities held in money market funds, DERA staff 15% and 20% of their portfolios, a tax-exempt money market fund’s analyzed the exposure that money respectively.1666

As shown in the figure below, DERA money market funds for which 15%, and 20% of their portfolios, staff also examined the percent of all guarantors compose more than 10%, respectively.1667

1663 As discussed in more detail below, this 1665 See Municipal Money Market Funds the term ‘‘guarantees’’ is used to refer both to concern primarily applies to tax-exempt funds, the Exposure to Parents of Guarantors (‘‘DERA guarantees and demand features. largest users of the basket, as they face a Guarantor Diversification Memo’’) (March 17, 1666 Id. The DERA Guarantor Diversification 2014), available at http://www.sec.gov/comments/ significantly more constrained supply of investable Memo also provides information regarding tax- s7-03-13/s70313-323.pdf. In the DERA Guarantor securities than other types of money market funds. Diversification Memo, the term ‘‘guarantors’’ is exempt money market funds, which we discuss 1664 See rule 2a–7(d)(3)(iii)(B) and rule 2a– used to refer both to the ultimate parent of issuers below. 7(a)(28). See also supra note 1583. of guarantees and issuers of demand feature, and 1667 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.001 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47879

In addition, as illustrated in the figure funds have above the 10%, 15%, and below, DERA staff examined the amount 20% thresholds, respectively.1668 of excess exposure that money market

DERA staff also found, as illustrated the entire money market fund industry excess of the 10%, 15%, and 20% below, that only a small percentage of assets are exposed to guarantors in thresholds.1669

1668 Id. 1669 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.002 ER14AU14.003 47880 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

In addition to showing that the industry dollars are above the 15% Guarantor Diversification Memo majority of money market funds do not threshold as of November 2012, addresses the commenter’s concern by use the basket, the data analyzed in the suggesting that few funds are using the reviewing the use of the twenty-five DERA Guarantor Diversification Memo basket this way. Second, a money percent basket over a period of two also shows that money market funds market fund can apply the basket to two years.1674 After further review, our staff that do use the twenty-five percent guarantors where each guarantor has found that the data we provided in the basket use the basket to a limited extent between 10% and 15% of the portfolio Proposing Release is comparable with for purposes of gaining a high level of guarantees and the sum equals 25% or the use of the twenty-five percent basket exposure to any one particular guarantor less. The difference between the 15% when we analyze money market funds’ or demand feature provider.1670 In fact, and the 10% threshold amounts in the use over two years.1675 Therefore, commenters noted that although a above illustrations represents the usage although commenters suggest that the money market fund may use the full under this scenario. As of November use of the twenty-five percent basket twenty-five percent basket to gain 2012, $6.02 billion or 0.2% of the may vary considerably during the exposure to one guarantor or demand industry dollars are used this way, course of operation, and commenters feature, money market funds will often suggesting that most funds use the did not provide any specific data use the twenty-five percent basket to twenty-five percent basket divided up suggesting otherwise, our staff found gain a smaller amount of exposure to among two guarantors with exposures that the use of the twenty-five percent two guarantors or demand feature up to 15%.1672 If we assume an even basket over a longer period was in fact providers above the 10% diversification split of 12.5% between two guarantors, relatively constant. limit, for a total of up to twenty-five then instead of having to reduce The data and figures provided above, percent.1671 exposure from 25% to 10% for one which show that most funds that are As noted by commenters, currently, a guarantor, most money market funds using the basket are using the basket money market fund can use the twenty- will be required to reduce exposure between the 15% and 10% thresholds, five percent basket in two ways. First, from 12.5% to 10% for two guarantors. suggest that eliminating the basket for a money market fund can apply the Thus, because most money market all money market funds (other than tax- basket to one guarantor where the funds are not today using the twenty- exempt money market funds), as guarantor can account for as much as five percent basket to gain high levels of opposed to providing a fifteen percent 25% of the portfolio’s guarantees. The exposure to any one particular guarantor basket, most effectively addresses our figures above show that $260 million or or demand feature provider, we believe concerns about a money market fund’s 0.01% of the industry dollars are above that any negative effects for these money exposure to a single guarantor or the 20% threshold as of November 2012 market funds that would be associated demand feature provider because and $740 million or 0.03% of the with reducing exposure to guarantors eliminating the basket provides a would generally be minimal. significant mitigation of the risks to 1670 Id. The DERA Guarantor Diversification One commenter suggested that the money market funds caused by their Memo shows that money market funds’ exposure in figures we provided in the Proposing excess of the 15% diversification threshold is substantial exposure to these providers. relatively small, amounting to 0.03% of the assets Release (which were derived from After further consideration, we continue in the entire money market fund industry as of monthly Form N–MFP filings) only to believe that removing the twenty-five November 2012. captured the funds that used the twenty- percent basket for money market funds 1671 See, e.g., Wells Fargo DERA Comment Letter; five percent basket on one particular Comment Letter of Federated Investors, Inc. (other than tax-exempt money market (Municipal Money Market Funds) (Apr. 23, 2014) day, but that the basket is regularly funds) instead of providing a fifteen (‘‘Federated DERA III Comment Letter’’); SIFMA relied upon during the course of the percent basket (or other size basket), DERA Comment Letter. For example, money market fund’s operations.1673 The DERA funds may use the twenty-five percent basket to obtain exposure for two demand feature providers twenty-five percent basket during the course of or guarantors above the 10% diversification limit, 1672 As discussed below, the DERA analysis their operations and that three quarters of its tax- in which case the exposure to any one demand further shows that the usage of the twenty-five exempt money market funds and all but two of its feature provider or guarantor would have to be less percent basket is predominantly used by tax-exempt 14 single state funds currently hold securities in than 15%, and the average exposure to any one money market funds. their twenty-five percent basket). demand feature provider or guarantor could not 1673 BlackRock II Comment Letter. See also 1674 See DERA Guarantor Diversification Memo, exceed 12.5%. See Federated DERA III Comment Federated II Comment Letter (stating that tax- supra note 1665. Letter. exempt money market funds regularly rely on the 1675 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.004 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47881

more appropriately addresses the risk and as discussed further below, DERA basket to a higher degree than money that a fund faces when it is heavily staff also analyzed data and figures market funds as a whole. As set forth exposed to a single guarantor or demand regarding the use of the twenty-five below, DERA staff examined the number feature provider. percent basket by tax-exempt money of other tax-exempt funds and single market funds. DERA staff found that tax- ii. Tax-Exempt Money Market Funds state funds for which guarantors exempt money market funds in general, compose more than 10%, 15%, and As discussed in greater detail in the and single state money market funds in 20% of their portfolios, respectively.1676 DERA Guarantor Diversification Memo, particular, use the twenty-five percent

As illustrated below, DERA staff also exempt funds and single state funds for 10%, 15%, and 20% of their portfolios, examined the percent of other tax- which guarantors compose more than respectively.1677

1676 Id. The DERA Guarantor Diversification municipal money market funds on Form N–MFP 1677 Id. Memo divides municipal money market funds into (Item 10), ‘‘single state funds’’ and ‘‘other tax- two categories, consistent with the two types of exempt funds.’’

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00147 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.005 ER14AU14.006 47882 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

In addition, DERA staff examined the have in assets above the 10%, 15%, and amount of excess exposure that other 20% thresholds, respectively.1678 tax-exempt funds and single state funds

Lastly, as illustrated below, DERA of the entire other tax-exempt fund and exposed to guarantors in excess of the staff found that only a small percentage single state fund industry assets are 10%, 15%, and 20% thresholds.1679

DERA staff analyzed, among other fund assets exposed to guarantors above features or guarantees in excess of the things: (i) The percentage of tax-exempt the 15% threshold, which shows the 10% and 15% guarantor diversification money market fund assets exposed to percentage of assets that will need to be limits, respectively, provides an guarantors above the 10% threshold, reinvested as a result of the fifteen accurate reflection of the potential which shows the percentage of assets percent basket that we are adopting impact that elimination or reduction of that would need to be reinvested if we today for tax-exempt money market the twenty-five percent basket would eliminated the twenty-five percent funds. We believe that our staff’s have on other tax-exempt funds and basket, as proposed; and (ii) the analysis of the percentage of assets single state funds. We also believe that percentage of tax-exempt money market invested in securities subject to demand looking to the percentage of assets, as

1678 Id. 1679 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.007 ER14AU14.008 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47883

opposed to the number of funds or features.1683 One commenter argued that guarantors is similar to that of the top excess amount of assets in dollars since the financial crisis, fewer issuers five guarantors.1687 Thus, we believe (which only show absolute numbers), have been providing guarantees and that, if today’s amendments cause non- most accurately shows the other credit support for securities to be tax-exempt money market funds to corresponding level of assets that will purchased by money market funds, and include additional guarantors or need to be reinvested. that removing the twenty-five percent demand feature providers in the funds’ The above data shows that the basket could force managers to purchase portfolios, there exists a supply of percentage of other tax-exempt funds paper of lower quality issuers that are guarantors and demand feature and single state fund assets exposed to unable or unwilling to obtain third- providers that have similar credit guarantors above the 10% and 15% party demand features.1684 Another quality as the top five guarantors used guarantor diversification limits are commenter stated that consolidation in by funds. As such, we believe that, for relatively small when compared to other the banking industry has substantially non-tax-exempt money market funds municipal money market funds and the reduced the pool of high-quality that are currently using the twenty-five money market fund industry as a whole, demand feature and guarantee percent basket, it is likely that these although the data also shows that other providers, and increased regulatory money market funds would be able to tax-exempt funds and single state funds capital requirements will likely further use these additional guarantors and use the basket to a greater extent than reduce the number of available demand feature providers and will not money market funds generally. In providers in coming years.1685 be forced to resort to low credit quality addition to acknowledging that the As discussed below, we do not guarantors or demand feature providers proposed elimination of the basket believe that the removal of the twenty- because of the amended rule. would have a greater effect on tax- five percent basket for non-tax-exempt A few commenters argued that exempt money market funds because of money market funds will cause money composite credit ratings from NRSROs their higher use of the basket, we have market funds to use lower credit quality are not a reliable standalone metric to 1688 also taken into account commenters’ guarantors and demand feature assess credit quality. We agree. This concerns, as discussed below, regarding providers or potentially reduce liquidity is why the DERA memo also assessed the limited availability of guarantor and and flexibility for money market funds, credit risk through CDS spreads, which demand feature providers for tax- and if any such impact were to occur, are the market’s current assessment of a exempt money market funds as opposed we expect that it would be limited. As guarantor’s future financial capacity to to non-tax-exempt money market funds. noted above, the data analyzed in the provide the necessary support. A few DERA Guarantor Diversification Memo commenters also argued that money b. Additional Considerations shows, among other things, that most market funds analyze the credit quality i. Non-Tax-Exempt Money Market funds, especially non-tax-exempt money of guarantors using a variety of factors Funds market funds, do not use the twenty-five other than CDS spreads and composite percent basket, and thus we believe that credit ratings.1689 While we recognize Several commenters generally most money market funds will likely that money market funds’ internal supported the removal of the twenty- not be forced to use lower credit quality analysis of the credit quality of 1680 five percent basket. For example, guarantors and demand feature guarantors and demand feature one commenter argued that eliminating providers.1686 Under today’s providers might be different, we believe the twenty-five percent basket for all amendments, non-tax-exempt money that using a combination of the objective money market funds would be an market funds will not be required to factors, CDS spreads and composite appropriate step to further reducing include more than 10 guarantors or credit ratings, for the purpose of our concentration risk in money market demand feature providers in their staff’s analysis is an acceptable 1681 funds. Other commenters, however, portfolios if each one maximized the alternative to conducting an individual opposed the removal of the twenty-five 10% diversification limit. DERA staff credit risk analysis of guarantors and 1682 percent basket. Commenters argued evaluated the exposure to guarantors closely approximates the credit risk of that the elimination of the twenty-five and found that the top five guarantor such guarantors and demand feature percent basket would increase money parents accounted for a combined total providers. Thus, after further review, we market funds’ reliance on lower quality of 43% of the exposure across all money believe our staff’s findings support the investments with higher credit risk, market funds. DERA staff measured the conclusion that, to the limited extent a particularly due to the limited number credit risk for each guarantor by credit money market fund may need to engage of providers of guarantees and demand default swap (CDS) spreads and new institutions as providers of composite credit ratings (NRSROs) and guarantees and demand features, there 1680 See, e.g., Barnard Comment Letter; CFA found that the credit quality of will be a sufficient supply of first tier Institute Comment Letter. See also U.S. Bancorp guarantors in the market. We therefore Comment Letter (supporting the removal of the guarantors among the top twenty twenty-five percent basket for all money market believe that, even with a 10% guarantor funds); Wells Fargo Comment Letter (supporting the 1683 Goldman Sachs Comment Letter; SIFMA limit for non-tax-exempt money market removal of the twenty-five percent basket only for Comment Letter; J.P. Morgan Comment Letter; ICI funds, any increase in guarantor taxable money market funds); Schwab Comment Comment Letter; Legg Mason & Western Asset diversification should not lead to Letter (supporting the removal of the twenty-five Comment Letter; Vanguard Comment Letter. percent basket, but recommending that state- 1684 Legg Mason & Western Asset Comment deterioration in credit quality. specific municipal money market funds be allowed Letter. See also ICI Comment Letter (expressing ii. Tax-Exempt Money Market Funds to continue using the basket to some extent). concern that eliminating the twenty-five percent 1681 U.S. Bancorp Comment Letter. basket would increase rather than decrease risk by Although a number of commenters 1682 See, e.g., SSGA Comment Letter; ICI increasing a fund’s reliance on less creditworthy opposed the removal of the twenty-five Comment Letter; Legg Mason & Western Asset credit support providers, noting that the universe of percent basket generally, many Comment Letter. Most of the commenters that institutions issuing or providing guarantees or opposed the removal of the twenty-five percent liquidity for eligible money market fund securities basket focused specifically on the consequences for has become limited). 1687 Id. tax-exempt money market funds. We address their 1685 J.P. Morgan Comment Letter. 1688 See, e.g., Wells Fargo DERA Comment Letter. particular concerns regarding tax-exempt money 1686 See DERA Guarantor Diversification Memo, 1689 See, e.g., Wells Fargo DERA Comment Letter; market funds below. supra note 1665 and accompanying text. Dreyfus DERA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47884 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

commenters specifically opposed the money market funds in the aggregate, events during this time period that removal of the twenty-five percent most money market funds do not use caused stress on money market basket for tax-exempt money market the twenty-five percent basket and those funds.1703 We note, however, that funds, and single state money market funds that do use the twenty-five another commenter stated that it was funds in particular.1690 Some percent basket do not make significant beneficial for money market funds to commenters argued that the twenty-five use of it.1696 Commenters, however, have the flexibility of the twenty-five percent basket has not been the reason argued that tax-exempt money market percent basket during the Eurozone tax-exempt money market funds have funds in particular do regularly rely on concerns in 2011,1704 which occurred experienced credit events in the the twenty-five percent basket.1697 For during our sample time period. As past.1691 For example, one commenter example, one commenter stated that as discussed above, the data analyzed in argued that the twenty-five percent of June 30, 2013, 75% of municipal the DERA Guarantor Diversification basket did not have an adverse impact money market funds made use of the Memo shows that over the course of two on tax-exempt money market funds and twenty-five percent basket.1698 Another years, the use of the twenty-five percent their shareholders and that significant commenter noted that nine of the top 10 basket remained steady and there was disruptions should not justify removal largest tax-exempt money market funds, minimal variability in the use of the of the twenty-five percent basket for tax- which represent approximately 40% of basket over time, even when certain exempt money market funds.1692 the tax-exempt money market fund events during this time period caused However, as we discussed in the assets, use the twenty-five percent stress on money market funds.1705 Proposing Release, in 2008, the basket.1699 As previously discussed, Many commenters expressed concern concentration of tax-exempt money commenters noted that besides using a regarding the impact of the proposed market funds in guarantee and demand single guarantor in the twenty-five removal of the twenty-five percent feature providers led to considerable percent basket, money market funds basket for tax-exempt money market stress in the municipal markets.1693 may also use two guarantors to fill the funds, and single state money market During this time municipal issuers had twenty-five percent basket by having, funds in particular, due to the limited to quickly find substitutes for demand for example, a 13% exposure to one availability of demand feature providers features on which they relied to shorten guarantor and a 12% exposure to and guarantors for these types of funds. their securities’ maturities.1694 In another.1700 The DERA Guarantor Commenters argued that the elimination addition, at least one provider of Diversification Memo found, as shown of the twenty-five percent basket would demand features and guarantees for above, that 10.8% and 2.6% of ‘‘single limit a tax-exempt money market fund’s many municipal securities held by state funds’’ and ‘‘other tax-exempt flexibility to obtain greater exposure to money market funds avoided funds’’ had at least one guarantor above strong credit sources in times when high bankruptcy in part due to substantial the 20% threshold as of November 2012, credit quality may be scarce.1706 A support received from various respectively.1701 The DERA Guarantor number of commenters also argued that entities.1695 We believe the risk that a Diversification Memo also found that the removal of the twenty-five percent money market fund faces in cases where 30.6% and 7.7% of single state funds basket will make it difficult for tax- the guarantor or demand feature and other tax-exempt funds had at least exempt money market funds to acquire provider comes under significant strain one guarantor above the 15% threshold sufficient liquid assets.1707 Commenters is substantial and that possible external as of November 2012, respectively. In argued that there is a relatively narrow support is unreliable in cases when addition, the memo shows that 80.2% group of banks and other financial guarantors or demand feature providers and 50.0% of single state and other tax- institutions that provide much of the may become stressed. We therefore exempt funds had at least one guarantor liquidity in the short-term municipal continue to believe that it is appropriate above the 10% threshold as of and TOB markets,1708 and that single to amend rule 2a–7 to enhance the November 2012, respectively.1702 DERA state funds in particular have even diversification requirements by staff’s findings are consistent with the fewer issuers available to them.1709 reducing the twenty-five percent basket data provided by the commenters above, One commenter stated that with a to a fifteen percent basket, in order to which suggest that tax-exempt money constrained supply of securities with limit a tax-exempt money market fund’s market funds use the twenty-five diverse guarantors, a twenty-five exposure to any one guarantor or percent basket to a greater extent than percent basket may actually allow a demand feature provider, thereby non-tax-exempt money market funds. manager to reduce risk by avoiding or mitigating the risk the fund faces when One commenter argued that although reducing exposure to the relatively it heavily relies on a single guarantor or the DERA staff analysis demonstrates weakest guarantors.1710 Some demand feature provider. that most tax-exempt money market commenters also argued that the twenty- As discussed above and in the funds use the twenty-five percent five percent basket is an important tool Proposing Release, when evaluating basket, the sample period (2010–2012) is not appropriate because there were no 1703 See Wells Fargo DERA Comment Letter. 1690 See, e.g., Federated II Comment Letter; 1704 See Fidelity DERA Comment Letter. Dreyfus Comment Letter; Wells Fargo Comment 1696 See Proposing Release, supra note 25, 1705 See DERA Guarantor Diversification Memo, Letter; Schwab Comment Letter; Vanguard nn.892–893 and accompanying text. supra note 1665. Comment Letter; BlackRock II Comment Letter. 1697 See, e.g., SIFMA Comment Letter; Fidelity 1706 Vanguard Comment Letter; Invesco Comment 1691 See, e.g., Vanguard Comment Letter; Comment Letter. Letter; BlackRock II Comment Letter. See also Federated II Comment Letter. 1698 SIFMA Comment Letter. Dreyfus Comment Letter; ICI Comment Letter; Legg 1692 Federated II Comment Letter. See also 1699 Fidelity Comment Letter (noting that only Mason & Western Asset Comment Letter; Federated Federated VII Comment Letter (arguing that tax- one of those nine funds was over 15% and VII Comment Letter; Federated II Comment Letter. exempt money market funds weathered problems recommending a fifteen percent basket for all 1707 Wells Fargo Comment Letter; Invesco by relying on the credit of the underlying obligor money market funds). Comment Letter; BlackRock II Comment Letter; or working with the obligor to substitute another 1700 See, e.g., Comment Letter of Investment SIFMA Comment Letter; Goldman Sachs Comment guarantor). Company Institute DERA (Apr. 22, 2014) (‘‘ICI Letter; Federated II Comment Letter. See also 1693 See Proposing Release, supra note 25, section DERA Comment Letter’’). Fidelity Comment Letter. III.J.3. 1701 See DERA Guarantor Diversification Memo, 1708 Id. 1694 Id. supra note 1665. 1709 See, e.g., BlackRock II Comment Letter. 1695 Id. 1702 Id. 1710 Wells Fargo Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47885

that money market funds may use to of the basket for tax-exempt money dollars above the 15% threshold is accommodate the variability and market funds, we have decided to allow smaller than the amount needed for the unpredictability of tax-exempt money market funds, remaining funds to reach the 10% or in the municipal market.1711 We including single state funds, to rely on 15% threshold for the same guarantor. recognize commenters’ concerns a fifteen percent basket, under which as Lastly, it is also reasonable to expect regarding the proposed removal of the much as 15% of the value of securities that if a reduction by any of the top twenty-five percent basket for tax- held in a tax-exempt money market guarantors does occur, this could exempt money market funds, and single fund’s portfolio may be subject to become an opportunity for another state money market funds in particular, guarantees or demand features from a guarantor to step in. We therefore due to the limited availability of single institution. Although eliminating believe that, although other tax-exempt demand feature providers and the basket for tax-exempt money market funds and single state funds may guarantors for these types of funds. As funds would reduce concentration risk currently use the twenty-five percent noted above, we believe that requiring by requiring tax-exempt money market basket to a higher degree than money tax-exempt money market funds to limit funds to lessen their exposure to a market funds generally and may face exposure to any one guarantor or single guarantor or demand feature greater supply constraints than non-tax- demand feature provider while still provider, we are concerned that exempt funds, because these funds will providing tax-exempt money market eliminating the basket entirely could be permitted to use a fifteen percent funds with a fifteen percent basket, will cause these funds to invest in weaker basket, any increase in guarantor address many of the commenters’ credits. We believe that a reduction of diversification should not lead to concerns regarding the limited supply of the twenty-five percent basket to a deterioration in credit quality and any demand feature providers and fifteen percent basket for tax-exempt negative effects for tax-exempt money guarantors for tax-exempt money market money market funds, which the DERA market funds that currently use the funds. Guarantor Diversification Memo shows twenty-five percent basket will be Several commenters suggested we use the basket more than non-tax- minimal.1716 reduce the twenty-five percent basket to exempt money market funds, A couple of commenters argued that a fifteen percent basket for tax-exempt appropriately addresses the concerns VRDNs provide a significant source of money market funds.1712 One related to heavy concentration in a liquidity for money market funds and commenter stated that, although the single guarantor or demand feature that the proposed removal of the twenty-five percent basket may not have provider as well as the concerns that twenty-five percent basket would been heavily used recently by money eliminating the twenty-five percent therefore have a negative impact on a market funds, the availability of a basket basket for tax-exempt money market fund’s ability to access liquidity through would provide useful flexibility to funds could lead to an overall VRDNs.1717 In addition, one of these money market funds on occasion.1713 A deterioration of credit quality or commenters argued that the second commenter argued that a fifteen liquidity because tax-exempt funds may combination of regulatory requirements percent basket would achieve the have to obtain guarantees or demand and the diminishing number of financial objective of balancing diversification features from less creditworthy guaranty companies and highly rated and flexibility, while reducing the institutions due to a limited supply of banks has significantly reduced the potential for unintended guarantees and demand features. number of entities offering credit 1714 We believe for several reasons that consequences. After further support for VRDNs,1718 noting that in reducing the twenty-five percent basket consideration, and in light of the data late 2012, tax-exempt money market to a fifteen percent basket should not for tax-exempt money market funds and funds had an average of 83% of total significantly restrict the ability of commenters’ concerns and assets invested in VRDNs.1719 As recommendations regarding the removal guarantors to fill the needed capacity as the guarantors become more diversified. 1716 See supra note 1665 and accompanying text 1711 See, e.g., Dreyfus Comment Letter; BlackRock First, the data analyzed in the DERA (discussing level of assets and supply of providers). II Comment Letter. See also Wells Fargo DERA Guarantor Diversification Memo shows 1717 Legg Mason & Western Asset Comment Comment Letter (noting that the basket provides a 0.5% and 0.2% of the guarantor’s Letter; Invesco Comment Letter. The interest rates means for money market funds to limit portfolio dollars are excess dollars above the 15% on VRDNs are typically reset either daily or every credit risk by concentrating exposure in the highest seven days. VRDNs include a demand feature that quality guarantor). threshold when single state funds and provides the investor with the option to put the 1712 See, e.g., Goldman Sachs Comment Letter; other tax-exempt funds, respectively, issue back to the trustee at a price of par value plus Fidelity DERA Comment Letter. See also Schwab are considered separately in November accrued interest. This demand feature is supported Comment Letter (recommending that single state 2012, meaning little if any additional by a liquidity facility such as letters of credit, lines money market funds be allowed to continue using 1715 of credit, or standby purchase agreements provided the twenty-five percent basket except that within capacity has to be developed. by financial institutions. The interest-rate reset and the basket no single guarantor or demand feature Second, it is reasonable to expect that a demand features shorten the duration of the provider could represent more than 15% of the reduction by one money market fund security and allow it to qualify as an eligible fund’s assets). Some commenters suggested we (because its exposure to a particular security under Rule 2a–7. See Handbook of Fixed reduce the twenty-five percent basket to a fifteen Income Securities 237 (Frank J. Fabozzi & Steven percent basket for all money market funds (both tax- guarantor is too high) could become a V. Mann eds., 8th ed. 2012) nn.735–36. exempt funds and non-tax-exempt funds). See purchasing opportunity for another 1718 Invesco Comment Letter (stating that, while Goldman Sachs Comment Letter; SIFMA Comment money market fund whose exposure to total municipal market debt outstanding has held Letter; Fidelity Comment Letter. See also J.P. a particular guarantor is below the 15% stable for the past five years at about $3.7 trillion, Morgan Comment Letter (recommending that threshold. Third, should any of the top VRDNs outstanding have declined steadily from instead of eliminating the basket, we mandate a $444.9 billion in December 2008 to only $246.8 maximum guarantee and/or demand feature guarantors listed in the DERA Guarantor billion in June 2013). exposure that can be held within the basket in any Diversification Memo choose to increase 1719 Id. (noting that there has been a marked one entity, such as at a 15% cap). their capacity, this could become a decline in the issuance of credit enhanced 1713 Goldman Sachs Comment Letter (suggesting purchasing opportunity for a money securities and that the contraction in the that our data is limited to a short period of time and availability of these securities hinders the level of arguing that it supports the conclusion that a market fund since the amount of excess diversification that managers can achieve in tax- smaller basket would satisfy portfolio managers of exempt money market fund portfolios; also most funds). 1715 See DERA Guarantor Diversification Memo, providing data that securities issued with a letter 1714 Fidelity Comment Letter. supra note 1665. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47886 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

discussed in the Proposing Release, and c. Additional Economic Analysis our staff found that approximately 131 as discussed further below, concerns Our diversification amendments, funds, or 21.9% of all funds submitting about the creditworthiness of guarantors including (i) the amendment to require Form N–MFP for November 2012, and demand feature providers have that money market funds treat the reported that they made use of the reduced the amount of VRDNs sponsors of ABS as guarantors subject to twenty-five percent basket for outstanding since 2010.1720 We expect rule 2a–7’s 10% diversification limit guarantees and demand features, even that reducing the twenty-five percent applicable to guarantees and demand when we treat sponsors of ABCP as basket to a fifteen percent basket instead features, unless the money market guarantors (and thus subject to a 10% of eliminating the basket will alleviate fund’s board of directors (or its delegate) diversification limitation). Thus, commenters’ concerns regarding the determines that the fund is not relying although a minority does use the availability of VRDNs. In addition, on the sponsor’s financial strength or its twenty-five percent basket, the majority because the amount of outstanding ability or willingness to provide of money market funds do not. VRDNs and other short-term municipal liquidity, credit or other support to Furthermore, money market funds as of February 28, 2014, had invested 16.5% debt has decreased 47% between 2008 determine the ABS’s quality or liquidity of their assets in ABS and securities and 2013, the top guarantors will have (‘‘ABS amendment’’) and (ii) the subject to demand features or some additional capacity built in should amendment to remove the twenty-five guarantees, suggesting that issuers have the overall demand for such securities percent basket for money market funds a ready supply of money market fund continue to decrease into the future.1721 other than tax-exempt money market investors eligible to purchase their Rule 2a–7 restricts money market funds funds and to reduce to fifteen percent, securities. The 131 funds that used the to short-term maturities, which in turn rather than eliminate, the twenty-five twenty-five percent basket had, on limits the municipal debt in money percent basket for tax-exempt money average, $31.4 billion of their assets market funds to VRDNs and other short- market funds, including single state term municipal debt.1722 In addition, invested in excess of the 10% money market funds (‘‘twenty-five diversification limitation we are analyzing money market fund 1724 percent basket amendment’’), are adopting today (i.e., in the twenty-five municipal debt holdings and the designed to provide a number of percent basket) as of November availability of acceptable money market benefits, as discussed in more detail 2012.1726 Furthermore, data as of fund municipal securities (VRDNs and below. DERA staff’s review of data November 2012, shows that 98.9% of other short-term municipal debt) from suggests that our ABS amendment and total money market fund assets are not 2002 to 2013 suggests that the twenty-five percent basket amendment in funds’ twenty-five percent baskets. municipal debt market is able to adjust (treating only ABCP sponsors as Thus, because most money market to both increasing and decreasing guarantors for purposes of this funds are not using the twenty-five 1723 1725 demand for such securities. analysis) would have little impact percent basket to gain high levels of on the majority of money market funds, exposure to any one particular guarantor of credit, standby purchase agreement or guarantee which do not make use of the twenty- or demand feature provider and because comprised 25.6% of total municipal market five percent basket, and would likely issuance in 2008 and that in 2012 these securities a very high percentage of money market made up 9.5% of total issuance). have a minimal impact on those funds fund assets are not in a twenty-five 1720 See Proposing Release, supra note 25, at that do. Because tax-exempt money percent basket, we believe any negative section III.E. market funds make greater use of the effects for these non-tax-exempt money 1721 See infra note 1723. basket than non-tax-exempt money market funds will generally be minimal. 1722 Our staff’s review of portfolio holdings of market funds and may face greater single state funds and other tax-exempt funds from Form N–MFP filings, using aggregate amortized constraints regarding the availability of 1726 This estimate likely overstates the number of values from November 2010 to December 2013, demand feature providers and funds and the amount of money market funds’ found that these funds held approximately 71% in guarantors, we have provided tax- assets that could be affected by our ABS VRDNs and 18% in other municipal debt. amendments for three reasons. First, it assumes that exempt money market funds with the any fully or partially supported ABCP owned by a 1723 The Federal Reserve Board’s Flow of Funds ability to use a fifteen percent basket. of the United States provides the amount of fund would result in the sponsor guaranteeing the ABCP. Under our amendments, however, an ABCP municipal securities held by money market funds DERA staff’s review of data suggests that (or other ABS) sponsor would not be deemed to and the overall market. It ranged from about $270 the effect of our twenty-five percent guarantee the ABCP if the board (or its delegate) billion in 2002 to a maximum of $520 billion in basket amendment on tax-exempt determines the fund is not relying on the sponsor’s 2008 only to decline to approximately $305 billion money market funds would thus also financial strength or its ability or willingness to by 2013. The decrease shows that $215 billion have little impact on the majority of tax- provide support to determine the ABCP’s quality or ($520–$305) or 39% exited the money market fund liquidity. We did not assume sponsors of other industry since the financial crisis. One can closely exempt money market funds. types of ABS guaranteed those ABS because we approximate these money market fund holdings by Based on the data analyzed in the understand that other forms of ABS offered to summing the amount of outstanding VRDNs DERA Guarantor Diversification Memo, money market funds either do not typically have (Source: Securities Market and Financial Markets sponsor support or, if they are supported, the Association Web site) with the amount of support typically is in the form of a guarantee or available at http://www.sifma.org/research/ outstanding short term municipal debt (Source: demand feature, which would already be included reports.aspx. Federal Reserve Board’s Flow of Funds of the in our calculation of exposure to providers of 1724 United States), suggesting that money market funds See infra note 1660. demand features and guarantees. Second, Form N– hold nearly all the VRDNs and short-term 1725 Our staff assumed when reviewing the Form MFP data does not differentiate between funds that municipal debt. This sum has nearly halved from N–MFP data that any fully or partially supported would have had exposure in excess of 10% upon a high of $500 billion in 2008 to $265 billion in ABCP owned by a fund would result in the sponsor the acquisition of a demand feature or guarantee 2013. This corresponds to a decrease of $235 guaranteeing the ABCP. For this purpose, our staff (which will not be permitted under our billion, or 47%, of short term municipal debt and considered an ABCP conduit to be fully supported amendments) and those funds that were under that VRDNs money market funds holdings. We note, as when the program’s investors are protected against level of exposure at the time of acquisition but the well, that the overall municipal debt market has asset performance deterioration and primarily rely fund later decreased in size, increasing the fund’s absorbed these large money market fund outflows, on the ABCP sponsor to provide credit, liquidity, exposure above the 10% limit (which will be and, in fact, the overall municipal debt market has or some other form of support to ensure full and permitted under our amendments). Third, where a grown approximately $200 billion during this same timely repayment of ABCP, and considered an fund owned securities issued by or subject to time period. See Federal Reserve Board, Flow of ABCP conduit to be partially supported when the demand features or guarantees from affiliated Funds of the United States, available at http:// ABCP sponsor, although not fully supporting the institutions, we treated the separate affiliated www.federalreserve.gov/releases/z1 and Securities program, provided some form of credit, liquidity, or institutions as single institutions for purposes of Market and Financial Market Association Reports, other form of support. See also infra note 1726. these estimates.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47887

In addition, we believe that, if today’s demand features from a single state funds that either did not use the amendments cause non-tax-exempt institution for both non-tax-exempt twenty-five percent basket or used the money market funds to include money market funds and tax-exempt twenty-five percent basket below the additional guarantors or demand feature money market funds will mitigate some 15% threshold of 0.0790%; and (iii) for providers in the funds’ portfolios, there of the risk that a money market fund prime money market funds, the average exists a sufficient supply of guarantors faces by limiting a fund’s exposure to yield for funds using the twenty-five and demand feature providers. any one guarantor or demand feature percent basket was 0.1740% as As discussed above, and as addressed provider. compared to the average yield for prime by certain commenters, we recognize The principal effect of the ABS money market funds that did not use the that tax-exempt money market funds, amendment and twenty-five percent twenty-five percent basket of and in particular, single state tax- basket amendment we are adopting 0.1875%.1731 The prime money market exempt money market funds, use the today may be to restrain some managers fund yield differences may not, of twenty-five percent basket to a greater of money market funds from being course, be caused by the use of the degree than other types of money heavily exposed to an individual ABS twenty-five percent basket, but may market funds. DERA staff found that sponsor and from making use of the instead reflect the overall risk tolerance approximately 128 tax-exempt funds, or twenty-five percent basket in the future, of fund managers that take advantage of 67.7% of all tax-exempt funds under perhaps different market the twenty-five percent basket. In submitting Form N–MFP for November conditions.1729 Our diversification addition, we acknowledge that the 2012, made use of the twenty-five amendments may deny fund managers current low interest-rate environment percent basket. For single state funds, some flexibility in managing fund may cause the in each our staff found that approximately 89 portfolios and could decrease fund comparison above to be less than if we single state funds, or 80.2% of single yields. To assess our amendment’s effect were measuring the yield spreads in a state funds submitting Form N–MFP for on yield, our staff examined whether the higher interest rate environment. November 2012 made use of the twenty- 7-day gross yields of funds that use the We requested comment as to whether five percent basket. However, tax- twenty-five percent basket were higher there would be a significant impact on exempt money market funds, including than the 7-day gross yields for those fund yield, and if so, how significant. single state funds, that do use the funds that do not.1730 Our staff found: Although commenters did not address twenty-five percent basket generally do (i) For other tax-exempt funds, the the specific impact on fund yield, one not make significant use of it. The 128 average yield for funds using the commenter stated that our staff’s tax-exempt money market funds that twenty-five percent basket was 0.0893% analysis assumed that funds could used the twenty-five percent basket had, as compared to the average yield for replace securities guaranteed or subject on average, 2.4% of their assets invested other tax-exempt funds that did not use to a demand feature in a twenty-five in excess of the 10% diversification the twenty-five percent basket of percent basket with the same securities limitation we are adopting today (i.e., in 0.0987% and the average yield for funds that were held by the funds that do not the twenty-five percent basket), and the using the twenty-five percent basket use the twenty-five percent basket, and 89 single state money market funds that above the 15% threshold was 0.0736% suggested that the elimination of the used the twenty-five percent basket had, as compared to the average yield for basket might therefore decrease both on average, 0.5% of their assets invested other tax-exempt funds that either did yield and liquidity of tax-exempt in access of the 15% diversification not use the twenty-five percent basket or funds.1732 We recognize that it is limitation as of November 2012.1727 In used the twenty-five percent basket possible that one money market fund addition, the 128 tax-exempt money below the 15% threshold of 0.0951%; may not be able to obtain the exact market funds that used the twenty-five (ii) for single state funds, the average securities of another money market fund percent basket had, on average, 0.3% of yield for funds using the twenty-five that is not currently relying on the their assets invested in excess of the percent basket was 0.0886% as basket. However, as discussed above, 15% diversification limitation we are compared to the average yield for single our staff’s analysis shows that there adopting today, and the 89 single state state funds that did not use the twenty- exists a sufficient supply of first tier money market funds that used the five percent basket of 0.0754% and the guarantors in the market for funds to twenty-five percent basket had, on average yield for single state funds using invest. Therefore, after further average, 0.5% of their assets invested in consideration, we believe that the effect excess of the 15% diversification the twenty-five percent basket above the 1728 15% threshold was 0.1075% as on yield, given the 7-day gross yields of limitation as of November 2012. funds that use the twenty-five percent Although we understand that non-tax- compared to the average yield for singe basket versus the 7-day gross yields for exempt money market funds, and tax- 1729 those funds that do not, will be exempt money market funds in One commenter suggested that compliance with our amendments would require it to reallocate minimal. particular, may have made greater use of or sell its money market fund portfolio securities. Our twenty-five percent basket the twenty-five percent basket in the See Fidelity Comment Letter (also suggesting that amendment requires non-tax-exempt past (and might do so in the future if we we extend our nine-month implementation period for modifying the twenty-five percent basket due to money market funds that use the fully retained the twenty-five percent the need for additional time for transactions). twenty-five percent basket, and tax- basket), we are concerned that funds However, funds with investments in excess of those exempt money market funds that use were previously exposed to permitted under the revised rule are not required the twenty-five percent basket at levels concentrated risks inconsistent with the to sell the excess investments to come into compliance. The amendments require a fund to above the fifteen percent threshold, or purposes of rule 2a–7’s diversification calculate its exposure to issuers of demand features that would use it in the future, to either requirements as discussed above. We and guarantees as of the time the fund acquires a not acquire certain demand features or continue to believe that amending rule demand feature or guarantee or a security directly guarantees (if the fund could not assume 2a–7 to tighten diversification limits for issued by the issuer of the demand feature or securities subject to guarantees or guarantee. See rules 2a–7(d)(3)(i) and (iii). 1730 We assumed that any fully or partially 1731 These averages are derived from Form N– supported ABCP owned by a fund would result in MFP data as of February 28, 2014, weighted by 1727 Id. the sponsor guaranteeing the ABCP. See supra note money market funds’ assets under management. 1728 Id. 1726. 1732 Federated VII Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47888 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

additional exposure to the provider of use that bank because the money market invest. However, the market for demand the demand feature or guarantee) or to funds to which the issuer hoped to features and guarantees for some single acquire them from different institutions. market its securities could not assume state funds is not national. For example, Funds that choose the latter course additional exposure to the bank. If the state of California through the could thereby increase demand for issuers were unable to receive demand California State Teachers Retirement providers of demand features and features or guarantees from banks (or System is a guarantor for securities held guarantees and increase competition other institutions) to which they would in California municipal money market among their providers. If new entrants have turned absent our amendments, fund portfolios as reported on Form N– do not enter the market for demand they would have to engage different MFP. Additional analysis of the data in features and guarantees in response to banks, which could make the offering the DERA Guarantor Diversification this increased demand, reducing the process less efficient and result in Memo shows that 74% of the single twenty-five percent basket to a fifteen higher costs if the different banks state fund’s excess guarantees above the percent basket for tax-exempt money charged higher rates. Issuers of 15% threshold on average come from market funds, and removing the twenty- securities with guarantees or demand California municipal money market five percent basket for all other money features (e.g., issuers of longer-term funds (39%), New York municipal market funds, could result in money securities that can be sold to money money market funds (24%), and market funds acquiring guarantees and market funds only with a demand Massachusetts municipal money market demand features from lower quality feature) also could be required to funds (11%). All other state municipal providers than those the funds use broaden their investor base or seek out money market funds account for 5% or today, although, as discussed above, we different providers of guarantees or less of the excess guarantees dollars expect such potential effect to be demand features under our above the 15% threshold. As such, we mitigated due to the available supply of amendments, which could make their would expect that in terms of the first-tier guarantors and demand feature offering process less efficient or more amount of assets, California, New York, providers that have similar credit costly. and Massachusetts may be affected more quality as the top guarantors that are As discussed above, some than other states. However, as we used by funds. If new entrants do enter commenters argued that single state discussed earlier, we expect the impact the market (or if current participants funds in particular would be negatively to be minimal since the amount of increase their participation), the effect affected by the removal of the twenty- excess guarantee dollars above the 15% on money market funds would depend five percent basket.1733 We believe that threshold is less than 0.5% of the single on whether these new entrants (or providing single state funds a fifteen state guarantee dollars.1736 This may be current participants) are of high or low percent basket retains much of the reduced further if other single state credit quality as compared to the flexibility for single state funds to invest funds with guarantees below the 10% providers money market funds would in securities subject to guarantees or and 15% threshold choose to increase use absent our amendments. demand features while also limiting the their percent exposures to those Our ABS amendment and twenty-five extent to which a single state fund can guarantors with excess exposure in percent basket amendment also may become exposed to any one guarantor or other funds. increase the costs of monitoring the demand feature provider. Although our We do not expect that our ABS and credit risk of funds’ portfolios or make amendments reduce the twenty-five twenty-five percent basket that monitoring less efficient, to the percent basket for all single state funds, diversification amendments will result extent they are more diversified under we are not changing the application of in operational costs for funds. We our amendments and money market rule 2a–7’s 5% issuer limit to single understand that money market funds fund advisers must expend additional state funds, which today applies only to generally have systems to monitor their effort to monitor the credit risks posed 75% of a single state fund’s total exposures to guarantors (among other by a greater number of guarantors and assets.1734 We historically have applied things) and to monitor the funds’ demand feature providers. Although we the issuer diversification limitation compliance with rule 2a–7’s current cannot provide a point estimate of these differently to single state funds, 10% demand feature and guarantee costs, and commenters did not provide recognizing that ‘‘single state funds face diversification limit. We expect that us with any data that would assist us a limited choice of very high quality money market funds could use those with a point estimate, we expect that issuers in which to invest’’ and, systems to track exposures to ABS these costs would be included in our therefore, that there is a risk that ‘‘too sponsors under our amendments and broader cost estimates as discussed stringent a diversification standard could continue to track the funds’ above in section III.I.1. A money market could result in a net reduction in safety compliance with a 10% demand feature fund that could not acquire a particular for certain single state funds.’’ 1735 The and guarantee diversification limit. To guarantee or demand feature under our market for demand features and the extent a money market fund did amendments could, for example, be able guarantees, in contrast, is national for have to modify its systems as a result of to acquire a guarantee or demand most single state funds and therefore our ABS and twenty-five percent basket feature from another institution in may not be subject to the same supply diversification amendments, we expect which the fund already was invested, at constraints as is the market for issuers that the money market fund would no additional monitoring costs to the in which single state funds may directly make those modifications when fund. modifying its systems in response to our Issuers also could incur costs if they 1733 See, e.g. BlackRock II Comment Letter; amendments to require money market were required to engage different Schwab Comment Letter; Federated VII Comment funds to aggregate exposure to affiliated providers of demand features or Letter; Dreyfus Comment Letter. issuers for purposes of rule 2a–7’s 5% guarantees under our amendments, 1734 See current rule 2a–7(c)(4)(i)(B) and rule 2a– diversification limit, for which we which could negatively affect capital 7(d)(3)(i)(B). provide cost estimates above.1737 formation. This could occur because an 1735 See Revisions to Rules Regulating Money Market Funds, Investment Company Act Release issuer might otherwise have sought a No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1736 See DERA Guarantor Diversification Memo, guarantee or demand feature from a 1996)] (‘‘1996 Adopting Release’’), at text following supra note 1665. particular bank, but might choose not to n.38. 1737 See supra note 1625 and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47889

Because the costs estimated above are specified hypothetical events that an important part of a fund’s stress those associated with activities typically include (i) increases in the level of testing.1742 involved in making systems short-term interest rates, (ii) the We also noted in the proposal that we modifications, we expect they also downgrade or default of particular have had several opportunities to assess would cover any systems modifications portfolio security positions, each the effectiveness of the stress testing associated with our ABS and twenty- representing various exposures in a requirements during periods of market five percent basket diversification fund’s portfolio, and (iii) the widening stress, including the 2011 Eurozone debt amendments. of spreads in various sectors to which crisis and the 2011 U.S. debt ceiling In the Paperwork Reduction Act the fund’s portfolio is exposed, each in impasses. We further assessed the role analysis in section IV.A.1 below, we combination with various increases in of stress testing in fund boards’ identified certain initial and ongoing shareholder redemptions.1740 The fund assessment of fund risks during the hour burdens and associated time costs adviser must report the results of such 2013 U.S. debt ceiling impasse. Our staff related to our diversification stress testing to the board, including has observed that funds that had strong amendments. Specifically, our ABS such information as may be reasonably stress testing procedures were able to amendment requires that the board of necessary for the board of directors to use the results of those tests to better directors adopt written procedures evaluate the stress testing results.1741 manage their portfolios and better requiring periodic evaluation of any We discuss these requirements and the understand and minimize the risks determinations made regarding modifications from the proposal in associated with these events.1743 instances in which the fund is not further detail below. Finally, we also noted that, both with relying on the ABS sponsor’s financial stable NAV and floating NAV funds, we strength or its ability or willingness to 1. Overview of Current Stress Testing believe that stress testing the liquidity of provide quality or liquidity. Requirements and Proposed money market funds could enhance a Furthermore, for a period of not less Amendments fund board’s understanding of the risks to the fund related to periods of heavy than three years from the date when the The current stress testing shareholder redemptions and could evaluation was most recently made, the requirements, adopted in 2010, require help the fund manage those risks. We fund must preserve and maintain in an that the fund adopt procedures also noted that from the staff’s review of easily accessible place a written record providing for periodic testing of the stress testing by funds, some funds of the evaluation. These requirements fund’s ability to maintain a stable price already incorporate an analysis of their are a collection of information under the per share based on (but not limited to) ability to maintain liquidity in their Paperwork Reduction Act, and are certain hypothetical events. These designed to help ensure that the stress tests.1744 hypothetical events include a change in Considering this information and objectives of the diversification short-term interest rates, an increase in limitations are achieved. We estimate experience, the Commission proposed shareholder redemptions, a downgrade certain modifications, enhancements, the one-time burden to prepare and of or default on portfolio securities, and adopt these procedures will be 1,368 and clarifications to the current stress the widening or narrowing of spreads testing requirements in rule 2a–7 to hours at $1,130,880 in total time costs between yields on an appropriate for all money market funds and we strengthen the stress testing benchmark selected by the fund for requirements. First, we added a estimate that the annual burden would overnight interest rates and commercial be approximately 608 burden hours and proposed requirement for each fund to paper and other types of securities held stress test its ability to avoid having its $842,080 in total time costs for all by the fund. As we discussed in the money market funds. We also note that weekly liquid assets fall below 15% of Proposing Release, we have monitored all fund assets. Under the floating NAV a board can delegate its responsibility to the stress testing requirement and how determine whether the fund is relying alternative, we also proposed removing different fund groups have approached the requirement that floating NAV funds on the ABS sponsor’s financial strength its implementation in the marketplace. or its ability or willingness to provide test their ability to maintain a stable Through our staff’s examinations of share price. Additionally, we proposed quality or liquidity pursuant to rule 2a– money market fund stress testing 1738 certain enhancements and clarifications 7. To the extent that a board procedures, we have observed delegates this responsibility, it may to the list of hypothetical events that disparities in the quality and funds were required to include in their incur additional costs related to its comprehensiveness of stress tests, the oversight of such a delegate, although stress testing. Finally, we proposed to types of hypothetical circumstances modify the requirements to report we expect that any such additional costs tested, and the effectiveness of materials would be minimal. results to the board, proposing an produced by fund managers to explain additional requirement that the fund J. Amendments to Stress Testing the stress testing results to boards. For adviser include such information as Requirements example, some funds test for may be reasonably necessary for the combinations of events, as well as for We are adopting amendments to the board of directors to evaluate the stress correlations between events and 1745 stress testing requirements under rule testing. between portfolio holdings, whereas 2a–7, with modifications from the Comments on the proposed changes others do not. As discussed in the proposal in response to comments. to the stress testing requirement were proposal, we believe that an evaluation Specifically, we are adopting reforms to mixed. Some commenters supported the of combinations of events and 1746 the current stress testing provisions that proposed reforms to varying degrees. correlations among portfolio holdings is will require funds periodically to test 1742 their ability to maintain weekly liquid See Proposing Release, supra note 25, at NAV. See rule 2a–7(g)(8)(i). Additionally, as section III.L. assets of at least 10% and to minimize discussed below, we recognize that fund advisers 1743 Id. 1739 principal volatility in response to and boards are more likely to be concerned with, 1744 Id. and the hypothetical events are focused on, 1745 Id. 1738 See rule 2a–7(j). downside volatility. 1746 See, e.g., TIAA–CREF Comment Letter; 1739 Stable NAV funds will continue to be 1740 Id. BlackRock II Comment Letter; MFDF Comment required to test their ability to maintain a stable 1741 See rule 2a–7(g)(8)(ii). Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00155 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47890 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Others opposed them.1747 Commenters 20%, to allow funds to manage liquidity would affect the level of shareholder who supported the reforms suggested with ‘‘an eye toward a significant redemptions or a portfolio manager’s that they will enable better management buffer’’ against the liquidity threshold decision to sell securities.1764 As an of money market fund risk and help that would trigger fees and gates.1756 alternative, commenters suggested that address run incentives by heightening Finally, one commenter, although funds could calculate the level of board awareness of how events can generally supportive of testing liquidity, shareholder redemptions that, if affect liquidity and share price.1748 suggested that rather than requiring satisfied using only weekly liquid Commenters who opposed the reforms funds to test against a specific liquidity assets, would reduce the fund’s weekly indicated that they believed the current threshold, funds should analyze the liquid assets to 15%.1765 Additionally, stress testing requirements were impact of specific hypothetical event one commenter, although not objecting sufficient, and that the reforms might be scenarios on weekly liquidity and the to having funds stress test for liquidity costly, difficult to implement, and fund’s NAV, even if such events fall maintenance generally, believed that the provide unnecessary information to short of triggering a specific liquidity stress tests as proposed were vague and boards.1749 Two commenters believed threshold.1757 qualitative in nature.1766 that stress testing should not be required Several commenters, however, We continue to believe that funds for floating NAV funds.1750 Other opposed the proposed requirement to should assess their liquidity as part of commenters believed that stress testing have funds stress test their liquidity.1758 the stress testing process. As one requirements should continue to apply One commenter noted that it believed commenter noted, investors are likely to to floating NAV funds.1751 These that testing liquidity would not be monitor their funds’ liquidity levels, comments are discussed in more detail particularly meaningful for funds, as it and the deterioration of liquidity could below. is not possible to predict what assets a spark redemptions.1767 We agree. We fund would sell to meet also believe that the benefits to testing 2. Stress Testing Metrics redemptions.1759 This commenter also liquidity will apply to floating NAV a. Liquidity believed that testing liquidity in floating funds as well as stable NAV funds. We As proposed, we are requiring money NAV funds would serve no useful believe that floating NAV funds need to market funds to test their liquidity, but purpose because any losses on sales of understand what can place stress on have modified the threshold to require securities to meet redemptions would be liquidity, regardless of the fact that funds to test their ability to maintain reflected in the fund’s NAV.1760 Several losses from the sales of securities are 10% weekly liquid assets from the 15% commenters believed that it was not reflected in a market-based NAV, proposed.1752 This change is consistent feasible for a fund to test ‘‘the particularly in light of the potential for with the modification from the proposal magnitude of each hypothetical event triggering a fee or gate.1768 It is regarding the threshold of weekly liquid that would cause’’ the fund to cross the important for boards to understand and assets that will trigger a default liquidity liquidity threshold,1761 as the proposed be aware of what could cause a fund’s fee.1753 Several commenters generally rule would have required for reporting liquidity to deteriorate below certain supported the proposed requirement to the board.1762 These commenters thresholds (or below a regulatory that funds test their liquidity.1754 One noted that, unlike stable share price, threshold) as this renders the fund less commenter supported the proposal that there was not a direct relationship able to satisfy redemptions through funds test against the 15% threshold, between a fund’s liquidity levels and internal liquidity and thus increases the and added that the commenter already the hypothetical events listed in the likelihood that satisfying future tests against multiple liquidity proposed rule, other than shareholder redemptions will generate liquidity thresholds and will continue to do redemptions.1763 They believed that costs. so.1755 Another commenter argued that conducting such stress tests would We disagree with the commenter that funds should be required to test against therefore require funds to make complex indicated that testing liquidity would a more conservative threshold, such as assumptions about how hypothetical not be meaningful because it is not events, such as an interest rate increase, possible to predict what assets would be 1769 Letter; Comment Letter of Treasurer, State of sold to meet redemptions. As Connecticut (Sept. 17, 2013) (‘‘Conn. Treasurer 1756 See MSCI Comment Letter. discussed below, we have made several Comment Letter’’); Barnard Comment Letter; 1757 See Fidelity Comment Letter. modifications to the proposed rule in Santoro Comment Letter. 1758 See ICI Comment Letter; Federated II response to comments to reduce the 1747 See, e.g., Federated VIII Comment Letter; ICI Comment Letter; Federated VIII Comment Letter; number and complexity of assumptions Comment Letter; Schwab Comment Letter; Legg Legg Mason & Western Asset Comment Letter; Mason & Western Asset Comment Letter; Dreyfus Invesco Comment Letter; IDC Comment Letter. that funds will need to make. We Comment Letter. 1759 See Legg Mason & Western Asset Comment 1748 See, e.g., BlackRock II Comment Letter Letter. 1764 See ICI Comment Letter (noting that funds do (noting that stress testing plays a critical role in a 1760 Id. not have a basis for determining the amount of board’s understanding of money market fund risks). 1761 See ICI Comment Letter; Federated VIII redemptions might indirectly result from significant 1749 See, e.g., ICI Comment Letter (noting that Comment Letter. See also IDC Comment Letter changes in interest rates, spreads or a downgrade there are limitations to stress testing and of fund (noting that testing when a hypothetical event may or default on portfolio securities); Federated VIII directors’ capacity to review and interpret stress impact a fund’s ability to maintain weekly liquid Comment Letter (arguing that the proposed test on tests, which could lead to diminishing returns as assets of 15% may not be feasible). liquidity levels would have to be based on a the number and complexity of stress tests increase). behavioral relationship between changes in interest 1762 See proposed rule 2a–7(g)(7)(ii) (Floating 1750 See Deutsche Comment Letter; Legg Mason & rates and decisions by the fund’s portfolio manager NAV Alternative or Fees and Gates Alternative). Western Asset Comment Letter. to sell portfolio securities); Schwab Comment Letter 1763 See ICI Comment Letter (arguing that there is 1751 See, e.g., BlackRock II Comment Letter; (noting that testing liquidity requires estimation of no practical means of testing when a hypothetical Fidelity Comment Letter; MSCI Comment Letter. data that is not directly observable, such as event, other than redemptions, would cause a 1752 See rule 2a–7(g)(8)(i). redemption contagion and security level price money market fund to cross the 15% liquidity correlations). 1753 See rule 2a–7(c)(2(ii). threshold); Federated II Comment Letter (same); 1765 Id. 1754 See, e.g., BlackRock II Comment Letter; Federated VIII Comment Letter (same). See also 1766 Fidelity Comment Letter; MSCI Comment Letter; Invesco Comment Letter (objecting to the testing of See Dreyfus Comment Letter. Dreyfus Comment Letter (but expressing objection scenarios in which a fund falls below the 15% 1767 See MSCI Comment Letter. to the stress tests as proposed as vague, qualitative, liquidity threshold because the only reasonable 1768 See Legg Mason & Western Asset Comment and onerous). scenario in which this would occur is shareholder Letter. 1755 See BlackRock II Comment Letter. redemptions). 1769 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47891

recognize that funds still need to make this measure, in addition to thresholds, particularly up to and certain assumptions in their stress modifications to the proposed including the 30% threshold, and to testing. In particular, when testing the hypothetical events discussed below, consider more generally the effects of effect of an increase in shareholder addresses the concern of the commenter hypothetical events and combinations of redemptions, funds will have to make that did not object to testing liquidity in those events on liquidity. assumptions regarding which assets are principle but believed that the proposed sold to meet such redemptions. We hypothetical events made the stress b. Principal Volatility believe, however, that the stress testing testing requirements vague and In addition to requiring funds to test requirements that we are adopting today qualitative in nature. Finally, as their liquidity against, at minimum, will still be helpful to a board’s discussed further below, we are specified hypothetical events, we are understanding of a fund’s liquidity and eliminating the proposed requirement requiring funds to test their ability to the events that can make it deteriorate, that funds report the ‘‘magnitude of minimize principal volatility.1774 Funds even when it includes some each hypothetical event’’ that would are currently required to test their assumptions. In support of this belief cause the fund to fall below the ability to maintain a stable NAV. In the that such testing can be useful to funds, liquidity threshold. This change from Proposing Release, we proposed we note that some commenters the proposal responds to commenters’ replacing this requirement for floating indicated that they already stress test concerns that making such a NAV funds with a requirement to test liquidity, even though it is not currently determination is not feasible.1772 their ability to maintain weekly liquid required.1770 Additionally, as we As noted above, we are requiring assets, and proposed requiring stable discuss below, we believe that a funds to test against a 10% weekly NAV funds to test their ability to disclosure and discussion of the liquid assets threshold. We have chosen maintain both a certain level of liquidity assumptions that fund managers made the 10% weekly liquid assets threshold and a stable share price.1775 In the when developing stress testing can because it is the same threshold that Proposing Release, however, we increase the board’s understanding of will trigger a default liquidity fee absent recognized that there might be other the stress testing results, and how the board action under the final metrics that could be used in stress results might differ if different amendments. Much like the inability to testing. Specifically, we requested assumptions are used. maintain a stable price, the triggering of comment on whether to require floating Regarding the commenters that noted a default fee absent board action under NAV funds to test their ability to meet that there was not a direct relationship our fees and gates reform may result in an investment objective, avoid losses or between a fund’s liquidity levels and consequences for a fund and its minimize principal volatility.1776 the hypothetical events listed in the shareholders. Requiring funds to stress In response, several commenters rule, we recognize that many of the test their ability to avoid falling below argued that floating NAV funds should hypothetical events in the rule do not this threshold should help inform continue to test their NAV stability.1777 have a direct effect on liquidity. We did boards and fund managers of the These commenters pointed out investors not intend to require funds to make circumstances that could cause a fund in floating NAV funds will continue to complex assumptions regarding how the to trigger a default liquidity fee and expect a relatively stable NAV.1778 hypothetical events listed in the provide them a tool to help avoid doing Additionally, commenters argued that proposed rule would affect redemption so. We considered setting the required the stress testing requirements should levels and therefore liquidity. In threshold at a more conservative level, not differ between floating NAV and in particular 30%, because this response to the concerns that these fixed NAV funds.1779 As we noted threshold is the level of weekly liquid commenters raised, and as discussed above, two commenters did not believe assets that funds are required to further below, we have modified the that stress testing requirements should maintain and the level below which stress testing requirements so that each apply to floating NAV funds.1780 One fund directors will be permitted to hypothetical event listed in the such commenter argued that testing for impose a discretionary fee or gate. We amendments is tested assuming varying floating NAV funds was not necessary believe, however, that fund directors levels of shareholder redemptions. We because a floating NAV already provides would benefit most from understanding are not requiring the fund to test, for optimal price transparency.1781 example, how a change in interest rates the events that could place such stress on a fund’s liquidity that it would or credit spreads by itself affects a 1774 trigger a liquidity fee, absent board See rule 2a–7(g)(8)(i). fund’s level of weekly liquid assets, but 1775 See Proposing Release, supra note 25, at rather how increases in redemptions action. Although we believe funds section III.L. combined with the effect of specific would also benefit from testing the 1776 See Proposing Release, supra note 25, at hypothetical events, like a change in ability to maintain higher liquidity section III.L. interest rates or credit spreads, may thresholds,1773 we are sensitive to the 1777 See BlackRock II Comment Letter (noting that potential costs of requiring funds to investors in floating NAV funds expect a relatively affect fund liquidity. It should also stable NAV); Fidelity Comment Letter (same); MSCI simplify the implementation of the stress test against multiple liquidity Comment Letter (noting that even with a floating requirement by not requiring the fund to thresholds, and have therefore chosen to NAV, there will still be a valuation ‘‘tipping make potentially complex or speculative set the liquidity threshold for required point’’). 1778 assumptions about how an increase in testing at the lower 10% threshold. Id. Nonetheless, we encourage funds to 1779 See BlackRock II Comment Letter; Fidelity interest rates or deterioration in Comment Letter. portfolio credit quality will affect consider testing multiple liquidity 1780 See Deutsche Comment Letter; Legg Mason & shareholder redemptions, and thereby Western Asset Comment Letter (commenting that affect liquidity, a concern that was 1772 Id. no stress testing should be required for Floating raised by commenters.1771 We believe 1773 See BlackRock II Comment Letter (noting that NAV funds, and arguing that having a floating NAV it stress tests against other weekly thresholds it fund test for liquidity would serve no useful deems appropriate); Fidelity Comment Letter purpose). The argument raised in the Legg Mason 1770 See BlackRock II Comment Letter; Dreyfus (noting that testing the effects of events on liquidity & Western Asset Comment Letter is discussed above Comment Letter. and share price can be useful to boards even if the in the discussion regarding the use of liquidity as 1771 See Federated VIII Comment Letter; ICI event ‘‘is not of sufficient magnitude to cause the a metric in stress testing. Comment Letter. MFF to violate’’ a threshold). 1781 See Deutsche Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47892 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

We agree with commenters that volatility, rather than avoiding losses volatility will increase such believed floating NAV funds should test because certain investors in floating understanding. their NAV stability. We believe that NAV funds might demand overall price 3. Hypothetical Events Used in Stress money market funds, regardless of stability, and therefore some floating Testing whether they have a floating NAV or NAV funds might determine that it is maintain a stable NAV, will continue to appropriate to consider both upward The Commission is also adopting strive to minimize principal volatility to and downward price pressures when modifications to the hypothetical events maintain a stable share price. In times developing stress tests.1784 that funds use in stress testing. As of market stress, funds could face We have retained the requirement that discussed further below, we have challenges in limiting principal modified these events from the volatility, and we believe that funds and stable NAV funds test their ability to Proposing Release to address fund boards would benefit from stress maintain a stable share price. Although commenter concerns about the potential testing to help them understand the we do not anticipate that stable NAV complexity of testing for some of the potential pressures on principal funds would approach this additional proposed hypothetical events, while stability, as the current requirements do requirement in a way that differs much, today. We have therefore modified the if at all, from a test to minimize still enhancing stress tests to proposed rule to require a fund to test principal volatility, it clarifies that incorporate correlations between both its ability to maintain liquidity and stable NAV funds are required to test securities and combinations of events. its ability to minimize principal the ability of the fund to avoid breaking In response to commenters’ concerns, volatility based on specified the buck. we have modified the rule text to clarify the number and extent of tests that the hypothetical events. We have The Commission believes that rule requires. determined not to set specific requiring funds to test against both the limitations or thresholds against which level of weekly liquid assets and As discussed above, we proposed funds should test principal volatility. principal volatility is appropriate. improvements to stress testing in the Unlike stable NAV funds, which have a Several commenters similarly supported Proposing Release because we believed clear threshold, we do not believe that testing both liquidity and principal that certain enhancements and there is single measure of what level of stability.1785 Although we recognize that clarifications to the hypothetical events volatility investors in floating NAV requiring testing against both metrics currently used in stress testing were funds will tolerate. This measure might could require more tests than requiring necessary to improve the minimum differ among floating NAV funds, testing against one metric, we believe quality of the stress testing by some depending on, for example, investor that testing for both metrics justifies the funds. The proposed enhancements composition. Accordingly, we believe additional burden of more tests. As included requiring the funds to consider that funds and fund boards are best commenters pointed out, principal factors such as correlations among suited to determining the amount of stability and minimizing price volatility securities returns and various principal volatility that investors in are two primary objectives of money combinations of events in their stress their floating NAV funds will likely market funds.1786 Additionally, we tests, an assessment of how a fund tolerate and, accordingly, what volatility believe that principal stability and would meet increasing shareholder threshold or thresholds should be used liquidity are interrelated. In particular, redemptions (taking into consideration in their stress testing. we agree with a commenter that pointed assumptions regarding the liquidity and We have chosen to use the term out that, in times of market stress, a price of portfolio securities), and both ‘‘minimize principal volatility’’ rather fund could experience (i) less price parallel and non-parallel shifts in the than ‘‘maintain a stable share price’’ to yield curve. clarify this requirement applies stability, resulting from a decline in liquidity or in an attempt to maintain Some commenters generally regardless of whether the fund has a supported the proposed floating or a stable NAV, and believe adequate liquidity, or (ii) less liquidity, enhancements.1788 Several commenters that this metric is consistent with the resulting from a decline in price opposed or expressed concerns about comments submitted.1782 We believe, stability or an attempt to maintain price stability.1787 We therefore believe the proposed enhancements.1789 based on comments, that funds would Specifically, some commenters argued generally approach this requirement boards should understand the range of events that could place stress on that the enhancements would not allow similar to how they today test the ability funds to retain flexibility to tailor stress to maintain a stable share price liquidity, principal stability or both, and tests to the fund.1790 Some commenters although, as discussed above, funds will that stress testing both liquidity and expressed concerns that the proposed need to determine what volatility 1784 enhancements would increase the threshold or thresholds they believe are Although we recognize that upward price burden, expense, and complexity of appropriate to test against.1783 We have pressures might be a relevant metric to stress test for some funds, we also recognize that funds will stress testing.1791 Some commenters chosen to use the metric of minimizing generally be more concerned with downward price believed that the proposed pressures. Accordingly, we do not interpret the 1782 See BlackRock II Comment Letter (noting that requirement to test the ability to minimize principal it believes that investors in a floating NAV fund volatility to require funds, as a matter of course, to 1788 See, e.g., MSCI Comment Letter; TIAA–CREF will expect the fund to have a ‘‘relatively stable test against upward price movements. This is Comment Letter. NAV’’); MSCI Comment Letter (noting that it is consistent with staff’s clarification of the stress 1789 See, e.g., Dreyfus Comment Letter; ICI unlikely that investors in floating NAV funds will testing rules adopted in 2010 that funds did not Comment Letter; Federated VIII Comment Letter; accept NAV fluctuations outside of a very small have to stress test against ‘‘breaking the buck on the Schwab Comment Letter; Invesco Comment Letter. band, and that there will be some form of a upside.’’ See Staff Responses to Questions about 1790 See Legg Mason & Western Asset Comment ‘‘valuation tipping point’’). Money Market Fund Reform, August 7, 2012, Letter; Comment Letter of Waddell & Reed 1783 See State Street Comment Letter (noting that available at http://www.sec.gov/divisions/ Investment Management Company (Sept. 17, 2013) it currently offers stress testing to liquidity funds investment/guidance/mmfreform-imqa.htm. (‘‘Waddell & Reed Comment Letter’’); SIFMA with a floating NAV, including the ability for a 1785 See BlackRock II Comment Letter; Fidelity Comment Letter. floating NAV to avoid losses greater than 25 or 50 Comment Letter; MSCI Comment Letter. 1791 See, e.g., Federated II Comment Letter; basis points, and that these tests are ‘‘relatively 1786 Id. Dreyfus Comment Letter; Invesco Comment Letter; simple’’ modifications to the stable NAV tests). 1787 See Fidelity Comment Letter. SSGA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47893

enhancements were too vague.1792 assumptions can place on funds and this requirement. First, commenters Commenters expressed concerns that their boards, a point raised by noted that testing for non-parallel shifts the proposed requirements to test for commenters. To address these concerns, in the yield curve would be unlikely to combinations of events and other events and as discussed below, we have yield results that are any more made the rule unclear about what events modified the proposed enhancements to informative than carefully chosen must be tested and the extent of testing specify certain minimum hypothetical parallel shifts in the yield curve, yet necessary to comply with the proposed events that funds are required to incorporating this factor into stress requirements, with some commenters incorporate in their testing. We believe testing would require significantly more arguing that the proposed rule required that the proposed requirements reflected effort. 1798 Another commenter noted potentially endless numbers of tests.1793 four primary areas of risk that can place that this requirement was vague and In particular, some commenters stress on funds. Those are (i) an increase open-ended, as there are an infinite believed that the proposed in the general level of short-term number of non-parallel interest rate enhancements would require funds to interest rates, (ii) a downgrade or default movements.1799 make unrealistic assessments about the of a portfolio security position, (iii) a We are not adopting the proposed liquidity and price of securities that a correlated increase in the credit spreads requirement to test for ‘‘[o]ther fund might sell to meet redemptions, for certain portfolio securities, and (iv) movements in interest rates that may and assessments about how an adverse an increase in shareholder affect fund portfolio securities, such as event in one portfolio security might redemptions.1796 We have therefore parallel and non-parallel shifts in the affect other portfolio securities. modified the hypothetical events that yield curve.’’ We are persuaded by Commenters argued that these funds must use in stress testing so that commenters’ concerns that requirements might require significant they focus on these risks and eliminated incorporating non-parallel shifts in the assumptions that would be difficult to several of the elements in the proposed yield curve will require funds to expend make and that could render the results rule within those areas of risk that effort determining the types of shifts to not useful to boards.1794 commenters argued would require the test for, with little more benefit than The Commission disagrees with most complex and unrealistic testing for parallel shifts in the yield commenters who argued that assumptions. As discussed further curve, and that testing for parallel shifts modifications to hypothetical events below, each fund is required to test each in the yield curve is encompassed by will reduce funds’ flexibility in of the first three events in combination the requirement to test for general developing stress tests.1795 First, the with increasing shareholder increases in the level of short-term requirements we are adopting today still redemptions, which we believe will interest rates.1800 leave the specific parameters of the allow funds to focus on the most b. Credit Events hypothetical events to the fund’s important combination of events that discretion. Furthermore, the will provide the most meaningful Funds currently are required to test hypothetical events specified in the rule results to boards, while reducing the for a downgrade of or default on are not a comprehensive list of the number of combinations of events that portfolio securities.1801 We proposed to hypothetical events that funds may the rule requires as a minimum set for enhance this requirement by requiring stress test, but a minimum set. As stress testing. that funds test for a ‘‘downgrade or discussed below, the rule requires a a. Interest Rate Increases default of portfolio securities and the effects these events could have on other fund adviser to include additional Funds are currently required to stress securities held by the fund.’’ As combinations of events that the fund test for a change in short-term interest discussed in the Proposing Release, we adviser deems relevant. rates. We proposed modifying this had proposed this requirement to ensure We are, however, persuaded by requirement so that funds would only that funds consider portfolio commenters that some of the proposed need to test for increases in the general correlations when stress testing. enhancements might require funds to level of short-term interest rates, making Commenters expressed concerns about make complex behavioral assumptions clear that funds did not have to test for the proposed enhancement, arguing that that might not be realistic and that decreases in short-term interest rates. the requirement was vague and might ultimately reduce the utility of We received no comments on this qualitative in nature because the fund stress testing to fund boards. We also aspect of the proposal, and we are would have to make assumptions about recognize that, as proposed, some of the adopting the modifications as the event that led to the downgrade or hypothetical events were vague and proposed.1797 default, resulting in stress testing results might be difficult to implement. Finally, Second, we proposed to add a that might not be meaningful to its we also are sensitive to the potential hypothetical event for funds to test, board.1802 burdens that administering a large namely ‘‘[o]ther movements in interest We were persuaded by number of stress tests with complex rates that may affect fund portfolio commenters of the potentially securities, such as parallel and non- 1792 See, e.g., ICI Comment Letter; Federated II 1798 See ICI Comment Letter; Fidelity Comment Comment Letter; Federated VIII Comment Letter; parallel shifts in the yield curve.’’ Letter. Dreyfus Comment Letter; Schwab Comment Letter. Commenters expressed concerns with 1799 See ICI Comment Letter. 1793 See Federated II Comment Letter (noting that 1800 See ICI Comment Letter (noting that a test for the rule is unclear about the type and number of 1796 See ICI Comment Letter (noting that the rule a parallel increase in the Treasury yield curve tests required); ICI Comment Letter (noting that the should only require tests for spreads in the yield corresponds to test for general increases in short- requirement to incorporate combinations of events curve; an increase in the spread of non-Treasury term interest rates). causes the number of test results to grow securities over the yield curve, redemptions, and a 1801 See current rule 2a–7(c)(10)(v). geometrically with each permutation of stress downgrade or default of a significant issuer and/or 1802 See, e.g., Dreyfus Comment Letter; see also events). provider of demand features and guarantees); ICI Comment Letter (noting that a stress test can 1794 See, e.g., Schwab Comment Letter; ICI Fidelity Comment Letter (suggesting standardized assume a downgrade or default without making any Comment Letter; Federated VIII Comment Letter; scenarios with combinations of interest rate assumptions about what caused it, but cannot Dreyfus Comment Letter; Invesco Comment Letter. increases, yield spread shocks across a sector of assess what other portfolio securities might be 1795 See Legg Mason & Western Asset Comment portfolio securities, a credit event of an issuer of a correlated to the downgrade or default without Letter; Waddell & Reed Comment Letter; SIFMA portfolio securities, and shareholder redemptions). some basis for assuming the adverse event that led Comment Letter. 1797 See rule 2a–7(g)(8)(i)(A). to the downgrade or default).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00159 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47894 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

speculative nature of the proposed Although the rule we are adopting downgrade or default, the impact on a requirement and that, as a result, the gives funds general discretion when fund of a downgrade or default of a proposed requirement might not making the determination of which portfolio security may vary substantially provide meaningful information to securities to test, we do believe it is depending on the size of the loss that boards about the correlation of portfolio appropriate to require funds to select the downgrade or default causes.1809 securities, which was the intent of the particular security positions Accordingly, we believe that it is proposed requirement. We have representing varying, i.e., different, appropriate to require stress testing to therefore determined not to require portions of the portfolio when making include varying assumptions on the funds to incorporate in their testing the such determinations, so that the fund’s amount of loss on a security as a result effect of a downgrade or default of one adviser and its board can better compare of a downgrade or default so that boards security on the price of other securities the differing results to the fund better understand how the amount of in the portfolio. We also believe that depending on the security that is tested. loss of a portfolio security will affect the eliminating this proposed requirement Tests of the hypothetical downgrade or fund overall.1810 It can also help boards will reduce the burden of the stress default of a portfolio security understand when pricing pressures on testing requirements relative to the representing the largest credit risk to the certain securities are unlikely to have a proposed requirements.1803 fund and of a portfolio security significant impact on the fund. For After reviewing the comments, we representing a median exposure, for example, during the debt ceiling have modified the requirement from example, allows a board to see how the impasse of 2013, staff observed through what was proposed. Specifically, we are results from these stress tests differ, and discussions with fund advisers that requiring that funds test for ‘‘a therefore better understand that a although yields on certain Treasury bills downgrade or default of particular downgrade or default of different increased and some funds holding these portfolio security positions, each securities will have different impacts on Treasury bills experienced some representing various portions of the the fund. increase in redemptions, there was very fund’s portfolio (with varying Finally, although we are not requiring little effect on the shadow price of assumptions about the resulting loss in funds to assume that any particular Treasury or government money market the value of the security). . . .’’ The event is causing the hypothetical funds. Stress testing can illustrate these current rule requires, and the proposed downgrade or default, funds may want effects. rule would have continued to require, to consider incorporating in this stress test, as appropriate, a deterioration in c. Credit Spread Increase in Portfolio that funds stress test for the downgrade Sectors or default on more than one portfolio the credit quality of a guarantor (or security (i.e., they are required to test for provider of demand features) of We proposed requiring that funds test portfolio securities, as suggested by one for the ‘‘widening or narrowing of a downgrade or default of portfolio 1806 securities). Commenters suggested that commenter. This type of scenario spreads among the indexes to which the rule could require funds to stress might be particularly relevant for funds interest rates of portfolio securities are in which a single entity is a guarantor test a particular portfolio security, such tied’’ in order to require funds to test for or provider of a demand feature for a as the most significant individual credit changes in spreads that may affect high concentration of portfolio risk to the fund, measured by the size specific . One commenter securities. of the holding, the likelihood of default supported the proposed requirement, 1804 After reviewing the comments, the noting that testing for asset class spreads or both, or the ‘‘median’’ portfolio Commission is also modifying the rule security.1805 can provide information about a fund’s to require that funds make varying exposure to investor flights that have Rather than have the rule define assumptions about the resulting loss in occurred in the past, such as in asset- which securities in the portfolio to test, the value of the security when testing backed commercial paper and European we believe that it is appropriate for the for a downgrade or default of a portfolio financials.1811 One commenter adviser to make a determination of security. The Commission notes that a which security positions, representing suggested that funds be required to test downgrade or default of a portfolio for a change in spreads by testing for a different portions of the portfolio, security does not always have a uniform would be most informative to the board parallel increase in the spread of non- effect on the price of a security. In some Treasury securities over the Treasury to test for a downgrade or default of an cases, the downgrade or default could issuer. We believe the most appropriate cause almost a complete loss on that 1809 A comparison of commenters’ discussion of security to test for a hypothetical default portfolio security.1807 In other cases, the stress testing a downgrade or default of a portfolio will vary among funds depending on loss on the security might be less, security illustrates that the effect of a downgrade or several factors, including the potentially even substantially less.1808 default can differ substantially, and thereby have composition of the fund’s portfolio and substantially different effects on the fund. Compare As with the size of the portfolio Dreyfus Comment Letter (‘‘We also know that a contemporaneous market events. The position of an issuer that has a single default of a 1% position . . . in a MMF can fund could determine that it should test break the buck.’’) with Fidelity Comment Letter a security that represents the single 1806 See ICI Comment Letter (arguing that funds (showing the results of stress testing the effect on biggest credit risk in the portfolio and a should be required to stress test a ‘‘downgrade or a hypothetical fund of a credit event resulting in a 10% loss on the portfolio security, which does not security that represents a ‘‘median’’ default of a significant issuer and/or provider of demand feature and guarantees). cause the hypothetical fund’s NAV per share to exposure, like commenters suggested, or 1807 For example, according to filings submitted drop below $0.9950). it could include securities representing to us pursuant to temporary rule 30b1–6T, money 1810 As with the requirement that funds test for different levels of exposure. market funds’ holdings of securities issued by a downgrade or default of particular portfolio Lehman Brothers Holdings Inc. or its affiliates were security positions representing various portions of typically valued at approximately 17% of their the fund’s portfolio, we believe it is efficient for 1803 See ICI Comment Letter (noting the time and amortized cost value in 2009. funds to make the determination of the appropriate cost that would need to be incurred in developing 1808 For example, according to filings submitted magnitudes of loss to incorporate in stress testing, highly sophisticated stress tests that the commenter to us pursuant to temporary rule 30b1–6T, money as that decision will vary depending on several believed would be required to incorporate this market funds’ holdings of securities issued by factors, including, for example, historical requirement). structured investment vehicle were typically valued information on losses on similar securities 1804 Id. at approximately 50% of their amortized cost value following a downgrade or default. 1805 See Fidelity Comment Letter. in 2009. 1811 See MSCI Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00160 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47895

yield curve, assuming a perfect spread changes on various sectors. For an evaluation of the effect that correlation in the price movement, example, a fund with concentrations of hypothetical events on issuers that regardless of issuer or maturity, which securities in a particular geographic operate in a similar industry, are based would show the board the ‘‘worst case region, such as Europe, could test a in a similar geographic region, or have scenario’’ for yield spread changes.1812 correlated spread shift among those other related attributes. Commenters Another commenter suggested that a test securities, and perhaps even test a expressed concerns about this proposed for changes in yield spreads that would correlated shift of securities from a requirement, arguing that it would be require the fund to test for a yield single country or group of countries that difficult to implement because it spread shift in a ‘‘typical portfolio are experiencing or have experienced required complex or speculative sector,’’ which it described as a sector stress, such as during the 2011 Eurozone assumptions about the effects of adverse (i.e., a logically related subset of debt crisis. We also believe that it could events.1818 holdings) representing the median be helpful to boards to include in the We believe that the requirement that exposure in the portfolio among all required report, discussed below, a we are adopting of an assumed defined sectors.1813 This commenter summary of the sector composition and correlated yield shift in specific sectors also noted that its suggested approach the concentration of that sector within of portfolio securities provides funds would incorporate into stress testing a the portfolio as part of the assessment of and boards information about the effect test for correlated price movements stress testing. of correlated price movements among among portfolio securities. We are not further specifying how similar securities in a simpler and less In response to these comments, we are funds should define sectors or which burdensome way than the proposed modifying the proposed requirement to sectors funds should test for a yield requirement of taking into consideration require funds to test for ‘‘a widening of spread change, such as requiring funds correlations among securities. Because spreads compared to the indexes to to test a ‘‘typical’’ or ‘‘median’’ sector, the requirement allows funds to assume which portfolio securities are tied in as suggested by one commenter.1816 We a perfectly correlated change in spreads various sectors of a fund portfolio (in believe that such determinations are among similarly situated securities, which a ‘sector’ is a logically related appropriate to leave to the fund’s funds will not be required to make subset of portfolio securities, such as discretion because such determinations assumptions about how adverse events securities of issuers in similar or related will vary among funds depending on affect prices of these securities. industries or geographic region, or several factors, including the Accordingly, although we are requiring securities of a similar security composition of the fund’s portfolio and some combinations of events, as type).’’ 1814 As discussed above and in contemporaneous market events. We are discussed below, we are not adopting the Proposing Release, the Commission not adopting the suggestion of one the requirement that fund advisers believes that it is important for funds to commenter that funds test for a perfect ‘‘assum[e] a positive correlation of risk stress test for potential correlations in correlation of spreads in all non- factors . . . and ‘‘tak[e] into the price movements of related Treasury securities to show funds the consideration the extent to which the ‘‘worst case scenario’’ of a spread fund’s portfolio securities are correlated. securities. That is because an event that 1817 affects the price of one security may also shift. This suggested test would not . . . ’’ when considering whether to test affect the prices of securities of similarly provide information about potential for additional events. correlations among similarly situated situated issuers or asset classes. We d. Shareholder Redemptions believe, as one commenter suggested, securities. For example, the suggested test would not provide any information The fourth hypothetical event that testing for a correlated shift in the about how an adverse event in a identified by the Commission and yield spread among logically related particular industry in which the fund commenters that is important to include securities (i.e., sectors) will illustrate the held portfolio securities might affect the in stress testing is shareholder impact on funds of a concurrent price fund. We believe that testing a spread of redemption levels. As noted above, shift among portfolio securities different sectors of a portfolio, will help however, rather than requiring funds to representing, for example, a similar the board better understand the consider shareholder redemptions in industry, similar geographic region, or composition of the fund portfolio and isolation, as is currently required and security type.1815 We understand that potential correlations among portfolio would have been required under the some money market funds today use securities. proposed rule, we are requiring that such assumed sectors in their stress Additionally, in the Proposing funds test for various levels of testing. Release, we proposed to require funds to shareholder redemptions in To implement this requirement, funds test for combinations of events that the combination with each of the three should generally group securities into adviser deemed relevant, ‘‘assuming a other required hypothetical events, i.e., logically related categories, or sectors, positive correlation of risk factors . . . an increase in interest rates, a such as securities of a similar industry, and taking into consideration the extent downgrade or default of various similar geographic region or security to which portfolio securities are portfolio securities, and a yield spread type (such as asset-backed commercial correlated such that adverse events change in various sectors of portfolio paper or variable rate demand notes), affecting a given security are likely to securities. and then test for the impact of yield also affect one or more other securities As discussed in the Proposing (e.g., a consideration of whether issuers 1812 Release, the Commission believes that See ICI Comment Letter. in the same or related industries or 1813 See Fidelity Comment Letter. testing for combinations of events can 1814 See rule 2a–7(g)(8)(i)(C). geographic regions would be affected by help funds better understand risks to the 1815 See Fidelity Comment Letter (suggesting that adverse events affecting issuers in the fund, and therefore included in the the stress testing requirements include standardized same industry or geographic region).’’ proposed rule a requirement that the yield shift spreads of a logically related subset of This proposed requirement was fund test for combinations of events that holdings); MSCI Comment Letter (supporting stress intended to have stress testing include testing requirements that focus on, among other the adviser deems relevant. Although things, stresses on spreads in asset classes, such as asset-backed commercial paper or European 1816 See Fidelity Comment Letter. 1818 See ICI Comment Letter; Federated VIII financials). 1817 See ICI Comment Letter. Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00161 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47896 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

the Commission did not include in the the composition of funds’ investor bases does not specify what assumptions the proposed rule any specific combinations and shareholder redemption fund must make, leaving that to the of events, the Commission requested preferences, as well as historical discretion of fund advisers because we comment on whether specific redemption activity in the fund. believe the determination of which combinations of events should be We also proposed to require that assumptions are most appropriate will required in the rule, noting in particular funds incorporate in stress testing an vary among funds, depending on, for the possibility of combining an increase assessment of how a fund would meet example, how funds have satisfied in shareholder redemptions with an redemptions, taking into consideration redemptions historically, and the increase in interest rates or a downgrade factors such as the liquidity and pricing composition of the fund’s portfolio. The of a portfolio security.1819 of the fund’s portfolio securities. One rule requires, however, that the fund’s Generally, redemptions, by commenter supported this proposed adviser include a summary of the themselves, are unlikely to create stress requirement, but noted that liquidity significant assumptions made when on a fund as long as the market for the data regarding fund portfolio securities performing the stress test. For example, fund’s portfolio securities is liquid and transactions was scarce.1825 Other such assumptions may include how interest rates remain unchanged.1820 commenters expressed concerns that redemptions are satisfied and the size of Similarly, an increase in interest rates, this requirement was vague and any ‘‘haircut’’ that the fund assumed in if no shareholders redeem from the fund qualitative, and would require detailed the sale of portfolio securities in order until the securities affected by the and sophisticated assumptions.1826 We to meet redemptions. interest rate shift mature, should have were persuaded by commenters’ e. Other Combinations of Events no price impact on the fund.1821 It is the concerns that the proposed requirement combination of events—and particularly could require complex assumptions to The proposed rule would have an interest rate or credit event combined implement for which data might not be required funds to test for ‘‘combinations with redemptions—that most typically readily available, particularly the of these and any other events that the can create fund stress.1822 We also requirement that the fund take into adviser deems relevant . . .’’ 1829 We believe combinations of events are more account the liquidity and pricing of the have made clarifying edits to the rule likely to be realistic scenarios than fund’s portfolio securities. We have we are adopting today in response to market events or increases in therefore not adopted this requirement some commenters who expressed redemptions in isolation (e.g., it is to simplify, and thereby reduce the concerns that the proposed rule was reasonable to expect that a money potential burden of, the stress testing open-ended and could be read to require market fund that experiences a requirements relative to the proposal. that funds test for combinations of every significant credit event may also We note, however, that funds need to event listed in the rule.1830 Specifically, experience a subsequent increase in make some basic assumptions about we are requiring funds to test for ‘‘[a]ny redemptions).1823 We are not including how a fund obtains cash for additional combinations of events that in the rule the redemption levels that redemptions to satisfy the new stress the adviser deems relevant.’’ We believe funds must include in stress testing.1824 testing requirements relating to the that the modified language clarifies that We believe that the appropriate level of fund’s level of weekly liquid assets. In the fund is only required to test for redemptions to test will vary among doing so, a fund could use a variety of additional combinations as the fund funds, and will depend, for example, on assumptions. For example, some adviser deems relevant, not for commenters suggested that funds combinations of every permutation of 1819 See Proposing Release, supra note 25, at assume that all redemptions are the events listed in the rule. section III.L. satisfied first using weekly liquid The rule requires that fund advisers 1820 Prices of fixed income securities typically assets.1827 This assumption would test for combinations of events that they remain stable if interest rates do not change. Thus, provide conservative stress test results deem relevant. Although a fund adviser shareholder redemptions that require funds to sell might determine that the three securities should have no effect on funds’ NAVs as given that it would have the most long as interest rates have not changed. We note dramatic effect on a fund’s level of combinations of events included in the that redemptions from a stable value money market weekly liquid assets. On the other hand, rule are sufficient, there might be fund have no impact on the fund’s market-based some funds may prefer to assume in circumstances when a fund adviser NAV per share as long as the NAV per share is believes it is necessary to incorporate $1.00. their stress tests other methods of additional scenarios. For example, a 1821 Prices of fixed income securities typically fall meeting shareholder redemptions (or fund adviser might believe that it would when interest rates rise. Thus funds that must sell may prefer to show how the stress tests fixed income securities before maturity are likely to be relevant for the board to understand realize capital losses if interest rates have risen. If results would differ if this assumption were varied). For example, a fund might instead funds hold securities to maturity, they 1829 See proposed rule 2a–7(g)(7)(i)(F) (Floating receive securities’ par value and should realize no assume that redemptions are met with a NAV Alternative or Fees and Gates Alternative). losses. Thus, interest rates increases that are not combination of weekly liquid assets and The full proposed requirement was ‘‘Combinations accompanied by securities sales to meet redemption sales of portfolio securities.1828 The rule of these and any other events the adviser deems requests should not cause funds to incur capital relevant, assuming a positive correlation of risk losses. factors (e.g., assuming that a security default likely 1825 1822 See Fidelity Comment Letter (illustrating the See MSCI Comment Letter. will be followed by increased redemptions) and effect on liquidity and NAV on increasing 1826 See, e.g., ICI Comment Letter (expressing taking into consideration the extent to which the shareholder redemptions in combination with each concerns about how to fulfill this requirement); fund’s portfolio securities are correlated such that of an (i) interest rate increase, (ii) a credit event, and Dreyfus Comment Letter (same). adverse events affecting a given security are likely (iii) a spread shift). 1827 See ICI Comment Letter; Federated VIII to also affect one or more other securities (e.g., a 1823 See State Street Comment Letter (noting that Comment Letter. consideration of whether issuers in the same or stress testing combinations of events is important 1828 See Fidelity Letter (illustrating a stress test related industries or geographic regions would be because stress events do not typically happen in that includes the assumption that sales of non- affected by adverse events affecting issuers in the isolation, and suggesting the Commission consider liquid assets to meet redemptions incur a cost); same industry or geographic region).’’ We discuss the combination of shareholder redemptions in MSCI Comment Letter (noting that to the extent that above why we are not adopting the proposed combination with increases in interest rates, a a redemption scenario would require the fund to requirement that follows the clause ‘‘Combinations downgrade or default, and credit spreads). sell securities, then the fund should make some of these any other events the adviser deems 1824 See Fidelity Comment Letter (suggesting assumption regarding a liquidity haircut, but that relevant.’’ standard scenarios including redemption levels of only simple assumptions can be reasonably 1830 See ICI Comment Letter; Federated VIII 0%, 25%, and 50%). expected). Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00162 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47897

the effect of a yield spread increase in volatility.1833 As discussed above, some items in the rule because we recognize a sector, in combination with a commenters had concerns that the that there is no one set of factors that downgrade of a portfolio security in that proposed requirement that funds report will be relevant for all funds, but we sector, particularly if that sector, or an to the board the magnitude of each believe these are examples of items that issuer within that sector, has hypothetical event that would cause the we encourage fund advisers to consider historically experienced stress. fund to have invested less than 15% in when developing the required report One commenter also argued that the weekly liquid assets was not assessing stress test results. requirement could be interpreted to feasible.1834 We believe that requiring We are adopting as proposed the mean that all special risk assessments funds to provide an assessment of the requirement that a fund’s adviser take the form of stress tests.1831 This is fund’s ability to maintain liquidity, provide ‘‘such information as may not a requirement of the rule. We agree rather than requiring the funds report a reasonably be necessary for the board of with the commenters that stress tests are specific value for each hypothetical directors to evaluate the stress testing not the only method to communicate event, addresses such concerns. We conducted by the adviser and the results fund risks to the board and that not have also added the requirement for an of the testing.’’ One commenter every risk can be incorporated into a assessment of the fund’s ability to supported this requirement, noting that stress test.1832 The rule does not require minimize principal volatility because, it is a common practice to provide the adviser to develop a stress test for as discussed above, we have added this directors with information that helps to every risk the fund faces, but requires metric to the stress testing requirements place stress-testing results in the adviser to consider whether stress in response to comments. We believe context.1836 Some commenters opposed testing for combinations of events not that requiring funds to provide an this requirement, arguing that the explicitly listed in the rule might be assessment of their ability to maintain provision of additional information relevant to the fund’s board. We believe liquidity and minimize principal could be burdensome for boards and stress testing should be used to help the volatility (and in the case of stable NAV would not provide useful information to board understand the principal risks of funds, to maintain a stable share price), fund boards.1837 We disagree. As we the particular fund and the risks that rather than the more prescriptive noted in the Proposing Release, the reasonably foreseeable stress events may requirements proposed and that are in staff’s examination of stress testing place on the fund. the rule currently, is also appropriate reports revealed disparities in the because we have modified the rule so 4. Board Reporting Requirements quality of information regarding stress that each ‘‘hypothetical event’’ is a testing provided to fund boards. We Funds are currently required to combination of two events. We want to believe that this requirement will allow provide the board with a report of the clarify that funds are not required to boards of directors to receive results of stress testing, which must separately test for interest rate increases, information that is useful for include the dates of testing, the a downgrade or default, a spread shift, understanding and interpreting stress magnitude of each hypothetical event or shareholder redemptions in testing results. We note that this 1835 that would cause a fund to ‘‘break the isolation. requirement does not require a fund We understand that under the current buck,’’ and an assessment of the fund’s adviser to provide the details and requirements, many funds, in addition ability to withstand events that are supporting information for every stress to reporting the magnitude of each event reasonably likely to occur within the test that the fund administered. To the that would cause the fund to ‘‘break the following year. We proposed contrary, a thoughtful summary of stress buck,’’ provide a table showing how the modifications to these reporting testing results with sufficient context for fund’s shadow NAV is affected by requirements. First, we proposed adding understanding the results may be different combinations of events and a requirement that the fund report to the preferable to providing details of every different values. Some funds include board the magnitude of each test. For example, information about information regarding, for example, the hypothetical event that would cause the historical redemption activities, as fund to have invested less than 15% of concentrations of several of the funds’ largest portfolio holdings, both by mentioned above, and the fund’s its total assets in weekly liquid assets. investor base could help boards evaluate Second, we proposed requiring funds to individual issuer and by sector, and of historical redemptions rates, as points of the potential for shareholder include in their assessment ‘‘such redemptions at the levels that are being information as may reasonably be reference. Several funds also include narratives to help explain the results. In tested. Additionally, information necessary for the board of directors to regarding any contemporaneous market evaluate the stress testing . . . and the some instances, for example, fund advisers used the narrative to compare stresses to particular portfolio sectors results of the testing.’’ could be helpful to a board’s We are adopting modifications to the results among funds or to explain consideration of stress testing results. proposed reporting requirements to results that they considered to be boards regarding stress testing in unusual. Some narratives also assessed Finally, after considering comments response to comments we received on the likelihood of the hypothetical regarding the assumptions that funds events. We are not including will need to make in administering the proposal. Specifically, we are 1838 adopting a requirement that the board of requirements for any of these specific stress tests, the Commission has directors be provided at its next annual meeting, or sooner if appropriate, a 1833 See rule 2a–7(g)(8)(ii). 1836 See ICI Comment Letter. 1837 report that includes the dates on which 1834 See, e.g., ICI Comment Letter; Federated II See Dreyfus Comment Letter; SIFMA Comment Letter; Federated VIII Comment Letter. Comment Letter. the testing was performed and an 1835 See ICI Comment Letter (noting that the stress 1838 See, e.g., Fidelity Comment Letter (including assessment of the fund’s ability to testing requirements adopted in 2010, by requiring in its suggested stress testing an assumption maintain at least 10% in weekly liquid funds to report the ‘‘magnitude of each hypothetical regarding the size of the loss on the sales of assets and to limit principal event’’ that would cause a fund to ‘‘break the buck,’’ securities to meet redemption and the size of the required funds to perform and report stress tests of loss on a portfolio security when testing a each event in isolation, and noting that changing hypothetical credit event); ICI Comment Letter 1831 See Federated VIII Comment Letter. this requirement would make it easier for boards to (suggesting funds use an assumption that 1832 See ICI Comment Letter; Federated VIII include combinations tests in the fund’s redemptions are satisfied using weekly liquid Comment Letter. procedures). assets).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47898 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

added a requirement that the adviser believe that the scenarios currently part on the extent to which funds include in the report a summary of the published by the Federal Reserve Board already engage in stress tests that are significant assumptions made when for stress testing under Dodd-Frank Act similar to the requirements. For performing the stress tests. As discussed Section 165(i) would be an effective example, although we are now requiring above, we have, in response to means of stress testing for money market funds to test for increases in the general comments, modified the required funds, because the Federal Reserve’s level of short-term interest rates in hypothetical events from the proposal to scenarios are focused on long-term combination with various levels of an reduce the number and complexity of horizons, which do not have a direct increase in shareholder redemptions, we the assumptions funds are required to causal link to foreseeable changes in understand that many funds already make. We recognize, however, that money market funds.1841 Another tested for increases in interest rates in funds will need to make some basic commenter, however, expressed some combination with shareholder assumptions when conducting the stress support for incorporating redemptions. tests. These assumptions would include, macroeconomic factors in money market The additional information generated for example, how the fund would satisfy fund stress tests.1842 One commenter from the amendments to the stress shareholder redemptions (e.g., through made recommendations regarding the testing requirements should provide weekly liquid assets or by selling certain stress testing scenarios required under several qualitative benefits to funds. portfolio securities, including any section 165(i), including scenarios Specifically, they should help fund assumption of haircuts such securities involving the four hypothetical events managers, advisers, and boards monitor, can be sold at) and the amount of loss in the stress testing rule amendments evaluate, and manage fund risk, and in value of a downgraded or defaulted we are adopting today, and stated that thus better protect the fund and its portfolio security. We believe that its recommendations would be an investors from the adverse having a summary of such assumptions effective means to evaluate risk in a consequences that may result from will help the board better understand money market fund portfolio.1843 falling below the 10% weekly liquid the stress testing results, and As discussed in the Proposing assets threshold or failing to minimize particularly the sensitivity of those Release, we intend to engage in a principal volatility (or, in the case of results to given assumptions. We believe separate rulemaking to implement the stable NAV funds, a stable share price). this information will allow the board to requirements of Section 165(i) of the The magnitude of these qualitative better understand money market fund Dodd-Frank Act, including determining benefits are not easily quantified and risk exposures, and thus allow it to appropriate baseline, adverse, and will vary from fund to fund based on the provide more effective oversight of the severely adverse scenarios for money extent to which funds are already fund and its adviser. market funds and other funds and voluntarily conducting stress testing 5. Dodd-Frank Mandated Stress Testing advisers with more than $10 billion in that meet the new requirements, as well consolidated assets.1844 In proposing as the investor base and portfolios of In the Proposing Release, we such stress testing for money market each fund. We received no comments requested comment on certain aspects of funds subject to these requirements, we regarding how to quantify such benefits. money market fund stress testing as it expect to consider the efficiencies that In the Proposing Release, we stated relates to our obligation under section funds subject to these additional that because funds are currently 165(i)(2) of the Dodd-Frank Act to requirements will achieve if the required to meet a stress testing specify certain stress testing scenarios broadly are built off of the requirement, we did not anticipate requirements for nonbank financial parameters set forth today. significant additional costs to funds companies that have total consolidated under the proposed rule. Several 6. Economic Analysis assets of more than $10 billion and are commenters responded that they regulated by a primary federal financial Our baseline for the economic expected to incur increased costs as a 1839 regulatory agency. Under this analysis we discuss below is the current result of the changes.1845 One section of the Dodd-Frank Act, among stress testing requirements for money commenter noted that it believed a other matters, we must establish market funds. The costs and benefits, majority of funds will need to change methodologies for the conduct of stress and effects on competition, efficiency, their stress testing procedures to some tests that shall provide for at least three and capital formation are measured in degree, specifically with respect to different sets of conditions, including increments over the current stress stress testing liquidity levels.1846 One baseline, adverse, and severely testing requirement baseline. The 1840 commenter provided a quantitative adverse. Two commenters benefits, as well as the costs, of the estimate for some of the proposed responded, noting that they did not stress test requirements will depend in changes, estimating that required

1839 software changes to implement two of For a definition of ‘‘nonbank financial 1841 See Fidelity Comment Letter (noting that the the proposed requirements, not companies’’ for these purposes, see Definition of Federal Reserve scenarios have at best an indirect ‘‘Predominantly Engaged in Financial Activities’’ causal link to changes in a money market fund); including costs to load data, run the and ‘‘Significant’’ Nonbank Financial Company and MSCI Comment Letter (noting that the horizon for tests, and analyze the results, would Bank Holding Company, Board of Governors of the the Federal Reserve’s stress scenarios is between Federal Reserve System, [78 FR 20756 (April 5, one and two years, while the scenarios that are of 1845 2013)]. See, e.g., SSGA Comment Letter (generally concern to money market funds are short-term, such 1840 Under this section of the Dodd-Frank Act, we supporting stress testing by funds, but asking the as valuation shocks and rapid shareholder Commission to consider the benefits of the also must define the term ‘‘stress test’’ for purposes redemptions). of that section, establish the form and content of the enhancements against the ‘‘substantial increase in 1842 See Santoro Comment Letter (noting that report to the Federal Reserve Board and the costs’’ associated with the proposed changes); State Commission regarding such stress testing, and stress testing should align with existing stress Street Comment Letter (noting that there will be require companies subject to this requirement to testing methodologies, and specifically macro both a development cost and on-going operational publish a summary of the results of the required market stress scenarios). costs); Schwab Comment Letter (noting that the stress tests. We note that under this section of the 1843 Fidelity Comment Letter (noting that the proposal is costly); TIAA–CREF Comment Letter Dodd-Frank Act, we must design stress testing not standardized scenario that it proposed could serve (supporting the proposed requirement and just for certain money market funds, but also other as the ‘‘severely adverse’’ conditions required by acknowledging that they would require operational types of funds and investment advisers that we Section 165(i)(2)(C)(2) of the Dodd-Frank Act). changes that would require time and resources to regulate and that meet the $10 billion total 1844 Proposing Release, supra note 25, at section implement). consolidated assets test. III.L. 1846 See State Street Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00164 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47899

range from $250,000 to $750,000.1847 combinations of events as part of their related to the collection of information We note, however, that the estimate was stress testing, as some funds do. We requirements for our stress testing based on an evaluation of two of the understand from commenters, however, amendments. As we discuss there in hypothetical stress tests that we that even funds that currently more detail, our staff estimates that the proposed, one of which the Commission incorporate liquidity metric in their amendments to stress testing associated has determined not to adopt and the stress testing might need to modify their with the requirement that money market other which the Commission has procedures to test against the 10% funds maintain a written copy of their modified and simplified substantially. threshold.1851 We also recognize that stress testing procedures, and any We stated in the Proposing Release funds, which currently are required to modifications thereto, and preserve for that we expected funds would use test their ability to maintain a stable a period of not less than six years similar hypothetical events when testing share price, will now be required to test following the replacement of such their ability to avoid falling below a the ability to minimize principal procedures with new procedures, the liquidity threshold to those events they volatility. We believe, based on our first two years in an easily accessible use when stress testing their ability to review of comments, that the costs of place, would involve 51,428 burden maintain a stable price. We also modifying stress testing from the metric hours, at an average one-time cost of understand many funds already test for of maintaining a stable share price to the $24.52 million for all money market their ability to avoid falling below a metric of minimizing principal volatility funds. In addition, our staff estimates 15% weekly liquid asset threshold as will not be substantial.1852 We that the amendments to stress testing part of their current stress tests. One recognize, however, that funds might associated with the requirement that commenter noted that it already tests incur some costs in analyzing and money market funds have written against the 15% liquidity threshold and determining the appropriate level of procedures that provide for a report of other liquidity thresholds, and one volatility against which to test. the stress testing results to be presented commenter stated generally that it Additionally, we believe there will be to the board of directors at its next already tests for liquidity maintenance, costs associated with stress testing the regularly scheduled meeting (or sooner, and neither commenter discussed the effect of the hypothetical events that we if appropriate in light of the results) costs of including liquidity metric in are adopting. The extent of those costs would create a total annual burden for 1848 stress testing. Two commenters will depend upon the extent to which all money market funds of an additional indicated that requiring funds to add a fund currently tests for the 25,155 burden hours at a total time cost this liquidity metric to the stress testing requirements or would need to modify of approximately $7.28 million. requirements would impose new costs, their stress testing procedures and We believe the new costs for stress but did not provide quantitative systems to add such tests. We estimates of the costs of adding a testing will be so small as compared to understand that many funds already test the fund’s overall operating expenses liquidity metric to the stress testing for events such as interest rate increases 1849 that any effect on competition would be requirements. One commenter, and credit events in combination with which provides stress testing services to insignificant. Although some hypothetical increases in shareholder commenters believed the proposed funds, noted that it currently provides redemptions. We also note that we have liquidity-related stress tests, but it did requirements would impose new costs, determined not to adopt several of the commenters did not indicate that such not currently provide a stress test that hypothetical events that commenters tests a fund’s ability to avoid falling costs would have competitive effects. indicated would require the most The new stress testing requirements below a 15% liquidity asset estimation or modeling.1853 Finally, as 1850 may increase allocative efficiency if the threshold. the rule requires that a fund test for After reviewing the comments, we information it provides to the fund ‘‘any additional combinations of events believe that the amendments to the adviser, and board of directors improves that the adviser deems relevant,’’ a fund stress testing requirements will impose the fund adviser’s ability to manage the might incur periodic costs for making some development and ongoing costs to fund’s risk and the board’s oversight of such an assessment and, if necessary, funds, particularly the requirement to fund risk management. Some money incorporating such additional tests in its test against a liquidity threshold. We market fund investors also may view the stress testing. believe that the costs will be lower for enhanced stress testing requirements In the Paperwork Reduction Act funds that already include liquidity and positively, which could marginally analysis in section IV.A.5 below, we increase those investors’ demand for identified certain initial and ongoing 1847 Federated VIII Comment Letter (noting that it money market funds and contacted a third-party service provider regarding hour burdens and associated time costs correspondingly the level of the funds’ the costs of implementing proposed rule 2a– investment in the short-term financing 7(g)(7)(i)(E), concerning testing for parallel and non- 1851 See State Street Comment Letter (noting that parallel shifts in the yield curve, and rule 2a– it currently provides a range of liquidity related markets. This in turn positively affects 7(g)(7)(i)(F), concerning testing for ‘‘combinations of stress tests). capital formation. We do not have the these and any other events that the adviser deems 1852 See State Street Comment Letter (noting that information necessary to provide a relevant, assuming a positive correlation of risk it currently provides stress testing services to reasonable estimate of the effects the factors . . . and taking into consideration the extent floating NAV liquidity funds that include testing a amendments might have on capital to which the fund’s portfolio securities are fund’s ability to avoid losses of greater than 25 or correlated . . .’’). 50 basis points, and that this would entail formation, because we do not know to 1848 See BlackRock Comment Letter; Dreyfus ‘‘relatively simple modifications,’’ with no what extent these changes would result Comment Letter. associated development costs). in increases or decreases in investments 1849 See Federated VIII Comment Letter; State 1853 See, e.g., Fidelity Comment Letter (noting in money market funds or in money Street Comment Letter (noting that the new that the proposed requirement to test for non- requirement would imposed both a development parallel shifts in the yield curve would require market funds’ allocation of investments cost and on-going operational costs). significantly more effort and analysis than testing among different types of short-term debt 1850 See State Street Comment Letter. See also for non-parallel shifts with little benefit); ICI securities. No commenters provided Federated VIII Comment Letter (noting that it Comment Letter (noting that the proposed such information or discussed the contacted a service provider of a risk management requirement to include assumptions as to how the system, who indicated that the provider’s system fund would sell portfolio securities to meet potential effects of the proposed stress could not test for an ability to maintain weekly redemptions were sophisticated and complex testing rule on efficiency or capital liquid assets at or above 15% of its total assets). assumptions). formation.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47900 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

K. Certain Macroeconomic operational costs of implementing the Non-government funds, however, will Consequences of the New Amendments reforms are discussed in each respective be subject to fees and gates, and some In this section, as well as in sections section. investors may shift their assets to III.A and III.B above, we analyze the We note that the reforms adopted government funds or other investment macroeconomic consequences of the today will affect the economy in a alternatives. Non-government funds, primary reform amendments that number of ways, many of which are which include prime and tax-exempt require fees and gates for all non- difficult, if not impossible to quantify. funds, held approximately $2.1 trillion government funds and an additional The effect of the reforms will depend on in assets as of February 28, 2014. Of this floating NAV requirement for investors’ choices among many approximately $2.1 trillion, we estimate institutional prime funds. We also investment alternatives, funds’ and retail prime funds managed examine, in conjunction with analyses competitors’ responses to the reforms approximately 33% of prime fund assets in these preceding sections, the effects and to each other’s strategies, and many (not including tax-exempt funds) or that the amendments may have on other factors in the larger economy. For $593 billion, whereas retail tax-exempt efficiency, competition, and capital these reasons, many of the funds managed 71% of tax-exempt fund formation and discuss the potential macroeconomic effects discussed here assets or $197 billion of assets, or $790 1859 implications of the changes for money are unquantifiable. We provide, billion in total retail fund assets. market fund investors, funds, and the however, ranges of possible outcomes The remaining funds are institutional short-term financing markets. We note where we can without being speculative prime funds, which will be subject to an that we presented extensive economic and we discuss effects qualitatively, as additional floating NAV requirement. analyses of the specific benefits and well. Much of the qualitative analysis of We estimate that institutional prime costs associated with the amended rules the reforms remains similar to that funds, other than tax-exempt funds, in sections III.A.5 and III.B.8 above, as presented in the Proposing Release. We managed approximately 67% of prime well as examined commenters’ specific note, however, that the magnitude of the fund assets (not including tax-exempt evaluations of the proposed fees and macroeconomic effects, both positive fund assets) or $1.2 trillion in assets and gates and floating NAV requirements. and negative, may be greater for funds institutional tax-exempt funds managed As such, we focus here on the specific 29% of tax-exempt funds assets or $82 that are subject to both a floating NAV 1860 macroeconomic effects of the reforms on and fees and gates than the funds billion, for a total of $1.269 trillion. current money market funds and the subject to just one type of reform. Many Consistent with these estimates, impact of the reforms on efficiency, commenters noted that the combination commenters noted that approximately 30% of tax-exempt funds currently self- competition, and capital formation. It is of reforms would have a greater impact report as institutional funds.1861 important to note that although a large than either alternative alone.1857 As noted in the Proposing Release, the number of commenters supported our In the remaining portion of this Commission recognizes that imposing proposed fees and gates requirement for section, we discuss in detail the likely fees and gates on non-government non-government funds,1854 and some macroeconomic effects of our primary money market funds and an additional commenters supported our floating reforms and the effects that these floating NAV requirement on NAV requirement for institutional prime amendments may have on efficiency, institutional prime funds will likely funds,1855 many commenters opposed competition, and capital formation. We 1856 affect the willingness of investors to the combination of alternatives. The first examine the effect of our commit capital to certain money market baseline for these analyses (and all of amendments on investors in money funds. On the one hand, the fees and our economic analysis in this Release) is market funds. We then analyze the gates requirements will have little effect money market fund investment and the effect on the money market fund on funds and their investors except short-term financing markets as they industry and the short-term financing during times of fund distress. During exist today. markets. such exceptional times, investors, In earlier sections we discussed the especially investors who are unlikely to specific benefits and costs associated 1. Effect on Current Investors in Money Market Funds redeem shares, may view the fees and with other reforms adopted today, gates requirements as protecting them including the amended rules that As of February 28, 2014, money from incurring costs from heavy increase portfolio and guarantor market funds had approximately $3.0 shareholder redemptions and improving diversification, enhance disclosure, and trillion in assets under management. Of their funds’ ability to manage and mandate stress testing. We discuss in this $3.0 trillion, government money mitigate potential contagion from such these sections the macroeconomic market funds had approximately $959 effects of the amendments, as well as billion in assets under management.1858 1859 Based on data from Form N–MFP and their effects on efficiency, competition, Government money market funds will iMoneyNet data as of February 28, 2014. To and capital formation. The specific estimate retail and institutional segments for non- not be required to comply with either government funds, we used self-reported fund data fees and gates or floating NAV from iMoneyNet as of February 28, 2014 to estimate 1854 See, e.g., Form Letter Type A [1], Type C [2], percentages for retail and institutional segments for and Type D [2]; Page Comment Letter; Federated V requirements. Because the regulatory landscape for these funds will remain each fund type. We then multiplied the percentages Comment Letter; J.P. Morgan Comment Letter; times the total market size segments, as provided TIAA–CREF Comment Letter; ICI Comment Letter; largely unchanged, we anticipate by Form N–MFP as of February 28, 2014. We note Reich & Tang Comment Letter; Northern Trust current investors will likely remain the retail designation is self-reported and omnibus Comment Letter. invested in the funds. accounts in these funds may include both 1855 See, e.g., BlackRock II Comment Letter; individual and institutional beneficial owners. For Goldman Sachs Comment Letter; Schwab Comment these reasons, our estimates may underestimate the Letter; Vanguard Comment Letter; CFA Institute 1857 See, e.g., Fidelity Comment Letter; Invesco number of funds with retail investors. Comment Letter; Comm. Cap. Mkt. Reg. Comment Comment Letter; Northern Trust Comment Letter; 1860 Our staff’s analysis, based on iMoneyNet Letter. State Street Comment Letter; SunGard Comment data, shows that the amount of municipal money 1856 See, e.g., BlackRock II Comment Letter; Letter; Wells Fargo Comment Letter; Government market fund assets held by institutional investors Dreyfus Comment Letter; Federated X Comment Finance Officers Association, et al. (Sept. 17, 2013) varied between 25% to 43% between 2001 to 2013. Letter; Goldman Sachs Comment Letter; Vanguard (‘‘GFOA II’’). 1861 See, e.g., BlackRock II Comment Letter; Comment Letter; American Benefits Council 1858 Based on Form N–MFP data as of February Federated VII Comment Letter; J.P. Morgan Comment Letter. 28, 2014. Comment Letter; Dreyfus II Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00166 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47901

redemptions. Likewise, some, but not in section III.B.1 above, and noted by mean a money market fund that has all, investors in institutional prime commenters,1867 unlike most policies and procedures reasonably funds may view the floating NAV investment products, money market designed to limit all beneficial owners requirement as reducing their funds’ funds are generally used as cash of the fund to natural persons.1871 We susceptibility to heavy investor management tools, and a floating NAV expect, however, that at least some redemptions and minimizing may curtail the ability of some investors investors who are natural persons that shareholder dilution. We believe the to use money market funds for cash currently are invested in non- amendments more generally will management purposes. Investors also government funds that are not increase funds’ resiliency and treat may be prohibited by board-approved designated retail may reallocate their investors more equitably than the rules guidelines, internal policies, or other assets to retail funds. We anticipate do today. Further, one commenter restrictions from investing in products these investors will likely move to retail pointed out that floating NAV money that do not have a stable value per funds that have investment objectives market funds will likely offer higher share.1868 A floating NAV also could that are similar to the objectives of their returns than stable NAV government drive investors with a more limited loss current funds. money market funds, and thus will tolerance away from money market Institutions invested approximately continue to attract investment.1862 This funds.1869 $1.27 trillion in non-government money commenter argued that institutional The Commission acknowledges, and market funds as of February 28, 2014. Of investors are unlikely to reallocate many commenters concur,1870 that, as a this $1.27 trillion, institutional prime assets from floating NAV institutional result of our reforms, some investors funds, other than tax-exempt funds, prime funds because they will continue may reallocate assets to either managed approximately $1.19 trillion in to be one of the most conservative and government money market funds or assets and institutional tax-exempt funds managed $82 billion. Under the flexible investment alternatives, even other investment alternatives. We do not reforms, these funds will be subject not with a floating NAV.1863 Finally, this anticipate our reforms will have a only to fees and gates, but also to an commenter contended that investor substantial effect on the total amount of additional floating NAV requirement. education may improve investor capital invested, although investors may As such, we believe as much as $1.269 confidence in floating NAV money reallocate assets among investment trillion in assets could be at risk for market funds, which could attract alternatives, potentially affecting issuers being reallocated to government funds capital.1864 and the short-term financing markets, which we discuss below. and other investment alternatives. On the other hand, we recognize As noted earlier in this section, retail But as discussed below, neither the many current investors in non- investors owned approximately $790 Commission nor most commenters government funds, especially billion of assets in non-government believe that all institutional investors in institutions, may prefer products that money market funds as of February 28, non-government funds will reallocate offer guaranteed liquidity and a stable 2014. Under the reforms, money market their assets. Institutional prime funds NAV rather than non-government funds funds that qualify as retail funds may typically offer higher yields than that will be subject to fees and gates and continue to offer a stable value as they government funds, and certain investors a floating NAV requirement after the do today—and facilitate their stable receive tax advantages from investing in reforms. As we noted in the Proposing price by use of amortized cost valuation tax-exempt funds. In addition, we have Release and in this Release, we and/or penny-rounding pricing of their been informed that, today, the Treasury anticipate these investors will consider portfolios. We anticipate few investors Department and the IRS will propose the tradeoffs involved with continuing in retail funds will reallocate assets to new regulations and issue a revenue to invest in the money market funds that other investment choices, given that procedure that we believe should are subject to the new requirements. As retail funds will continue to offer price remove the most significant tax-related discussed in section III.A.1.c.iv above, stability, yield, and liquidity in all but impediments associated with our 1872 several commenters noted and we exceptional circumstances. We are floating NAV reform. Additionally, concur that fees and gates might force defining a retail money market fund to the Commission, which has authority to some investors to either abandon or set accounting standards, has clarified severely restrict investment in affected (Sept. 17, 2013) (‘‘Def. Contrib. Inst. Inv. Ass’n that an investment in a floating NAV money market funds.1865 Likewise, Comment Letter’’); GFOA II Comment Letter. money market fund generally meets the commenters expressed concern that 1867 See, e.g., Form Letter Type E [1]; Federated definition of a ‘‘cash equivalent.’’ 1873 investors would migrate away from IV Comment Letter; Invesco Comment Letter; State And according to one commenter, more Street Comment Letter; Chamber II Comment Letter; institutional prime funds because a GFOA II Comment Letter; National Association of than half of survey respondents floating NAV would eliminate the stable State Auditors, Comptrollers and Treasurers (Sept. indicated the likelihood of using a value feature that currently makes 17, 2013). floating NAV money market fund would money market funds attractive to many 1868 Form Letter Type B [2], Type D [1–2], and increase if such a fund’s shares are shareholders.1866 As discussed in detail Type F [1]; Federated IV Comment Letter; J.P. considered cash equivalents for Morgan Comment Letter; American Benefits 1874 Council Comment Letter; Ass’n Fin. Profs. II accounting purposes. Thus, we 1862 See Thrivent Comment Letter. Comment Letter; National Association of College believe these factors and actions taken 1863 Id. and University Business Officers (Sept. 17, 2013) by the Commission and other regulatory 1864 Id. (‘‘Nat’l Ass’n of College & Univ. Bus. Officers agencies should help preserve the 1865 Ky. Inv. Comm’n Comment Letter; Boeing Comment Letter’’); Chamber II Comment Letter; Comment Letter; Schwab Comment Letter; State Treasurer, State of Utah (Aug. 26, 2013) American Bankers Ass’n Comment Letter; State (‘‘Utah Treasurer Comment Letter’’). 1871 See rule 2a–7(a)(25). ‘‘Beneficial ownership’’ Street Comment Letter; GFOA II Comment Letter; 1869 BlackRock II Comment Letter; SunGard typically means having voting and/or investment 42 Members of U.S. Congress Comment Letter. Comment Letter; Treasury Strategies Comment power. See supra note 679. 1866 Fidelity Comment Letter; Legg Mason & Letter; American Bankers Ass’n Comment Letter; 1872 See supra section III.B.6. Western Asset Comment Letter; SunGard Comment ABA Business Law Section Comment Letter. 1873 As discussed in detail in section III.B.6.b, Letter; U.S. Bancorp Comment Letter; Association 1870 See Dreyfus DERA Comment Letter, many investors questioned whether an investment for Financial Professionals, et al. (Sept. 17, 2013) Federated DERA I Comment Letter, Fidelity DERA in a floating NAV money market fund would meet (‘‘Ass’n Fin. Profs. II Comment Letter’’); Defined Comment Letter, Invesco DERA Comment Letter, the definition of a ‘‘cash equivalent.’’ Contribution Institutional Investment Association and Wells Fargo DERA Comment Letter. 1874 See Deutsche Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00167 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47902 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

attractiveness of institutional prime to the fees, gates, and floating NAV exit the prime space,1884 and would funds to investors, perhaps reducing the requirements,1881 and retail money cause many investors to invest their assets reallocated to alternatives. market funds might continue to cash assets in government money As noted by several commenters, it is maintain a stable price. Similarly, the market funds, direct investments, bank difficult to estimate the amount of assets survey designers did not present to deposits, or other investment that institutional investors might survey participants the possibility that alternatives.1885 As discussed in the reallocate from non-government funds the Treasury Department and IRS would DERA Study,1886 the Proposing to either government funds or other propose new regulations and issue a Release,1887 and below, there are a range 1875 investment alternatives. One revenue procedure that we believe will of investment alternatives that currently commenter estimated that 64% or $806 remove the most significant tax-related compete with money market funds. billion could shift from prime funds to impediments associated with a floating Each of these choices involves different 1876 1882 government funds, whereas another NAV reform. Moreover, survey tradeoffs, and money market fund commenter estimated that 25% of assets designers were not able to anticipate investors that are unwilling or unable to in its institutional prime funds would that the Commission, which has invest in their current option under the transfer permanently into government authority to set accounting standards, reforms would need to analyze the funds.1877 A third commenter estimated would clarify that an investment in a various tradeoffs associated with each a shift in assets of between $500 billion floating NAV money market fund would alternative. Specifically, investors could and $1 trillion.1878 In an earlier letter, meet the definition of a ‘‘cash choose from among at least the this commenter cited a survey of equivalent.’’ For these and other reasons following alternatives: Direct institutional investors that estimates herein, we believe that the survey data investors may withdraw between $660 submitted by commenters reflecting that investments in money market and $750 billion from money market certain investors expect to reduce or instruments; money market funds that funds if the Commission adopts a eliminate their money market fund are not subject to the reforms; bank floating NAV requirement because they investments under the floating NAV deposit accounts; bank certificates of cannot tolerate principal volatility.1879 alternative may overstate how investors deposit; bank collective trust funds; As with much of the survey evidence are likely to actually behave under the LGIPs; U.S. private funds; offshore provided by commenters,1880 however, final amendments that we are adopting money market funds; short-term we note that this survey was today.1883 investment funds (‘‘STIFs’’); separately administered before the Proposing The Commission recognizes, however, managed accounts; ultra-short bond Release and before the tax and that some assets will likely flow out of funds; and short-duration exchange- accounting relief that we are discussing non-government funds as a result of the traded funds (‘‘ETFs’’).1888 The today was known. For example, the reforms, and that the greatest effect will following table, taken from the DERA survey, which was administered likely be on institutional prime funds. Study and Proposing Release, outlines between February 13, 2012 and March Commenters specifically noted that a the principal features of various cash 6, 2012, did not consider that combination of proposals would force alternatives to money market funds that government funds might not be subject most money market fund sponsors to exist today.

TABLE 1—CASH INVESTMENT ALTERNATIVES

A Redemption B Restrictions on Product Valuation Investment risks restrictions Yield Regulated investor base

Bank demand deposits ...... Stable ...... Below benchmark No ...... Below benchmark Yes ...... No. up to depository insurance (‘‘DI’’) limit; above benchmark above DI limit C.

1875 See Federated DERA I Comment Letter; use of money market funds under either our floating extinct solely as a result of a move to a more Invesco DERA Comment Letter. NAV or liquidity fees and gates reform. See, e.g., ICI accurate and transparent valuation methodology.’’); 1876 See Fidelity DERA Comment Letter. Comment Letter (citing the 2013 AFP Liquidity Comment Letter of John M. Winters (Dec. 18, 2012) 1877 See Dreyfus DERA Comment Letter; Survey, Association of Financial Professionals, (available in File No. FSOC–2012–0003) (‘‘[T]he Federated DERA I Comment Letter. The commenter 2013 AFP Liquidity Survey: Report of Survey feared migration to unregulated funds has not been Results (June 2013)); Wells Fargo Comment Letter; did not provide a basis for the estimate in this quantified and is probably overstated.’’). Northern Trust Comment Letter; Invesco Comment letter. We note, however, the commenter presented 1884 See, e.g., Dreyfus Comment Letter; Invesco similar estimates using survey data in a previous Letter; BlackRock II Comment Letter; Sungard Comment Letter; PFM Asset Mgmt. Comment letter. See Federated X Comment Letter. Comment Letter. Letter; ICI Comment Letter; SIFMA Comment Letter. 1878 See Federated DERA I Comment Letter. 1881 See Treasury Strategies, Money Market Fund 1885 1879 See Federated X Comment Letter and Regulations: The Voice of the Treasurer (Apr. 19, See, e.g., Blackrock II Comment Letter; _ _ Treasury Strategies, Money Market Fund 2012), available at http://www.ici.org/pdf/rpt 12 Dreyfus Comment Letter; Legg Mason & Western _ _ Regulations: The Voice of the Treasurer (Apr. 19, tsi voice treasurer.pdf. Asset Comment Letter; Northern Trust Comment 2012) http://www.ici.org/pdf/rpt_12_tsi_voice_ 1882 See supra section III.B.6.a. Letter; PFM Asset Mgmt. Comment Letter; SunGard treasurer.pdf, which is cited in Federated X 1883 See, e.g., Better Markets FSOC Comment Comment Letter. Comment Letter. Federated concludes, ‘‘. . . at a Letter, supra note 59 (in response to industry 1886 See DERA Study, supra note 24, Table 6. minimum, $660 to $750 billion would be driven survey data reflecting intolerance for the floating 1887 See Proposing Release, supra note 25, from institutional prime funds . . .’’ We note, NAV, stating that ‘‘it is difficult to predict the level Table 2. however, the cited survey queries institutional of contraction that would actually result from 1888 respondents about money market funds generally instituting a floating NAV. [. . . .] The move to a See, e.g., Comment Letter of Investment and does not reflect that government funds are not floating NAV does not alter the fundamental Company Institute (Feb. 16, 2012) (available in File be subject to the floating NAV requirement. In attributes of money market funds with respect to No 4–619.) (‘‘ICI Feb 2012 PWG Comment Letter’’); addition, the survey did not address fees and gates. the type, quality, and liquidity of the investments Comment Letter of the Association for Financial 1880 A number of commenters cited survey data in the fund. [. . . .] It is therefore unrealistic to Professionals et al. (Apr. 4, 2012) (available in File indicating that organizations would reduce their think that money market funds . . . will become No. 4–619) (‘‘AFP Comment Letter’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00168 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47903

TABLE 1—CASH INVESTMENT ALTERNATIVES—Continued

A Redemption B Restrictions on Product Valuation Investment risks restrictions Yield Regulated investor base

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

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00169 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47904 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

I Private funds generally rely on one of two exclusions from investment company regulation by the Commission. Section 3(c)(1) of the Invest- ment Company Act, in general, excludes from the definition of ‘‘investment company’’ funds whose shares are beneficially owned by not more than 100 persons where the issuer does not make or propose to make a public offering. Section 3(c)(7) of the Act places no limit on the number of holders of securities, as long as each is a ‘‘qualified purchaser’’ (as that term is defined in section 2(a)(51) of the Act) when the securities are acquired and the issuer does not make or propose to make a public offering. Most retail investors would not fall within the definition of ‘‘qualified purchaser.’’ Moreover, such private funds also generally rely on the private offering exemption in section 4(2) of the Securities Act or Securities Act rule 506 to avoid the registration and prospectus delivery requirements of Section 5 of the Securities Act. Rule 506 establishes ‘‘safe harbor’’ criteria to meet the private offering exemption. The provision most often relied upon by private funds under rule 506 exempts offerings made ex- clusively to ‘‘accredited investors’’ (as that term is defined in rule 501(a) under the Securities Act). Most retail investors would not fall within the definition of ‘‘accredited investor.’’ Offshore private funds also generally rely on one of the two non-exclusive safe harbors of Regulation S, an issuer safe harbor and an offshore resale safe harbor. If one of the two is satisfied, an offshore private fund will not have to register the offer and sale of its securities under the Securities Act. Specifically, rules 903(a) and 904(a) of Regulation S provide that offers and sales must be made in ‘‘offshore transactions’’ and rule 902(h) provides that an offer or sale is made in an ‘‘offshore transaction’’ if, among other conditions, the offer is not made to a person in the United States. Regulation S is not available to offers and sales of securities issued by investment companies re- quired to be registered, but not registered, under the Investment Company Act. See Regulation S Preliminary Notes 3 and 4. J See id. K Collective investment funds include collective trust funds and common trust funds managed by banks or their trust departments, both of which are a subset of short-term investment funds. For purposes of this table, short-term investment funds are separately addressed. L Collective trust funds are generally limited to tax-qualified plans and government plans, while common trust funds are generally limited to tax- qualified personal trusts and estates and trusts established by institutions. M STIFs are generally regulated by 12 CFR 9.18. The Office of the Comptroller of the Currency recently reformed the rules governing STIFs subject to their jurisdiction to impose similar requirements to those governing money market funds. See Office of the Comptroller of Currency, Treasury, Short-Term Investment Funds [77 FR 61229 (Oct. 9, 2012)]. N Regarding all items in this row of the table, LGIPs generally are structured to meet a particular investment objective. In most cases, they are designed to serve as short-term investments for funds that may be needed by participants on a day-to-day or near-term basis. These local gov- ernment investment pools tend to emulate typical money market mutual funds in many respects, particularly by maintaining a stable net asset value of $1.00 through investments in short-term securities. A few local government investment pools are designed to provide the potential for greater returns through investment in longer-term securities for participants’ funds that may not be needed on a near-term basis. The value of shares in these local government investment pools fluctuates depending upon the value of the underlying investments. Local government invest- ment pools limit the nature of underlying investments to those in which its participants are permitted to invest under applicable state law. See http://www.msrb.org/Municipal-Bond-Market/About-Municipal-Securities/Local-Government-Investment-Pools.aspx. Investors in local government investment pools may include counties, cities, public schools, and similar public entities. See, e.g., The South Carolina Local Government Investment Pool Participant Procedures Manual, available at http://www.treasurer.sc.gov/media/4755/The-South-Carolina-Local-Government- Investment-Pool-Participant-Procedures-Manual.pdf. O Although the performance of an ETF is measured by its NAV, the price of an ETF for most shareholders is not determined solely by its NAV, but by buyers and sellers on the open market, who may take into account the ETF’s NAV as well as other factors. P Many separately managed accounts have investment minimums of $100,000 or more. Q Depending on the nature and scope of their investments, these investors may also face risks stemming from a lack of portfolio diversification. R Some money market fund instruments are only sold in large denominations or are only available to qualified institutional buyers. See gen- erally rule 144A under the Securities Act (17 CFR 230.144A(7)(a)(1)).

These investment options offer such, we anticipate that direct than they do today. This expected different combinations of price stability, investment in securities similar to those increase in the number government risk exposure, return, investor held by money market funds today will funds could be because complexes that protections, and disclosure. For be limited to investors with large cash currently offer government funds will example, some current money market management requirements and active offer additional government funds or fund investors, in particular bank trust Treasury functions. because other complexes will offer new departments and corporate trusts, may Alternatively, commenters suggested government funds. In either case, choose to manage their cash themselves that some investors, especially investors competition among government funds and, based on our understanding of in institutional prime funds, will should increase although the impact on cash management reallocate assets to government competition likely should, at the practices, many of these investors will funds.1891 Investors that shift their margin, be larger if new complexes enter invest directly in securities similar to assets from institutional prime funds to the government fund market. those held by money market funds government money market funds will In addition, a reallocation of assets to today. According to one commenter, likely sacrifice yield,1892 but they will government funds could lower the however, this strategy may create retain the principal stability and yields received by both investors in additional burdens and risks for these liquidity of their assets. To the extent government funds and direct purchasers investors, including having to acquire, that assets under management in of government securities. If an increase retain, and monitor the maturity of government funds increase, we in demand for government funds, which short-term investments.1889 Any desire anticipate investors will have more must largely invest in eligible to self-manage cash will likely be government funds from which to choose government securities, subsequently tempered by the expertise required to increases the demand for these invest in a diversified portfolio of 0003) (‘‘U.S. Chamber FSOC Comment Letter’’) securities,1893 the rates on eligible money market securities directly and (‘‘Quite simply, it is more efficient and economical to pay the management fee for a money market the costs of investing in those securities funds than to hire the internal staff to manage the 1893 Government money market funds must invest given the economies of scale that will be investment of cash.’’). at least 99.5 percent of their portfolio in cash, lost when each investor has to conduct 1891 Federated IV Comment Letter; TRACS ‘‘government securities’’ as defined in section credit analysis itself for each investment Financial Comment Letter; Wells Fargo Comment 2(a)(16) of the Act, and repurchase agreements Letter; Boeing Comment Letter; American Bankers collateralized with government securities. See rule (in contrast to money market funds Ass’n Comment Letter; Def. Contrib. Inst. Inv. Ass’n 2a–7(a)(16). Allowable securities include securities which are able to spread their credit Comment Letter; ICI Comment Letter; see also supra issued by government-sponsored entities such as analysis costs for each security across section III.C. the , government their entire shareholder base).1890 As 1892 See, e.g., Federated X Comment Letter; Angel repurchase agreements, and those issued by other Comment Letter. Commenters noted that investors ‘‘instrumentalities’’ of the U.S. government. It that shift assets from prime funds to government excludes, however, securities issued by state and 1889 See, e.g., M&T Bank Comment Letter. funds will earn lower rates on their investments municipal governments, which do not generally 1890 See, e.g., Comment Letter of U.S. Chamber because government funds are less risky and offer share the same credit and liquidity traits as U.S. (Jan. 23, 2013) (available in File No. FSOC–2012– lower yields than prime funds. government securities.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00170 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47905

government securities and hence yields these investors may gain full insurance for 51% of the surveyed organizations’ on government funds might fall.1894 coverage if they are willing and able to short-term investments in 2012, which Several commenters argued that break their cash holdings into is up from 25% in 2008.1903 Money absorbing assets from non-government sufficiently small pieces and spread market funds accounted for 19% of funds into government funds could them across banks, but doing so may these organizations’ short-term reduce yields on eligible government impose an administrative burden on investments in 2012, down from 30% securities in what is already a low yield investors.1898 just a year earlier, and down from environment.1895 The extent to which It is important to note that investors almost 40% in 2008.1904 asset reallocation affects yields on will likely earn lower yields on deposit We discussed in the Proposing government funds, however, will accounts than what they currently Release and commenters who addressed depend on the amount of capital that receive on non-government funds.1899 this issue agreed that one practical shifts into government funds and on the One commenter even suggested flows of constraint for many money market fund supply of eligible government securities capital into banks may create additional investors is that they may be precluded to meet heightened demand for these downward pressure on the yields paid from investing in certain alternatives securities by government funds. We to depositors, further lowering investor outside of funds regulated under rule discuss these issues in further detail returns.1900 If the additional capital that 2a–7, such as STIFs, offshore money below. flows from non-government funds is market funds, LGIPs, separately As noted above, commenters more than banks can profitably lend, managed accounts, and direct indicated that some investors that then banks might reduce the interest investments in money market currently invest in non-government rates that they pay to depositors. If, instruments, due to significant funds may shift assets into demand however, banks have sufficient restrictions on participation.1905 For deposits or short-maturity certificates of opportunities to invest the additional example, STIFs are only available to deposit. FDIC insurance that covers capital, interest rates would likely not accounts for personal trusts, estates, and deposit accounts (which include fall. employee benefit plans that are exempt checking and savings accounts, money In addition, as discussed above, from taxation under the U.S. Internal 1906 market deposit accounts, and investors in non-government funds may Revenue Code. STIFs subject to certificates of deposit) guarantees not reallocate assets in a significant regulation by the Office of the principal stability within the insurance way, and if they do, may not reallocate Comptroller of the Currency also are limits and in certain instances liquidity large amounts of capital to banks. Given subject to less stringent regulatory 1896 that deposit accounts held over $8 restrictions than rule 2a–7 imposes, and irrespective of market conditions. 1901 We noted in the Proposing Release that trillion as of February 28, 2014, we STIFs under the jurisdiction of other some institutions may be deterred from do not anticipate that additional flows banking regulators may be subject to no from non-government funds will have a restrictions at all equivalent to rule 2a– moving their investments from money 1907 market funds to banks, because their sufficient impact to materially push 7. Similarly, European money assets in many cases may be above the down interest rates at banks. Even if market funds can take on more risk than current depository insurance limits; investors reallocate capital to demand U.S. money market funds because they assets above the limits would be deposits, recent history indicates are not currently subject to regulatory exposed to counterparty and sector- demand deposits can successfully restrictions as stringent as rule 2a–7 on specific risks that are different and less absorb large flows of capital from their credit quality, liquidity, maturity, and diversification.1908 If investment attractive than the risk profiles of investors. As discussed in the DERA diversified non-government money Study, individual and business holdings in checking deposits and currency have 1903 See 2012 AFP Liquidity Survey, supra note market funds today.1897 Nevertheless, significantly increased in recent years 64. 1904 relative to their holdings of money See id., 2008 AFP Liquidity Survey, supra 1894 See, e.g., Federated X Comment Letter. note 64. 1902 1895 See Dreyfus DERA Comment Letter; market fund shares. The 2012 AFP 1905 See, e.g., Form Letter Type B [2], Type D [1– Federated DERA I Comment Letter; Invesco DERA Liquidity Survey of corporate treasurers 2], and Type F [1]; Federated IV Comment Letter; Comment Letter; Wells Fargo DERA Comment indicates that bank deposits accounted J.P. Morgan Comment Letter; Treasury Strategies Letter. Comment Letter; American Benefits Council 1896 FDIC insurance covers all deposit accounts, Comment Letter; Ass’n Fin. Profs. II Comment money market fund. Such investors would continue including checking and savings accounts, money Letter; Nat’l Ass’n of College & Univ. Bus. Officers to seek out diversified investment pools, which may market deposit accounts and certificates of deposit. Comment Letter. or may not include bank time deposits.’’). See also FDIC insurance does not cover other financial 1906 See, e.g., American Bankers Ass’n Comment Federated X Comment Letter. products and services that banks may offer, such as Letter. See Testimony of Paul Schott Stevens, 1898 , bonds, mutual fund shares, life insurance Certain third party service providers offer President and CEO of the Investment Company policies, annuities, or securities. The standard such services. See, e.g., Nathaniel Popper and Institute, before the Committee on Banking, insurance amount is $250,000 per depositor, per Jessica Silver-Greenberg, Big Depositors Seek New Housing, and Urban Affairs, United States Senate, insured bank, for each account ownership category. Safety Net, N.Y. Times (Dec. 30, 2012). on ‘‘Perspectives on Money Market Mutual Fund See http://www.fdic.gov/deposit/deposits/. 1899 See, e.g., Federated X Comment Letter; Angel Reforms,’’ June 21, 2012, available at http:// _ _ _ _ 1897 See, e.g., Comment Letter of Crawford and Comment Letter. www.ici.org/pdf/12 senate pss mmf written.pdf. Company (Jan. 14, 2013) (available in File No. 1900 See Angel Comment Letter. 1907 For a discussion of the regulation of STIFs by FSOC–2012–0003) (‘‘Bank demand deposits . . . 1901 From Board of Governors, Federal Reserve the Office of the Comptroller of the Currency (OCC), lack the diversification of money market funds and System, as of February 28, 2014. Demand deposits see Proposing Release, supra note 25, Table 2, carry inherent counterparty risk.’’); Comment Letter at domestically chartered commercial banks, U.S. explanatory n.M. The OCC’s rule 9.18 governs of Investment Company Institute (Jan. 10, 2011) branches, and agencies of foreign banks, and Edge STIFs managed by national banks and federal (available in File No 4–619) (‘‘The Report suggests Act corporations (excluding those amounts held by savings associations. Other types of banks may or that requiring money market funds to float their depository institutions, the U.S. government, and may not follow the requirements of OCC rule 9.18, NAVs could encourage investors to shift their liquid foreign banks and official institutions) less cash depending, for example, on state law requirements balances to bank deposits. We believe that this items in the process of collection and Federal and federal tax laws. See Office of the Comptroller effect is overstated, particularly for institutional Reserve float held $1.069 trillion. Savings deposits, of Currency, Treasury, Short-Term Investment investors. Corporate cash managers and other which include money market deposit accounts, Funds, at n.6 and accompanying text [77 FR 61229 institutional investors would not view an totaled $7.221 trillion. See http:// (Oct. 9, 2012)]. undiversified holding in an uninsured (or www.federalreserve.gov/Releases/h6/current/ 1908 For a discussion of the regulation of underinsured) bank account as having the same risk default.htm. European money market funds, see Proposing profile as an investment in a diversified short-term 1902 See DERA Study, supra note 24, at figure 18. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00171 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47906 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

alternatives are less stringently redemptions.1913 Other investment made the funds more resilient to both regulated than non-government funds, alternatives, such as bank CDs, also portfolio losses and investor then they could pose greater risk than impose redemption restrictions. redemptions, no fund would have been money market funds and thus may not The Commission recognizes that not able to withstand the losses that the be viable or attractive alternatives to every cash investment alternative Reserve Primary Fund incurred in 2008 investors that highly value principal presented here will be available and without breaking the buck, and nothing stability. Offshore money market funds, attractive to each investor, which may in the 2010 reforms would have which are investment pools domiciled leave investors with fewer investment prevented the Reserve Primary Fund’s and authorized outside the United options than those enumerated above. holding of Lehman Brothers debt. We States, generally sell shares to U.S. Investors, however, have available a therefore believe that the relative costs investors only in private offerings, range of investment options, with each to investors from losing certain features limiting their availability to investors at choice offering different tradeoffs. of some of today’s money market funds large.1909 Further, few offshore money Money market fund investors that are should be acceptable in light of the market funds offer their shares to U.S. unwilling or unable to invest in their significant benefits stemming from investors in part because doing so could current option after the reforms will advancing our goals of reducing money create adverse tax consequences.1910 need to analyze the various tradeoffs market funds’ susceptibility to heavy In the Proposing Release and sections associated with each alternative. We redemptions, improving their ability to III.A and III.B of this Release, we anticipate the money market fund manage and mitigate potential contagion recognize, and commenters industry may also innovate in various from redemptions, and increasing the concurred,1911 that some current money ways to meet investors’ needs. For transparency of their risks. market fund investors may have self- example, some managers may try to imposed restrictions or fiduciary duties stabilize their funds’ NAVs by choosing 2. Efficiency, Competition and Capital that limit the risks they can assume or low principal-risk portfolio investment Formation Effects on the Money Market that preclude them from investing in strategies, whereas other funds may seek Fund Industry certain alternatives. They may be to offer higher yields within the restrictions of rule 2a–7. In this section, we consider certain prohibited from investing in, for effects on the money market fund example, enhanced cash funds that are We also recognize the reforms adopted today may cause investors to industry of investors reallocating money privately offered to institutions, wealthy away from certain money market funds clients, and certain types of trusts due reallocate assets to investment alternatives that offer different as a result of our reforms. As discussed to greater investment risk, limitations on in section III.A, our primary reforms investor base, or the lack of disclosure combinations of yield, risk, and features than those of the funds in which they will not apply to government money and legal protections of the type 1915 are invested today. The fact that market funds. As such, we afforded them by U.S. securities anticipate current investors in 1912 investors have bought non-government regulations. Likewise, we recognized government funds will likely remain in the Proposing Release that money funds rather than these other investment alternatives reveals that they almost invested in these funds, as they will market fund investors that can only offer the price stability, liquidity, and invest in SEC-registered investment certainly prefer these funds to the alternatives. We, and a number of yield to which these investors are vehicles could not invest in LGIPs, 1916 commenters,1914 acknowledge that it is accustomed. As discussed further in which are not registered with the SEC section III.K.3 below, in fact we expect (as states and local state agencies are doubtful that any of the non-money market fund investment alternatives some non-government money market excluded from regulation under the fund shareholders will likely reallocate Investment Company Act). In addition, provide the identical combination of price stability, transparency, risk, their investments to government money many unregistered and offshore market funds. Accordingly, to the extent alternatives to money market funds— liquidity, yield, and level of regulation provided by past money market funds. investors reallocate funds between these unlike registered money market funds in two alternatives, we expect that our the United States today—are not However, with today’s adopted amendments, the Commission addresses primary reforms will affect the short- prohibited from imposing gates or term funding market and capital redemption fees or suspending certain concerns inherent in the current structure of non-government money allocation at least in the short-run as market funds that create incentives for discussed further below. We also expect Release, supra note 25, Table 2, explanatory nn.E to have an increase in allocative and H; Common Definition of European Money shareholders to redeem shares ahead of Market Funds (Ref. CESR/10–049). See also supra other investors and thus contribute to efficiency because investors will be section II.B.3. the likelihood of heavy share making choices best suited to their 1909 See Proposing Release, supra note 25, Table redemptions and shareholder dilution. investment risk profiles. Furthermore, to 2, explanatory n.I. Specifically and as pointed out in the the extent that new government funds 1910 See Proposing Release, supra note 25, Table DERA study, although the 2010 reforms will be offered because of an increased 2, explanatory n.G. demand for government funds, 1911 See, e.g., Form Letter Type B [2], Type D [1– 2], and Type F [1]; Federated IV Comment Letter; 1913 See, e.g., Proposing Release, supra note 25, J.P. Morgan Comment Letter; Treasury Strategies Table 2, explanatory n.F. 1915 Government money market funds are Comment Letter; American Benefits Council 1914 Form Letter Type A [1], Type B [2], Type C permitted to opt in to the fees and gates reforms if Comment Letter; Ass’n Fin. Profs. II Comment [1], Type D [1], and Type F [1]; Federated II they disclose they are doing so in advance. Because Letter; Nat’l Ass’n of College & Univ. Bus. Officers Comment Letter; PFM Asset Mgmt. Comment government funds hold assets with little credit risk, Comment Letter. Letter; Comment Letter of Square 1 Asset we believe it is unlikely that these funds will ever 1912 According to the 2012 AFP Liquidity Survey, Management (Sept. 17, 2013) (‘‘Square 1 Comment choose to impose fees or gates. supra note 64, only 21% of respondents stated that Letter’’); Comment Letter of Farmers Trust 1916 If government funds experience heavy enhanced cash funds were permissible investment Company (July 23, 2013) (Farmers Trust Comment inflows, the yields on eligible government vehicles under the organization’s short-term Letter’’); Comment Letter of City of Chicago, Office securities, in which government funds largely investment policy. In contrast, 44% stated that of the City Treasurer (Sept. 24, 2013) (‘‘Chicago invest, might fall. If the yields on portfolio assets prime money market funds were a permissible Treasurer Comment Letter’’); Comment Letter of fall, the yields on the fund will decline as well. We investment and 56% stated that Treasury money United States Conference of Mayors (July 18, 2013) discuss this possibility and its impact in greater market funds were a permissible investment. (‘‘U.S. Conference of Mayors Comment Letter’’). detail below.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00172 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47907

competition among government funds allocating the costs of redeeming shares and lessen the probability the fund’s will also increase. when liquidity is costly to shareholders weekly liquid assets decline sufficiently Like government funds, money that redeem shares.1917 If investors for a fee or gate to be possible. These market funds that qualify as retail funds make better informed investment portfolio management changes may will also be able to continue transacting decisions given the liquidity risk affect competition within the at a stable value and will not be subject inherent in these money market funds institutional prime money market fund to the floating NAV reform. Retail funds as a result of the fees and gates industry (or broader money market fund will be required to consider imposing a amendments, allocational efficiency industry) if these funds more favorably fee or gate if their liquidity comes under will be enhanced. compete with other less conservatively stress. As such, retail funds will be In addition to the impacts discussed managed funds. They also could affect competing with government and above, the combination of our floating capital formation to the extent they shift floating NAV funds based on their NAV and fees and gates reforms may portfolio investment away from certain structure. Although some investors may have a number of effects on efficiency, issuers or certain maturities or lessen reallocate their investments away from competition, and capital formation in the yields passed through to investors retail money market funds because they the institutional prime money market from their money market fund could impose a fee or gate, we expect fund industry. First, by allocating investments. In addition, an increase in many investors will remain in these market-based gains and losses on these types of funds could encourage funds because their investment portfolio securities in institutional issuers to fund themselves with shorter experience under normal market prime funds to each shareholder on a term debt. conditions is unlikely to change. Some proportionate basis, the floating NAV Other portfolio managers of investors may move into retail money should increase allocational efficiency institutional prime funds could respond market funds in response to our reforms, in this industry, as investors are by using affiliate financial support to as there are likely some natural persons allocating their investment capital based minimize principal volatility or avoid currently invested in funds that are on true returns.1918 Doing so will further declines in weekly liquid assets that categorized as institutional prime or increase the allocative efficiency could lead to the imposition of a fee or institutional tax-exempt money market discussed above in institutional prime gate.1919 The emergence of these types funds that would prefer to stay in a money market funds attributable to the of money market funds also could have money market fund that maintains a fees and gates reform and its effect on competitive effects within the stable NAV per share and that has a shareholders’ understanding of money institutional prime money market fund similar investment risk profile as their market funds’ liquidity risk. industry (or broader money market fund current fund. Funds with both retail and Our primary reforms also may affect industry), depending on how favorably institutional investors also may create how different kinds of money market they compete with money market funds new retail-only non-government funds funds compete in the industry, and thus that are managed differently. These with the same investment objective. affect efficiency, competition, and funds could reduce allocational Although we do not have a basis for capital formation in the industry. For efficiency to the extent shareholders estimating the amount of assets that example, we anticipate that some invest in money market funds based on might be reallocated to retail non- institutional investors will continue to the assumption that principal volatility government funds because we do not demand a combination of relative price and liquidity risk will be borne by the know what fraction of the shareholder stability, liquidity, and yields that are fund’s sponsor or other affiliate rather base of these funds today categorized as higher than the yields offered by than on the risk-return profile of the institutional would qualify as natural government funds. Managers of floating fund’s portfolio (although this impact persons, we anticipate the number of NAV money market funds may respond could be tempered to the extent any of retail funds and competition among to these investors in one of several these costs are passed on to investors these funds to increase as they compete ways. Some managers may respond by through higher management fees). They to attract new investors and thus altering their portfolio management and also could affect capital formation if increase their allocative efficiency. The preferentially investing portfolio affiliate sponsor support leads to higher impact on competition likely should, at holdings in shorter-maturity, lower-risk investment in riskier or longer-term debt the margin, be larger if the increase in securities than they do today. They securities than otherwise would occur if the number retail funds stems from new would do so to reduce NAV fluctuations investors had to bear the principal complexes offering additional retail volatility or liquidity risk accompanying funds as opposed to current complexes 1917 Allocational efficiency refers to investors efficiently allocating their funds to available those money market fund investments. offering additional retail funds. Finally, some portfolio managers of Today’s fees and gates amendments investments, taking all relevant factors into account. 1918 institutional prime money market funds are designed to moderate redemption Some commenters noted the potential for inequitable treatment of shareholders under the may seek to competitively distinguish requests by allocating liquidity costs to stable NAV model. See, e.g., Better Markets FSOC their funds post-reform by altering their those shareholders who impose such Comment Letter (stating that ‘‘an investor that portfolio management and investing in costs on funds through their succeeds in redeeming early in a downward spiral redemptions and, in certain cases, stop may receive more than they deserve in the sense relatively longer-term or riskier that they liquidate at $1.00 per share even though securities than they do today. These heavy redemptions in times of market the underlying assets are actually worth less. stress by providing fund boards with funds may seek to appeal to investors Without a sponsor contribution or other rescue, that that, if investing in a floating NAV additional tools to manage heavy differential in share value is paid by the redemptions and improve risk shareholders remaining in the fund, who receive less not only due to declining asset values but also 1919 Fund affiliates could avoid declines in transparency. As such, the fees and because early redeemers received more than their weekly liquid assets, for example by purchasing gates amendments should increase fair share of asset value.’’); Comment Letter of non-weekly liquid assets or directly purchasing allocational efficiency in the non- Wisconsin Bankers Association (Feb. 15, 2013) fund shares. Under the reforms we are adopting government money market fund (available in File No. FSOC–2012–0003) (stating today, we are requiring increased disclosure of any that ‘‘[a] floating NAV has the benefits of . . . affiliate financial support of money market funds. industry by making liquidity risk more reducing the possibilities for transaction activity These reforms, and their effects on efficiency, apparent to shareholders in these funds that results in non-equitable treatment across all competition, and capital formation, are discussed through enhanced disclosure and by shareholders’’). See also supra section II.B.1. above in sections III.E and III.F.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00173 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47908 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

money market fund that could be complexes that primarily advise credit.1922 Since government funds are subject to fees or gates, now may be government money market funds may not subject to the fees and gates and willing to sacrifice liquidity in times of benefit competitively as these funds are floating NAV requirements, we disagree stress or some principal stability for generally not affected by our primary that today’s adopted amendments have greater yield. The emergence of these reforms and may experience inflows, a negative impact on the availability and types of money market funds may which would raise these fund advisers’ cost of short-term funding for the federal enhance competition in the money management fee income. Similarly, fund government. As discussed in the market fund industry among different complexes that manage mostly retail Proposing Release and herein, we types of institutional prime money money market funds may be believe the effects of a shift, including market funds along the risk-return competitively advantaged post-reform any effects on efficiency, competition, spectrum. It also would affect changes over those that primarily manage and capital formation, will depend on in capital formation post-reform to the institutional prime funds. These latter the amount of capital reallocated to extent that it shifts investment to issuers funds will be subject to both our floating specific investment alternatives and the of longer-term or riskier securities or NAV and fees and gates reforms and nature of the alternatives. More increases yields paid to investors (or thus may experience a greater decline in specifically, the extent to which money increases management fees paid to assets than retail money market funds as market fund investors choose to certain types of fund complexes). Thus, a result of our primary reforms. We thus reallocate their assets to investment depending on the magnitude of the anticipate our primary reforms may alternatives, including other money primary reforms’ effect on the assets significantly alter the competitive market fund types, as a result of these managed by different types of money makeup of the money market fund reforms will drive the effect on the market funds, the type and number of industry, producing related effects on short-term financing markets. We institutional prime funds may contract efficiency and capital formation. We discuss the potential impact of these overall, potentially limiting investors’ believe, however, that these changes are shifts in investment below. choices among them, or may expand, necessary to accomplish our policy As discussed in the Proposing potentially enhancing investors’ choices goals. Release, because non-government among them. Accordingly, competition money market funds’ investment among institutional prime funds may 3. Effect of Reforms on Investment strategies differ from a number of the increase or decrease with an impact that Alternatives, and the Short-Term investment alternatives enumerated, a will likely be stronger if the number of Financing Markets shift by investors from non-government complexes offering institutional prime money market funds to these funds changes. In this section, we consider the effects alternatives could affect the markets for Finally, as discussed above, we of the reforms on investment short-term securities. Commenters recognize investors in institutional alternatives, issuers, and the short-term warned that movement of invested prime funds may reallocate assets to financing markets. We have presented assets from prime money market funds investment alternatives. In addition to extensive economic analysis relating to to, for example, government money the potential effects on investors our final policy choices and discussed market funds could skew short-term described above and the short-term commenters’ views in earlier sections of funding away from private markets to funding markets described below, a the Release. As such, we focus here on the public sector.1923 The magnitude of reallocation of assets out of these funds the specific macroeconomic effects of the effect will depend on not only the may affect the profitability of the money the reforms on investment alternatives, size of the shift but also the extent to market fund industry, and thus have as well as the short-term financing which there are portfolio investment incremental effects on efficiency, markets and the impact of the reforms differences between non-government competition, and capital formation. For on efficiency, competition, and capital money market funds and the chosen example, fund complexes that, on net, formation on issuers in the short-term investment alternatives. As discussed in experience a decline in managed money financing market and the short-term the DERA Study, for example, even a market fund assets as a result of our financing market. modest shift from prime funds to other primary reforms, will likely earn lower We recognized in the Proposing types of money market funds could fund advisers’ management and other Release that the amendments we are represent a sizeable increase in certain fees than they do today.1920 It is adopting today could create incentives investments.1924 If instead investors in important to note, however, that fees for for investors to shift assets out of non- institutional prime funds choose to managing these assets will still be government money market funds, which manage their cash directly rather than earned, but by the asset managers to could lead to changes in the funding of invest in alternative cash management which assets are reallocated. To the and other effects on the short-term products, they may invest in securities extent investors shift assets within a financing markets. Many commenters that are similar to those currently held fund complex (e.g., to a government agreed with our views.1921 Some by prime funds, in which the effects on fund), at least some of the fees may be commenters, for example, cautioned issuers and the short-term financing 1925 retained by the fund complex. If, that a decrease in investor demand for markets will likely be minimal. however, investors instead reallocate money market funds could limit the 1922 assets to non-money market fund availability and raise the cost of short- Form Letter Type E [1] and Type F [1]; alternatives, the managers of these other Fidelity Comment Letter; Invesco Comment Letter; term funding for businesses, as well as iMoneyNet Comment Letter; KeyBank Comment options will benefit. This shift may have federal, state, and local governments, Letter; Ass’n Fin. Profs. II Comment Letter; Fin. competitive implications within the and that it is currently unclear whether Svcs. Inst. Comment Letter. money market fund industry as not all these entities would be able to find and 1923 Blackrock II Comment Letter; Invesco Comment Letter; Wells Fargo Comment Letter; U.S. fund complexes are likely to be equally use alternative efficient sources of affected by a movement in money Bancorp Comment Letter; ICI Comment Letter. 1924 market fund assets as a result of the See DERA Study, supra 24, Table 7. 1921 See, e.g., MFDF Comment Letter; Ariz. Ass’n 1925 The preference for this alternative, however, primary reforms. For example, fund of County Treasurers Comment Letter; Utah may be tempered by the cost to investors of Treasurer Comment Letter; Northern Trust managing cash on their own. See, e.g., supra note 1920 See Federated X Comment Letter. Comment Letter; Fidelity Comment Letter. 580 and accompanying text.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00174 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47909

We believe, and a number of securities during the financial crisis.1933 However, as noted by several commenters agreed,1926 that some One commenter specifically stated that commenters, it is difficult to estimate capital will be reallocated from non- negative yields would be problematic the amount of assets that institutional government funds, especially for the competitiveness of government investors might reallocate from non- institutional prime funds, to funds and investors, as well as for government funds to government government money market funds. If the parties holding government securities funds.1939 Several commenters magnitude of the flows is large, we for regulatory capital and collateral cautioned this supply of eligible anticipate the shift in investment could purposes.1934 government securities would likely be affect not only the government Evidence from the financial crisis also insufficient if today’s reforms were securities market, but also issuers, indicates, however, that government adopted.1940 One commenter, however, including companies and funds absorbed large inflows of assets. argued that the supply would be municipalities, that previously sold Specifically, approximately $498 billion adequate.1941 This commenter estimated securities to non-government funds. It is or 24% of assets flowed out of prime 64% or $806 billion could shift from important to note that although funds, whereas $409 billion or 44% of prime funds to government funds,1942 investors may reallocate assets to assets flowed into government funds whereas a second commenter estimated government funds, it is also possible between September 2, 2008 and October 25% of assets in its institutional prime and even likely that some will reallocate 7, 2008,1935 and even with these funds would transfer permanently into assets to bank demand deposits and unprecedented reallocations of assets, government funds.1943 A third other investment vehicles, which would Treasury-bill rates approached or fell commenter estimated between $500 mitigate the negative impact of the below zero for only a relatively short billion to $1 trillion.1944 The first reforms on the short-term funding period during the crisis.1936 One commenter noted, however, that prime market in general and bank issuers of commenter also noted the supply of funds invested 19.5% of their assets on short-term papers in particular.1927 Treasury bills has declined by more average in eligible government Commenters cautioned that there is than $250 billion on three separate securities as of February 28, 2014, limited market capacity if investors occasions between January 31, 2009 and explaining that prime funds hold reallocate their assets from non- March 31, 2014 without apparent eligible government securities to meet government money market funds into market dislocation.1937 We recognize the Daily Liquid Asset and Weekly government money market funds.1928 that any reallocation of assets from non- Liquid Asset requirements of Rule 2a- Commenters noted a specific concern government money market funds into 7.1945 As such, they would likely divest that reallocating assets from non- government money market funds may some of these assets to meet investor government funds to government funds affect yields in the short-run. However, redemption requests, thereby freeing up would increase the demand for eligible we believe that the two-year period for eligible government securities for government securities,1929 which could funds to implement the fees and gates government fund purchase. Applying reduce these securities’ yields in what is and floating NAV reforms that we are this 19.5% estimate to prime funds at already a low-yield environment. Low adopting may help facilitate the market large and assuming investors reallocated yields on eligible government securities adjustment process. For example, fund 64% of prime fund assets to government would not only affect investors in complexes with non-government funds funds,1946 the commenter then government funds, but also those that have both institutional and retail estimated the demand for eligible investors who directly purchase investors as well as other fund government securities would increase government securities.1930 Commenters complexes will have time to originate noted heavy flows to government funds retail funds not subject to the floating Letter; Wells Fargo DERA Comment Letter. One during the financial crisis caused NAV requirement to meet the needs of commenter (see the Invesco DERA Comment Letter) estimated eligible government assets were $2 several government funds to close to retail clients. Similarly, retail investors trillion, which is substantially lower than the other new investors to prevent additional net in non-government funds that will be commenters’ estimates. It appears the estimate does inflows,1931 while yields fell close to subject to the floating NAV after the not include repurchase agreements collateralized by zero.1932 These problems arose even U.S. Treasuries or other government securities and implementation period will have time to may have other assumptions, so we focus here on with large issuances of government reallocate assets to a retail fund. More the estimates provided in the other four letters. generally, investors will have time to 1939 See Federated DERA I Comment Letter and 1926 See, e.g., Federated IV Comment Letter; identify investment alternatives and Invesco DERA Comment Letter. See also supra TRACS Financial Comment Letter; Wells Fargo consider trade-offs for alternatives other sections III.A–B. Comment Letter; Boeing Comment Letter; American 1940 See BlackRock DERA Comment Letter; Bankers Ass’n Comment Letter; Def. Contrib. Inst. than government funds. Dreyfus DERA Comment Letter; Federated DERA I Inv. Ass’n Comment Letter. See also Dreyfus DERA Commenters, using data from July Comment Letter; Invesco DERA Comment Letter. Comment Letter, Federated DERA I Comment 2013 through March 2014, estimated 1941 See Fidelity DERA Comment Letter. Letter, Fidelity DERA Comment Letter, Invesco 1942 Id. DERA Comment Letter, and Wells Fargo DERA there are between $5.2–$6.8 trillion in 1938 1943 Comment Letter. eligible government securities. See Dreyfus DERA Comment Letter. 1944 1927 See supra section III.K.1 of this Release. See Federated DERA I Comment Letter. The commenter did not provide a basis for the estimate 1928 1933 See BlackRock DERA Comment Letter; See, e.g., Blackrock II Comment Letter; in this letter. We note, however, the commenter Invesco DERA Comment Letter; ICI DERA Comment Dreyfus Comment Letter; Federated II Comment presented similar estimates using survey data in a Letter. Letter; Invesco Comment Letter; Northern Trust previous letter. See Federated X Comment Letter. 1934 Comment Letter; Schwab Comment Letter. See Federated DERA I Comment Letter. We address limitations of inferences from the 1929 See supra section III.C.1. 1935 See SEC Staff Analysis http://www.sec.gov/ survey in section III.B. 1930 See, e.g., Federated X Comment Letter; comments/s7-03-13/s70313-324.pdf. These 1945 See Fidelity DERA Comment Letter. The Dreyfus DERA Comment Letter; Federated DERA I investors would not be government money market Federated DERA I Comment Letter estimated prime Comment Letter; Invesco DERA Comment Letter; funds [5]. funds invested 27% of assets in eligible government Wells Fargo DERA Comment Letter. 1936 See SEC Staff Analysis http://www.sec.gov/ securities. More specifically, the letter stated prime 1931 See Dreyfus DERA Comment Letter; Invesco comments/s7-03-13/s70313-324.pdf. These money market funds held $95 billion in Treasury DERA Comment Letter. The commenters did not investors would not be government money market securities, $130 billion in agency securities, and address where the potential new investors funds [6–7]. $169 in fully collateralized repurchase agreements. ultimately invested their assets. 1937 See Fidelity DERA Comment Letter. It cited year-end assets in prime money market 1932 See Dreyfus DERA Comment Letter; 1938 See Federated DERA I Comment Letter; funds of $1.486 trillion. Federated DERA I Comment Letter. Fidelity DERA Comment Letter; ICI DERA Comment 1946 See Fidelity DERA Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00175 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47910 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

‘‘approximately $806 billion, which is funds generally and the concomitant and their investors.1961 Because we only about 8% of current total available increase in demand for eligible cannot foresee all of the ways markets eligible government securities.’’ 1947 The government securities.1953 This will evolve, we cannot predict the commenter concluded, ‘‘the supply of commenter suggested, for example, the macroeconomic effects of these eligible government securities is more ‘‘eventual resolution of the Federal changes.1962 Nevertheless, we than adequate to meet anticipated National Mortgage Association and acknowledge changes in the market demand.’’ 1948 We agree with this Federal Home Loan Mortgage arising from the reforms may have commenter. Applying the 19.5% Corporation will reduce the macroeconomic effects in the future. estimate to institutional prime funds at supply,’’ 1954 as will a reduction in the In a separate analysis, the staff noted large and assuming investors reallocated federal deficit.1955 The same commenter that some investors that currently own 25% of prime fund assets to government noted several factors have increased the eligible government securities might funds,1949 the demand for eligible demand of government securities, choose to reallocate these assets to other government securities would increase including the stockpiling of securities global safe assets,1963 which could free about $239 billion, which is only about by the Federal Reserve ‘‘as a result of up eligible government securities for 4% of current total available eligible quantitative easing and other policy government fund purchase.1964 A government securities.1950 Therefore, initiatives.’’ 1956 The commenter further number of commenters argued the we do not anticipate the reallocation of notes continued trade deficits, structural Commission should focus solely on the fund assets will be large relative to the and regulatory changes in the markets supply of eligible government securities, market for eligible government for financial contracts, and regulatory given that government funds are largely securities. capital and liquidity requirements have restricted to investing in eligible It is also difficult to estimate the increased and are likely to continue government securities.1965 Several future supply of available eligible increasing the demand for U.S. commenters also argued investors other government securities, given market government securities.1957 We agree than government funds may be forces and possible changes in the with the commenter that many of these restricted from holding assets other than supply and demand. Commenters, as factors will increase the demand for eligible government securities, which well as the staff, noted a number of U.S. government securities.1958 would preclude them from buying other factors that may affect the supply and On the other hand, several factors assets.1966 One commenter pointed out demand of eligible government may decrease the future demand for and certain global safe assets can present securities.1951 Some factors would affect increase the future supply of eligible risks, such as ,1967 the net supply negatively, whereas other government securities. For example, one credit risk (securitized assets and factors would affect it positively. Given commenter hypothesized companies, investment grade corporate debt),1968 the large number of possible factors and seeking better investment opportunities, and commodity risk (gold),1969 and the range of possible effects of each may reduce their holdings of cash factor on both the supply of eligible equivalents, thereby reducing their 1961 See Fidelity DERA Comment Letter. government securities and the economy holdings of government money market 1962 It is important to also note that arguments funds and eligible government supporting the idea of a shortfall typically ignore overall, we cannot estimate the net 1959 the ability of market participants to adapt to a macroeconomic effect of the factors securities. This commenter further suggested that central banks might wind changing landscape. See SEC Staff Analysis http:// overall.1952 For this reason, we discuss www.sec.gov/comments/s7-03-13/s70313-324.pdf. these factors qualitatively. down their open market bond 1963 See SEC Staff Analysis http://www.sec.gov/ purchases, which could cause investors comments/s7-03-13/s70313-324.pdf. A ‘‘safe asset’’ Several factors could increase the to sell short-term and purchase long- is defined as any debt asset that promises a fixed future demand for and decrease the term government securities to earn amount of money in the future with virtually no future supply of eligible government default risk. Safe assets are generally considered to higher yields. In addition, the securities. For example, one commenter be information insensitive: Investors’ concerns commenter suggested that the Federal discussed the impact of rising interest about asymmetric information or adverse selection Reserve Bank of New York through its are ameliorated when trading because the asset’s rates on the market Overnight Reverse Repo Program might creditworthiness is known with near certainty, increase government repurchase reducing the need for investors to collect 1947 Id. information. The safety of a given asset does not 1948 Id. agreements as part of its quantitative depend on the creditworthiness of the issuer alone 1960 1949 See Dreyfus DERA Comment Letter. easing exit strategy, and the but also is determined by the liquidity of the market in which the asset trades and by guarantees. Any 1950 See Dreyfus DERA Comment Letter. This Treasury could increase the supply of asset can be rendered safe by an implicit or explicit estimate assumes institutions invest about $1.187 Treasury Floating Rate Notes designed promise from a or credit-worthy trillion in prime funds. To estimate assets managed to be attractive to money market funds institution to buy it if its price falls below a certain by institutional prime funds, we used self-reported level. fund data from iMoneyNet as of February 28, 2014 1953 1964 to estimate the percentage of assets managed by See Federated DERA I Comment Letter. See SEC Staff Analysis http://www.sec.gov/ institutional prime funds. We then multiplied the 1954 Id. comments/s7-03-13/s70313-324.pdf. We note percentage times the assets managed by prime 1955 Id. government money market funds are largely funds, as provided by Form N–MFP as of February 1956 See Federated DERA I Comment Letter; precluded from investing in securities other than 28, 2014. Commenters, using data from July 2013 Invesco DERA Comment Letter. government securities. The market for global safe assets may provide investment alternatives for through March 2014, estimated there are between 1957 See Federated DERA I Comment Letter; $5.2–$6.8 trillion Eligible Government Securities. Invesco DERA Comment Letter; Wells Fargo DERA current investors in government funds and See Federated DERA I Comment Letter; Fidelity Comment Letter. institutional investors invested in non-government funds that are willing to reallocate assets. DERA Comment Letter; ICI DERA Comment Letter; 1958 See SEC Staff Analysis http://www.sec.gov/ 1965 Wells Fargo DERA Comment Letter. comments/s7-03-13/s70313-324.pdf. See Dreyfus DERA Comment Letter; Federated DERA I Comment Letter; Fidelity DERA 1951 See SEC Staff Analysis http://www.sec.gov/ 1959 See Fidelity DERA Comment Letter. Comment Letter; ICI DERA Comment Letter; comments/s7-03-13/s70313-324.pdf, pp. [4–5]. 1960 See Fidelity DERA Comment Letter; Invesco DERA Comment Letter; Wells Fargo DERA 1952 We note commenters did not provide data to Federated DERA I Comment Letter. The Federated Comment Letter. help the Commission estimate the effects of these DERA I Comment Letter notes, however, using the 1966 factors. See, e.g., BlackRock DERA Comment Letter; Program to counteract ‘‘the unintended See Federated DERA I Comment Letter; Wells Dreyfus DERA Comment Letter; Federated DERA I consequences of the Commission’s reforms may not Fargo DERA Comment Letter. Comment Letter; Fidelity DERA Comment Letter; be an appropriate use, however, of a monetary 1967 Id. Invesco DERA Comment Letter; Wells Fargo DERA policy tool,’’ and it may be an unreliable source of 1968 See Federated DERA I Comment Letter. Comment Letter. supply. 1969 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00176 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47911

suggested investors either may not available to issuers, which could a common requirement among choose to or cannot hold them.1970 negatively impact capital formation in municipalities.1980 Moreover, this commenter suggested the short-term financing market and As discussed above, although we are that using global safe assets for perhaps increase the cost of short-term not able to estimate the flows of capital regulatory and counterparty purposes financing. In this scenario, however, from institutional prime funds, we do may be more expensive than using banks, which tend to fund longer-term expect some outflow when investors in eligible government securities.1971 lending and capital investments, will institutional prime funds weigh the We recognize that government funds have additional monies to invest in the costs and benefits of each investment and certain other investors are restricted long-term financing market, which alternative against the prime fund from investing in assets other than could lower the cost of capital for long- investment and find an investment eligible government securities and that term financing and aid capital formation alternative a superior allocation. Given other investors may prefer to invest in in that market. the heterogeneity of investors’ eligible government securities. As Several commenters noted that shifts preferences and investment objectives discussed above, commenters estimated in assets from institutional prime funds and constraints, we do not expect that there are between $5.2-$6.8 trillion of all investors will allocate assets to the 1972 to banks, although reducing systemic eligible government securities. Of risk in money market funds, might same alternative. We expect, for these, government money market funds increase systemic risk in the banking example, that some investors will today hold about $959 billion or 16%, system.1976 Some commenters, for allocate assets to government funds, which leaves over $5 trillion or 84% of example, noted that a shift of assets some to demand deposits, and others to eligible government securities in the from money market funds to bank various other alternatives. If, however, hands of investors that may be able to deposits would increase the size of the significant capital flows from prime reallocate their investments in eligible banking sector and investors’ reliance money market funds to demand government securities to other on FDIC-deposit insurance, possibly deposits, the size of the banking sector assets.1973 The staff’s analysis, which increasing the concentration of risk in will increase. It is uncertain to what we credit, suggests any shift in demand banks.1977 Several commenters also extent an increase in the size of the from eligible government securities to observed that banks in this scenario banking sector is a concern. First, banks global safe assets more generally would would likely need to raise capital to are highly regulated and attuned to be small relative to the overall supply of meet capital adequacy standards.1978 managing and diversifying risks. global safe assets, which is estimated to Second, because the size of the be $74 trillion.1974 Consistent with this Several commenters discussed the effects of evolving regulations (and remaining institutional prime funds’ argument, a commenter notes that the portfolios will, in aggregate, be smaller, entire market for eligible government related regulatory uncertainty) on banks’ willingness to accept large inflows. For these portfolios could contain a higher securities is less than 10% of the market percentage of high-quality prime assets, 1975 example, they noted that pending for global safe assets. Based on these with improved diversification, and comments and the staff’s analysis, we proposals to increase banks’ leverage ratios could limit banks’ willingness to likely could be less susceptible to heavy continue to believe that some investors redemptions. Taken together, it is not and market participants may reallocate accept large cash deposits on their balance sheets, because banks will need clear what the net effect on the assets from eligible government resilience of the short-term funding securities to other safe assets, which to raise large amounts of new capital to 1979 markets will be due to a shift of assets would free up eligible government reflect the growth in bank assets. Finally, commenters explained that from institutional prime funds to the securities for government fund banking sector. purchase. state and municipal entities might not be able to find banks willing to accept Historically, money market funds If significant capital flows from have been a significant source of institutional prime funds to demand their large deposits due to the high cost of collateralizing public bank deposits, financing for issuers of commercial deposits, issuers and the short-term paper, especially financial commercial capital markets may be affected. If banks paper, and for issuers of short-term invest the additional capital in the 1976 See, e.g., Federated X DERA Comment Letter; Fidelity DERA Comment Letter; Invesco DERA municipal debt.1981 Analysis of Form short-term financing markets, we do not Comment Letter; PFM Asset Mgmt. DERA Comment anticipate a large impact on issuers or Letter; Reich & Tang DERA Comment Letter; UBS 1980 See, e.g., Ga. Treasurer Comment Letter; WV the short-term capital markets. But if DERA Comment Letter. Bd. of Treas. Invs. Comment Letter; Chicago they do not, less capital will be 1977 See, e.g., Comment Letter of James Angel Treasurer Comment Letter. The commenters (Feb. 6, 2013) (available in File No. FSOC–2012– explained that many state and local governments 0003) (‘‘Angel FSOC Comment Letter’’) (stating that have laws that require their bank deposits to be 1970 Id. ‘‘[m]any of the proposed reforms would seriously collateralized by marketable securities at a higher 1971 Id. reduce the attractiveness of money market funds,’’ amount than the current $250,000 FDIC deposit 1972 See Federated DERA I Comment Letter; which ‘‘could increase, not decrease, systemic risk insurance limit (often over 100 percent of the Fidelity DERA Comment Letter; ICI DERA Comment as assets move to too-big-to-fail banks.’’); Comment deposits after the deduction of the amount of Letter; Wells Fargo DERA Comment Letter. One Letter of Jonathan Macey (Nov. 27, 2012) (available deposit insurance). commenter (see the Invesco DERA Comment Letter) in File No. FSOC–2012–0003) (stating that a 1981 Based on Form N–MFP data, non-financial estimated eligible government assets were $2 ‘‘reduced money market fund industry may lead to company commercial paper, which includes trillion, which is substantially lower than the other the flow of large amounts of cash into [the banking corporate and non-financial business commercial commenters’ estimates. It appears the estimate does system], especially through the largest banks, and paper, is a small fraction of overall money market not include repurchase agreements collateralized by increase pressure on the FDIC.’’); See, e.g., holdings. In addition, commercial paper financing U.S. Treasuries or other government securities and Comment Letter of Federated Investors, Inc. (Jan. by non-financial businesses is a small portion (one may have other assumptions, so we focus here on 25, 2013) (available in File No. FSOC–2012–0003) percent) of their overall credit market instruments. the estimates provided in the other four letters. (‘‘A floating NAV would accelerate the flow of According to Federal Reserve Board flow of funds 1973 Based on Form N–MFP data as of February assets to ‘‘’’ banks, further data, as of December 31, 2012 non-financial 28, 2014, government money market funds had concentrating risk in that sector.’’). company commercial paper totaled $130.5 billion approximately $959 billion in assets under 1978 See, e.g., Federated X Comment Letter; Angel compared with $12,694.2 billion of total credit management. Comment Letter. market instruments outstanding for these entities. 1974 See SEC Staff Analysis http://www.sec.gov/ 1979 See, e.g., Federated X Comment Letter; State As such, we do not anticipate a significant effect on comments/s7-03-13/s70313-324.pdf [3]. Street Comment Letter; American Bankers Ass’n the market for non-financial corporate fund raising. 1975 See Wells Fargo DERA Comment Letter. Comment Letter. Continued

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00177 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47912 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

N–MFP data from November 2010 a contraction of more than 40% or sources of financing. To the extent through March 2014 indicates that $647.5 billion in the amount of issuers’ funding costs rise, whether financial company commercial paper commercial paper outstanding. short or long term, issuers will be less and asset-backed commercial paper Although the decline in funds’ likely to raise capital and invest in comprise most of money market funds’ commercial paper holdings was large, it projects, possibly affecting capital commercial paper holdings.1982 Thus, is important to place commercial paper formation negatively. However, we also we acknowledge that a shift by investors borrowing by financial institutions into note that to the extent that fees and from non-government money market perspective by considering its size gates slow capital from leaving money funds to other investment alternatives compared with other funding sources. market funds during times of stress, the could cause a decline in demand for As with non-financial businesses, fees and gates amendments adopted commercial paper and municipal debt, financial company commercial paper is today should benefit the short-term reducing these firms and municipalities’ a small fraction (3.2%) of all credit funding market. This is because money access to capital from money market market instruments.1985 We have also from maturing portfolio assets may need funds and potentially creating a decline witnessed the ability of issuers, to be reinvested in the short-term in short-term financing for them.1983 If, especially financial institutions, to funding market, which may help however, money market fund investors adjust to changes in markets. Financial prevent that market from completely shift capital to investment alternatives institutions, for example, dramatically locking up during times of stress as we that demand the same assets as prime reduced their use of commercial paper have experienced during the financial money market funds, the net effect on from $1.1 trillion at the end of 2008 to crisis. To that extent, fees and gates may the short-term financing markets should $449.2 billion at the end of 2012.1986 As allow issuers to continue accessing the be small. such, we continue to believe that short-term served by As discussed in the DERA Study, the financial institutions, as well as other money market funds while they identify 2008–2012 increase in bank deposits firms, will be able to identify alternate alternate sources of short-term capital. coupled with the contraction of money short-term financing sources if the Municipalities also could be affected market funds provides data to examine amount of capital available to purchase if the new amendments cause the size how capital formation can be affected by financial commercial paper declines in or number of municipal money market a reallocation of capital among different response to our money market fund rule funds to contract. Commenters funding sources. According to Federal changes. expressed concern about a loss of Reserve Board flow-of-funds data, We recognize, however, that as part of funding or other adverse impacts on 1988 money market funds’ investments in this shift there is the potential that state and local governments. As commercial paper declined by 45%, or commercial paper issuers may have to discussed in detail in section III.B, $277.7 billion, from the end of 2008 to offer higher yields to attract alternate however, we anticipate the impact will the end of 2012. Contemporaneously, investors, which would increase issuers’ likely be relatively small. As of the last funding corporations reduced their short-term cost of capital.1987 Any quarter of 2013, municipal funds held holdings of commercial paper by 99% approximately 7% of the municipal debt 1984 increase in yield would likely increase 1989 or $357.7 billion. The end result was demand for these investments which in outstanding. Of that 7%, retail turn could to some extent mitigate the investors owned approximately 71% of Federal Reserve Board flow of funds data is potential adverse capital formation the assets under management. Even available at http://www.federalreserve.gov/releases/ though municipal funds will be subject z1/Current/z1.pdf. effects on the commercial paper market. to our fees and gates reforms, we do not 1982 In addition, according to the DERA Study, Issuers, facing higher short-term anticipate that retail investors in supra note 24, ‘‘as of March 31, 2012, money market financing costs, might consider the funds held $1.4 trillion in Treasury debt, Treasury significant numbers will divest their trade-offs of shifting into longer-term repo, Government agency debt, and Government assets in municipal funds because these agency repo as its largest sector exposure, followed by $659 billion in financial company commercial subsidiaries, custodial accounts for reinvested funds should continue to offer price 1990 paper and CDs, its next largest sector exposure.’’ collateral of securities lending operations, Federal stability, yield, and liquidity in all 1983 See, e.g., Comment Letter of Associated Reserve lending facilities, and funds associated Oregon Industries (Jan. 18, 2013) (available in File with the Public-Private Investment Program 1988 A number of commenters argued that No. FSOC–2012–0003) (stating that if the proposed (PPIP).’’ applying our floating NAV reform to municipal reforms ‘‘drive investors out of money market 1985 According to the Federal Reserve Flow of funds would reduce demand for municipal funds, the flow of short-term capital to businesses Funds data as of December 31, 2012, commercial securities and raise the costs of financing. See, e.g., will be significantly disrupted.’’); U.S. Chamber paper outstanding was $449.2 billion compared Fidelity Comment Letter (noting that tax-exempt FSOC Comment Letter (stating that ‘‘any changes with $13,852.2 billion of total credit market funds purchase approximately 65% of short-term [that make money market funds] a less attractive instruments outstanding for financial institutions. municipal securities and that fewer institutional investment will impact the overall costs for issuers 1986 The statistics in this paragraph are based on investors in tax-exempt funds will lead to less in the commercial paper market resulting from a the Federal Reserve Board’s Flow of Funds data. purchasing of short-term municipal securities by reduced demand in commercial paper.’’); Comment See also 2012 FSOC Annual Report, available at tax-exempt funds and a corresponding higher yield Letter of N.J. Municipal League (Jan. 23, 2013) paid by municipal issuers to attract new investors); (available in File No. FSOC–2012–0003) (stating http://www.treasury.gov/initiatives/fsoc/ BlackRock II Comment Letter; Federated VII that ‘‘money market funds hold more than half of Documents/2012%20Annual%20Report.pdf, at 55– Comment Letter; ICI Comment Letter; U.S. Mayors the short-term debt that state and 56, 66 (showing substantial declines in domestic Comment Letter. municipal governments for public projects,’’ which banking firm’s reliance on short-term wholesale 1989 could force local governments to ‘‘limit projects and funding compared with deposit funding). The Basel Based on data from Form N–MFP and the staffing, spend more on financing . . . or increase III liquidity framework also proposes requirements Federal Reserve Board ‘‘Flow of Funds Accounts of taxes’’ if such financing was no longer available.); aimed at limiting banks’ reliance on short-term the United States’’ (Z.1), which details the flows Comment Letter of Government Finance Officers . See 2011 FSOC Annual Report, and levels of municipal securities and loans, to Association, et al. (Feb. 13, 2013) (available in File available at http://www.treasury.gov/initiatives/ estimate outstanding municipal debt, (March 6th, No. FSOC–2012–0003) (stating that with respect to fsoc/Documents/FSOCAR2011.pdf, at 90 2014), available at http://www.federalreserve.gov/ FSOC’s floating NAV proposal, ‘‘changing the (describing Basel III’s proposed liquidity coverage releases/z1/current/z1.pdf. This estimate is fundamental feature of money market funds . . . ratio and the net stable funding ratio); Basel consistent with a previous estimate presented in would dampen investor demand for municipal Committee on Banking Supervision: Basel III: The U.S. Securities and Exchange Commission. 2012 securities and therefore could deprive state and Liquidity Coverage Ratio and liquidity risk Report on the Municipal Securities Market. The local governments and other borrowers of much- monitoring tools (Jan. 2013), available at http:// estimate in the 2012 report was based on data from needed capital.’’). www.bis.org/publ/bcbs238.pdf (describing revisions Mergent’s Municipal Bond Securities Database. 1984 The Federal Reserve flow of funds data to the liquidity coverage ratio). 1990 Retail municipal funds are exempt from the defines funding corporations as ‘‘funding 1987 See, e.g., Federated X Comment Letter. floating NAV requirement adopted today.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00178 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47913

but exceptional circumstances. We 4% between the end of 2008 and the to moderate the amount of assets that therefore anticipate that many retail end of 2012. Municipalities were able to may be potentially redistributed by investors will continue to find fill the gap by attracting other investor limiting our fees and gates requirement municipal funds to be an attractive cash types. Other types of mutual funds, for to non-government funds and our management tool compared to other example, increased their municipal floating NAV requirement to alternatives. securities holdings by 61% or $238.6 institutional prime funds. If Of that 7% of municipal debt billion. Depository institutions have shareholders either remain in non- outstanding that municipal funds held, also increased their funding of government money market funds or institutional investors, who might divest municipal issuers during this time move to alternatives that invest in their municipal fund assets if they do period by $141.2 billion as investors similar underlying assets, the not want to invest in a floating NAV have shifted their assets away from competitive effects are likely to be fund, held approximately 30% of money market funds into bank deposit small. If, however, investors reallocate assets.1991 Because we estimate that accounts. Life insurance companies (whether directly or through institutional municipal funds held almost tripled their municipal securities intermediaries) investments into approximately 2% of the total holdings from $47.1 billion at the end substantively different assets, the effects municipal debt outstanding, we believe of 2008 to $121 billion at the end of may be larger. In that case, issuers may at most approximately 2% is at risk of 2012. Because historically other types of have to access different investor bases leaving the municipal debt market.1992 investors have increased their and perhaps offer higher yields to attract Of this 2% of the municipal debt market investment in municipal debt when capital, whether from the smaller money that institutions hold, we anticipate money market funds have decreased market fund industry or from other many investors that currently invest in their investment, the Commission investors. Either way, we recognize that institutional municipal funds likely expects that other investors may again issuers that are unable to offer the value the tax benefits of the funds and increase their investment in municipal required higher yield may have should choose to continue investing in debt if money market funds reduce their difficulties raising capital, at least in the municipal funds to take advantage of funding of the municipal debt market in short-term financing markets. However, the tax benefits. In addition, we the future, though we note that yields as discussed in detail earlier in this anticipate that some investors who on municipal securities could rise. For section, we can neither precisely qualify as natural persons and currently these reasons, we do not anticipate the estimate the amount of capital that will are invested in institutional prime funds amendments adopted today will be reallocated nor its destination. may reallocate their assets to retail substantially affect capital formation in The Commission anticipates other municipal funds, thereby increasing the municipal debt market. competitive consequences and effects investment in retail municipal funds. The amendments we are adopting on capital formation as well. For Even if municipal funds were to today, including the floating NAV example, we expect managers of non- reduce their purchasing of municipal requirement and enhanced disclosure government money market funds will securities, we expect that other requirements should improve have incentives to closely manage investors may fill the gap. Between the informational efficiency in the capital weekly liquid assets and principal risk end of 2008 and the end of 2012, for markets by increasing investors’ ability so as to avoid crossing the threshold for example, money market funds to knowledgably allocate capital. We triggering fees and gates or having a decreased their holdings of municipal recognize, however, that a fund’s volatile NAV.1995 To manage these risks, debt by 34% or $172.8 billion.1993 imposition of a liquidity fee increases fund managers will have incentives to Despite this reduction in holdings by the cost of reallocating their assets while hold short-maturity, low-risk securities, money market funds, municipal issuers it is in place, whereas a gate prevents and as a result the overall short-term increased aggregate borrowings by over investors from doing so. The additional financing markets may tilt toward these costs of liquidity and inability of issuances. If so, the prices of these 1991 See Dreyfus II Comment Letter indicated that investors to redeem shares may impede securities are likely to rise and yields based on data from iMoneyNet institutional tax- the efficient allocation of capital and may fall. We anticipate issuers that are exempt funds represent ‘‘approximately $80 billion hence capital formation during periods able and willing to issue securities that in assets,’’ which ‘‘constitute approximately 30% of of market stress because investors will meet these criteria may gain a the current Municipal MMF industry.’’ Commission not be able to reallocate capital as freely. staff estimates based on data from Form N–MFP and competitive advantage over other We have tried to mitigate the magnitude iMoneyNet as of February 28, 2014 confirm these issuers in the market. Alternatively, the statistics. To estimate the assets managed by the of this effect by reducing the time that new amendments may create a retail and institutional segments of municipal gates are in place to at most 10 business competitive advantage for issuers of funds, we used self-reported fund data from days in any 90-day period (down from iMoneyNet as of February 28, 2014 to estimate higher yielding and riskier assets that the proposed 30 calendar days) and by percentages. We then multiplied the percentages are rule 2a–7-eligible securities if non- times the total assets managed by municipal funds, adopting a 1% default liquidity fee government funds pursue more as provided by Form N–MFP as of February 28, (down from the proposed 2% fee). We aggressive investment strategies within 2014. We note the retail designation is self-reported also expect that funds will impose fees and omnibus accounts in these funds may include and gates infrequently.1994 the confines of rule 2a–7 or if relatively both individual and institutional beneficial owners. less risk-averse investors avoid For these reasons, our estimates may underestimate Although we recognize that the the number of funds with retail investors. In the reallocation of assets by money market government funds and instead invest in Proposing Release, we estimated that retail fund investors may affect efficiency, non-government funds. If so, issuers of investors own close to all municipal fund assets. higher-yielding 2a–7-eligible assets may We now recognize retail investors own competition, and capital formation within the short-term financing markets, gain a competitive advantage. approximately 71% of municipal fund assets. The DERA study pointed out that 1992 This estimate is calculated as follows: the final amendments reflect our efforts Municipal funds hold 7.5% of municipal debt although the 2010 reforms made money × outstanding 29% of municipal assets held by 1994 As discussed in section III.E, the DERA study institutional investors = 2.2% of total municipal found that 2.7% of the funds had their monthly 1995 See, e.g., SIFMA Comment Letter; BlackRock debt held by institutions. weekly liquid assets percentages fall below 30% II Comment Letter; Wells Fargo Comment Letter; 1993 The statistics in this paragraph are based on and 0.02% of the funds had their monthly weekly Peirce & Greene Comment Letter; Dreyfus Comment the Federal Reserve Board’s Flow of Funds data. liquid assets percentages fall below 10%. Letter; Goldman Sachs Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00179 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47914 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

market funds more resilient to both funds.1997 We are adopting this opposition to fees and gates.2001 We portfolio losses and investor approach based on our evaluation, discuss specific comments on fees and redemptions, no fund would have been discussed both in other sections of this gates in detail in section III.A.2002 able to withstand the losses that the Release and below, of our policy goals, As discussed here and in the Reserve Primary Fund incurred in 2008 experience, observations, and analysis, Proposing Release, liquidity fees are without breaking the buck, and nothing as well as careful consideration of designed to preserve the current benefits in the 2010 reforms would have comments received on the following of principal stability, liquidity, and a prevented the Reserve Primary Fund’s reasonable alternatives. market yield, but reduce the likelihood holding of Lehman Brothers debt. We that ‘‘when markets are dislocated, costs therefore believe that the costs to a. Standalone Liquidity Fees and that ought to be attributed to a participants in the short-term funding Redemption Gates redeeming shareholder are externalized on remaining shareholders and on the market are acceptable relative to the One option outlined in the Proposing benefits stemming from advancing our wider market.’’ 2003 Even if a liquidity Release was for non-government fund fee is imposed, fund investors will goals of reducing money market funds’ boards to be given discretion to impose susceptibility to heavy redemptions, continue to be able to access liquidity, liquidity fees and permit imposition of although at a cost. The ability of fund improving their ability to manage and redemption gates under certain mitigate potential contagion from boards to impose liquidity fees when conditions, but without also requiring a liquidity costs are high would have redemptions, and increasing the floating NAV for institutional prime transparency of their risks. many benefits, including reducing the money market funds.1998 We believe a incentives for shareholders to redeem L. Certain Alternatives Considered standalone fee option would reduce shares when the fees are in effect. In this section, we discuss certain money market funds’ susceptibility to Liquidity fees will require redeeming reasonable alternatives that we heavy redemptions when liquidity costs shareholders to bear the liquidity costs considered as potential other methods are high and fund liquidity is stressed associated with their redemptions, for achieving our primary reform goals, and would allocate liquidity costs to rather than transferring those costs to as well as a number of other alternatives redeeming shareholders, making them remaining shareholders. Likewise, fees suggested by commenters, and discuss pay for the liquidity that they receive, would help reduce investors’ incentives their benefits as well as their rather than transferring such liquidity to redeem shares ahead of other limitations.1996 The goals of today’s costs to remaining shareholders. Gates, investors, especially if fund managers reforms include reducing money market in addition to liquidity fees, would help deplete their funds’ most liquid assets funds’ susceptibility to heavy improve the ability of fund managers first to meet redemptions, leaving later redemptions, improving their ability to and boards to manage and mitigate redemption requests to be met by selling manage and mitigate potential contagion potential contagion from high levels of less liquid assets. Liquidity fees would from such redemptions, and increasing shareholder redemptions.1999 A protect fund liquidity by requiring the transparency of their risks, while standalone fees and gates requirement redeeming shareholders to repay funds preserving, as much as possible, the would eliminate some of the benefits of for the liquidity costs incurred. For benefits of money market funds. Having money market funds as they exist today these reasons, we believe liquidity fees considered carefully the trade-offs of the for investors, but retain others. Investors would reduce money market funds’ alternatives discussed below, we would face the possibility of costly susceptibility to heavy redemptions believe, based on our experience, redemptions or the elimination of when liquidity fees are high and would observations, and analysis, as well as redemptions temporarily when fund improve fund managers and boards’ careful consideration of comments liquidity is stressed. On the other hand, ability to manage and mitigate potential received on the adopted reforms and fees and gates, as discussed in section contagion from such redemptions. alternatives, that the amendments we III.A and below, would retain the We also recognize that the possibility are adopting today best effectuate our advantages of a stable-price product, of fees and gates being imposed when a policy goals. avoiding certain issues associated with fund is under stress may make the risk floating NAV funds. A large number of of investing in money market funds 1. Liquidity Fees, Gates, and Floating commenters supported, to varying more salient and transparent to some NAV Alternatives degrees and with varying caveats, our investors, which could sensitize them to In the Proposing Release, we fees and gates proposal.2000 Many other the risks of investing in the funds. The presented a number of reform options. commenters, however, expressed their disclosure amendments we are adopting Among them were standalone floating today will require funds to provide NAV, standalone fees and gates, and a 1997 We did not propose to apply either the fees disclosure to investors regarding the combination of fees, gates, and a floating and gate or floating NAV reforms to government possibility of fees and gates being NAV requirement. Today we are money market funds, and accordingly the final imposed if a fund’s liquidity is amendments do not apply to government funds, for significantly stressed. Funds’ adopting an approach that includes fees the policy reasons discussed in section III.C.1. The and gates for all non-government money analysis of reasonable alternatives below therefore disclosures that shareholders may face market funds, as well as an additional does not focus on the potential effects of these liquidity fees and redemption gates may targeted reform of a floating NAV for the alternatives as applied to government funds. help inform and could perhaps sensitize 1998 funds with investors most susceptible to See Proposing Release, supra note 25, at some of those investors to some of the section III.B. We note that we have adopted this risks of investing in money market heavy redemptions, institutional prime alternative for a certain subset of funds-namely retail funds that limit their investors to natural funds. 1996 This section discusses reasonable alternatives persons. We discuss the reasons why we adopted to the primary fees and gates and floating NAV this alternative for retail funds, and the tradeoffs 2001 See, e.g., Capital Advisors Comment Letter; reforms discussed above. We also discuss involved, in section III.C.2. Boston Federal Reserve Comment Letter; Americans reasonable alternatives to other rule amendments, 1999 See section III.A for a detailed discussion of for Fin. Reform Comment Letter; Edward Jones as well as more specific or distinct issues, commenters’ responses. Comment Letter. throughout other parts of the Release. For example, 2000 See, e.g., Form Letter Type A, Fidelity 2002 We discuss the trade-offs of standalone fees see supra section III.B.5 for a discussion of Comment Letter; Federated V Comment Letter; versus standalone gates in section III.L.1.a below. alternatives related to decimal place rounding. Northern Trust Comment Letter. 2003 See Proposing Release, supra note 25, n.343.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00180 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47915

Redemption gates would stop heavy address all of the factors that might lead a stable-price fund for institutional redemptions in times of market or fund to heavy redemptions in certain money investors, while retaining other benefits stress.2004 Like liquidity fees, gates market funds. As discussed previously, that investors currently experience with would preserve the current benefits of we have found that certain money money market funds. money market funds under most market market funds (i.e., institutional prime First and foremost, we believe a conditions. Funds, however, would be funds) pose particularly significant risks standalone floating NAV would help able to use gates to respond to runs by that fees and gate alone do not fully reduce institutional prime money halting redemptions. Gates would address.2006 Specifically, fees and gates market funds’ susceptibility to heavy provide a ‘‘cooling off’’ period, which are intended to enhance money market redemptions by reducing the might temper the effects of short-term funds’ ability to manage and mitigate incremental incentive for shareholders investor panic, possibly reducing potential contagion from high levels of in these funds to redeem shares ahead investors’ incentives to redeem shares. redemptions and make investors pay of other investors when a fund’s shadow In addition, gates would allow funds to their share of the costs of the liquidity NAV falls below $1.00.2010 As discussed generate additional internal liquidity as that they receive. They do not, however, in Section III.B, a floating NAV assets mature and would reduce or eliminate the incremental incentive for requirement mandating that eliminate the likelihood that funds sell certain investors to redeem shares ahead institutional prime money market funds otherwise desirable assets and engage in of other shareholders when their money transact at share prices that reflect ‘‘fire sales.’’ They would also provide market fund’s shadow price falls below current market-based factors (not time for funds to identify solutions in $1.00—a risk to which institutional amortized cost or penny rounding, as crises and communicate the nature of prime funds are particularly susceptible, currently is permitted) would lessen any stresses to shareholders. and the potential resultant dilution of investors’ incentives to redeem early to Standalone liquidity fees and gates remaining shareholders interests. Thus, take advantage of transacting at a stable would preserve many of the current we believe a liquidity fee combined value. As a result, the floating NAV benefits of money market funds under with a redemption gate—without a requirement by itself without an normal market conditions. As discussed floating NAV—will not adequately accompanying liquidity fee and/or in the Proposing Release, the ability of address this risk of heavy redemptions redemption gate would help mutualize funds to impose liquidity fees and for institutional prime funds. However, potential losses and costs among all redemption gates, had it been available balanced with the competing goal of investors, including redeeming 2011 during the financial crisis, might have retaining the benefits of money market shareholders. helped some funds manage the heavy funds for investors to the extent A standalone floating NAV, which possible, as discussed above, we believe many observers perceive to be more redemptions that occurred and may 2012 have helped limit the contagion effects that a standalone fees and gates equitable than a stable NAV, may also minimize investor dilution. A of such redemptions, though it is approach does meet our policy goals 2007 standalone floating NAV should result impossible to know what exactly would when applied to retail funds. in redeeming investors receiving only have happened if money market funds b. Standalone Floating NAV their fair share of the fund when there had operated with fees and gates at that Another option outlined in the are embedded losses in the portfolio, time. Unlike a floating NAV, which Proposing Release was for institutional thereby avoiding dilution of remaining affects day-to-day fund pricing, fund prime funds to transact at a floating shareholders. A standalone floating boards would impose liquidity fees and NAV with no liquidity fees or gates.2008 NAV requirement would also preserve gates only when liquidity costs are high Most commenters opposed requiring a certain current benefits of money market and fund liquidity is stressed. In standalone floating NAV.2009 As we funds, because investors would addition, a standalone liquidity fee and discuss in detail in section III.B, we continue to be able to redeem shares redemption gate structure would believe a floating NAV requirement during times of market stress without preserve many of the benefits of stable reduces certain money market funds’ paying a liquidity fee or waiting for a price money market funds, avoiding susceptibility to heavy redemptions and redemption gate to be lifted. A many of the costs associated with improves the allocation of gains, losses, 2005 standalone floating NAV would also floating NAV funds. and costs among shareholders. It does avoid certain costs associated with The Commission recognizes, however, not, however, fully address the ability of liquidity fees and redemption gates. that liquidity fees and redemption gates fund managers and boards to manage We anticipate a standalone floating address some of the risks associated and mitigate potential contagion from NAV would contribute to the allocation with money market funds, but cannot high levels of shareholder redemptions. of money market fund risks in the same A standalone floating NAV requirement ways that a floating NAV does in a 2004 See supra section III.A. We note, however, combination approach. As discussed in gates could prompt pre-emptive runs if investors would eliminate some of the benefits of anticipate them. We believe, however, that several the Proposing Release and in section aspects of today’s amendments mitigate this risk, 2006 See supra section III.B. and the effects of such pre-emptive runs should 2007 The tradeoffs of just a fee or gate (without a 2010 Although most commenters opposed they occur. For example, board discretion in floating NAV) are discussed in section III.A. We requiring a floating NAV, a number of commenters imposing gates mitigates this risk. We have also note that one commenter suggested a ‘‘penny did agree that a floating NAV would address this tried to mitigate the magnitude of this effect by rounding’’ alternative that, if combined with fees incremental incentive to redeem. See, e.g., Thrivent reducing the time that gates are in place to at most and gates, is very similar to the fees and gates Comment Letter; TIAA–CREF Comment Letter; Fin. 10 business days in any 90-day period (down from alternative we proposed (which included a Svcs. Roundtable Comment Letter; SIFMA the proposed 30 days) and adopted a 1% default requirement for penny-rounded pricing). We Comment Letter; Systemic Risk Council Comment liquidity fee (down from a 2% fee). discuss this alternative at notes 512–515 and Letter. But see, e.g., BlackRock II Comment Letter; 2005 As discussed previously, the Commission accompanying text. We are not adopting this Dreyfus Comment Letter; Federated IV Comment acknowledges, for example, some investors may suggested ‘‘penny rounding’’ alternative combined Letter; Ropes & Gray Comment Letter; ICI Comment reallocate assets from floating NAV prime funds to with fees and gates for the reasons described in this Letter; Chamber II Comment Letter. either government money market fund or other section III.L.1.a. 2011 See, e.g., Deutsche Comment Letter; TIAA– stable-price alternatives, which may impose costs 2008 See Proposing Release, supra note 25, at CREF Comment Letter; Systemic Risk Council on investors, funds, and the short-term capital section III.A. Comment Letter. markets. We discuss these effects in more detail in 2009 See supra section III.B for a detailed 2012 See supra section III.B; see also TIAA–CREF section III.K. discussion of comments we received on this issue. Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00181 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47916 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

III.B, a floating NAV requirement is reforms discussed above (as well as liquidity or a stable NAV.2019 These designed to increase the allocation of other reforms discussed in sections III.E, commenters also suggested that letting the risks present in money market funds III.I, and III.J) by addressing the each fund choose would allow them to by causing shareholders to experience incremental incentive for institutional select the approach that they can gains and losses when a fund’s value investors to redeem from prime funds. implement at lowest cost and with least fluctuates. Some money market fund We believe that an approach that disruption. The commenters who investors, accustomed to a stable NAV, includes both fees and gates for all non- supported allowing fund choice may not appreciate the risks associated government money market funds as well between the principal reforms we are with money market funds whose prices as a floating NAV for a subset of those adopting today also emphasized they may remain stable, but whose funds (i.e., institutional prime money did not support imposing both reforms underlying values may fluctuate in market funds) provides fund managers in combination, only alternatively.2020 times of market stress. As we have and boards with targeted and additional One commenter that supported fund discussed previously, transacting at tools to manage heavy redemptions and choice nonetheless suggested prices based on current market values help limit contagion. intermediaries may be unwilling to will help ensure that institutional accommodate funds that have two investors who invest in floating NAV c. Fund Choice of Standalone Floating options as they would have to bear the funds do so only if they are willing to NAV or Standalone Liquidity Fees and costs of dealing with both sets of tolerate small fluctuations in share price Redemption Gates reforms for different funds.2021 The in return for potentially higher We also considered providing commenter that opposed allowing a 2013 yield. And for those investors who institutional prime money market funds choice of structural reforms stated that are unwilling to tolerate the risk that the a choice of either transacting with a having both primary structural reforms price fluctuations reflect, we anticipate floating NAV or being able to impose available could be confusing for they may reallocate their investments to liquidity fees and gates in times of investors and may promote regulatory 2022 other, more appropriate alternatives, stress—in other words, each arbitrage. They argued that the which may help reduce any redemption institutional prime money market fund Commission should adopt a pressure that these investors could have would choose to apply either the standardized structure that is simple for 2023 caused in times of stress had they floating NAV alternative or the liquidity investors to understand. 2014 remained in the funds. fees and gates alternative.2016 In the We have carefully considered these A standalone floating NAV would not Proposing Release, we discussed how comments. However, for the same necessarily eliminate, however, providing such a choice might allow reasons that we believe a standalone shareholders’ incentives to redeem each money market fund to select the approach with either fees and gates or shares from institutional prime money reform alternative that is most efficient, floating NAV would not fully address market funds ahead of other investors cost-effective, and preferable to its the risks inherent in money market when liquidity costs are high. In times shareholders. We suggested such a funds, we believe, based on our of severe market stress when the choice might enhance the efficiency of consideration of relevant risks and secondary markets for funds’ assets our reforms and minimize costs and policy objectives, allowing institutional become illiquid and liquidity costs are competitive impacts. prime money market funds to choose high, investors may still have an between them also would not address incentive to rapidly redeem shares A number of commenters offered the risks posed by money market funds. before their fund’s liquidity dries up. A support for this ‘‘choice’’ reform As discussed above, the floating NAV 2017 floating NAV may also not alter approach, and one commenter alternative by itself would not 2018 institutional prime money market fund specifically opposed it. The necessarily eliminate shareholders’ shareholders’ incentives to redeem commenters who supported allowing incentives to redeem shares from money shares in times of market stress when funds to choose which reform market funds ahead of other investors investors want to shift from money alternative to implement argued that when liquidity costs are high. In times market funds into securities with greater this approach would allow the market to of severe market stress when the quality, liquidity, and transparency. As decide which reform was most suitable secondary markets for funds’ assets such, when the situation develops, a rather than imposing a top-down become illiquid and liquidity costs are standalone floating NAV would not solution. They noted that each high, investors may still have an necessarily prevent heavy shareholder alternative offers a varying set of incentive to redeem shares before their redemptions in institutional prime benefits and drawbacks and that fund’s liquidity dries up. A floating money market funds and the related allowing funds to choose which reform NAV also may not alter money market effects on the short-term capital markets to implement would allow them to offer fund shareholders’ incentives to redeem or help fund managers and boards different kinds of funds to clients who shares in times of market stress when manage redemptions.2015 Thus, a may have divergent priorities for either investors want to shift from money standalone floating NAV would likely market funds into securities with greater be insufficient to satisfy these important 2016 We note that we did not propose to require quality, liquidity, and transparency. As policy goals of the money market fund retail or government funds to adopt a floating NAV, and accordingly this discussion focuses on the such, a floating NAV alternative by itself reform. tradeoffs between allowing such a choice for would not necessarily prevent heavy We have therefore determined to institutional prime funds. We discuss the reasons shareholder redemptions and the related adopt a floating NAV as a targeted why we are not mandating either a floating NAV effects on the short-term capital markets reform that is intended to supplement or fees and gates for government money market funds, but allowing them to opt in to fees and gates the broader liquidity fees and gates if they choose in section III.C.1 and discuss why we 2019 See, e.g., ICI Comment Letter; MFDF believe that a floating NAV is not necessary for Comment Letter; SPARK Comment Letter. 2013 See, e.g. Vanguard Comment Letter. retail funds in section III.C.2. 2020 See, e.g., ICI Comment Letter; Dreyfus 2014 See supra section III.B. 2017 Dreyfus Comment Letter; Legg Mason Comment Letter; Goldman Sachs Comment Letter. 2015 We have discussed the particular risks posed Comment Letter; ICI Comment Letter; MFDF 2021 See ICI Comment Letter. by institutional prime funds throughout this Comment Letter. 2022 See Vanguard Comment Letter. Release and especially in section III.B. 2018 Vanguard Comment Letter. 2023 Id.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00182 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47917

or help fund managers and boards risks that our reforms are designed to in advance are difficult and likely futile manage the rapid heavy redemptions to address. tasks.’’ 2032 which institutional prime funds can be We continue to believe that funds and susceptible. These funds would lack the d. Standalone Fees or Standalone Gates their boards should be permitted to additional tools of fees and gates to help The amendments we are adopting choose between fees and gates but be capable of utilizing both when manage heavy redemptions and limit today will allow funds to impose determining the best way to address contagion. Thus, providing institutional liquidity fees and redemption gates.2025 heavy redemptions. As discussed in prime funds an alternative and having Some commenters on the proposal, section III.1 above, fees and gates can some funds adopt a floating NAV would however, expressed a preference for prevent us from satisfying certain accomplish similar policy goals, but one either just fees or just gates. For may be better suited to one set of important policy goals of the money example, some commenters noted a market fund reform for those funds. circumstances or funds than the preference for fees over gates.2026 One Some funds might instead choose to other.2033 The flexibility in today’s commenter argued that liquidity fees adopt the liquidity fees and gates amendments should address many of option. However, as discussed above, could slow runs, as the price for the commenters’ concerns in favoring these funds, while having certain tools liquidity would be factored into one approach over the other,2034 to manage heavy redemptions, would investors’ redemption decisions, because it gives boards the option to have a diminished ability to address an whereas a gate could exacerbate the risk impose fees, gates, neither or both. The of pre-emptive runs if investors expect flexibility provided in today’s important factor that can lead to 2027 redemptions in money market funds. gates to be imposed. Another amendments will allow funds to tailor Specifically, fees and gates would not commenter stated that although a the redemption restrictions they employ eliminate the incentive for institutional liquidity fee might be acceptable to to market conditions, as well as the investors to redeem shares ahead of shareholders if it reflected the cost of preferences and behavior of their other shareholders to avoid market- liquidity, gates that prevented investors particular shareholder base and to adapt based losses embedded in their fund’s from accessing their cash would be the restrictions over time as they and the portfolio or mitigate shareholder least attractive alternative for industry gain experience employing dilution. Liquidity fees and gates would institutional investors that use money such restrictions. Of course, not allocate day-to-day gains, losses, market funds for cash management consideration of any such factors would 2028 and costs to investors on a proportionate purposes. have to be made in the context of the basis, a risk that is particularly relevant Conversely, other commenters fund’s best interests.2035 The flexibility to institutional prime funds. expressed a preference for gates over provided by today’s amendments also In addition, we note that today fees.2029 One commenter noted liquidity allows funds to alter their approach as neither funds nor their investors may fees are unlikely to prevent institutional events unfold. For example, if a board necessarily internalize the full likely investors from redeeming shares in a determines initially that a liquidity fee effects of their own decisions on other crisis, but that gates would be more is in the best interests of the fund, but funds and investors and the short-term likely to achieve the Commission’s the fee turns out to be ineffective in financing markets, and thus capital goals.2030 Similarly, another commenter reducing heavy redemptions, the board formation.2024 The approach that we are described gates as the ‘‘most effective adopting today, which subjects all non- 2032 See Peirce & Greene Comment Letter. option in addressing run risk,’’ but was 2033 As discussed in the Proposing Release, government funds to the fees and gates skeptical as to whether fees ‘‘would shareholders valuing principal preservation may reform and only institutional prime deter shareholders from redeeming their prefer a redemption gate over a liquidity fee, funds to the additional floating NAV shares in a time of extreme market particularly if the fund expects to rebuild liquidity requirement, is designed to address 2031 through maturing assets. In contrast, shareholders stress.’’ Finally, a commenter preferring liquidity over principal preservation may these externalities by reducing money suggested implementing only fully prefer a liquidity fee because it allows access to that market funds’ susceptibility to heavy discretionary gates but no fees, noting in investor’s money market fund shareholdings—it redemptions and improving their ability part that, ‘‘establishing appropriate just imposes a greater cost for that liquidity if the to manage and mitigate potential fund is under stress. See, e.g., Comment Letter of triggers and setting properly sized fees BlackRock, Inc. on the IOSCO Consultation Report contagion from such redemptions. on Money Market Fund Systemic Risk Analysis and Because allowing institutional prime 2025 As discussed in section III.C.1, government Reform Options (May 28, 2012), available at funds to choose between either a funds are not required to impose fees or gates, but http://www.iosco.org/library/pubdocs/pdf/ floating NAV or fees and gates would may opt to do so if they choose. We believe that IOSCOPD392.pdf (stating their preference for liquidity fees over gates ‘‘because clients with an effectively negate the combined effects if a government fund were to choose to opt into a fee and gate regime, for the same reasons discussed extreme need for liquidity can choose to pay for that liquidity in a crisis’’); Comment Letter of BNP of the reforms that we have found to be below, such a fund should have the flexibility to Paribas on the IOSCO Consultation Report on necessary to address their risks, we use both tools, rather than be limited to just one or Money Market Fund Systemic Risk Analysis and the other. We further note that gating is always believe that this is not the most Reform Options (May 25, 2012), available at entirely discretionary (once a fund goes below 30% appropriate alternative, for the reasons http://www.iosco.org/library/pubdocs/pdf/ weekly liquid assets), and that if a board finds that IOSCOPD392.pdf (stating that it ‘‘would not make discussed above. For these reasons, we a fee is not in the best interests of the fund need sense to restrict the redeemer willing to pay the now believe neither liquidity fees and not impose it, and thus a government fund that price of liquidity’’); see also Capital Advisors opted into fees and gates could apply effectively redemption gates nor floating NAV, Comment Letter. only a fee or only a gate if the boards finds that alone, addresses all of the factors that 2034 using only one such tools is in the best interests of See supra section III.A.1.c.i addressing pre- might lead to heavy redemptions in the fund. emptive run concerns and section III.A.2 addressing concerns with default thresholds and fees. We also institutional prime money market funds, 2026 See, e.g., Deutsche Comment Letter; Capital note that, to the extent an investor is seeking to and thereby to allow them such a choice Advisors Comment Letter. invest in a money market fund for cash 2027 would not effectively mitigate all of the See Deutsche Comment Letter. management purposes and views a fund with the 2028 See Capital Advisors Comment Letter. ability to impose a fee or gate as incompatible with 2024 See generally MFDF Comment Letter 2029 See, e.g., Fein Comment Letter; Peirce & cash management, it may alternatively invest in a (discussing, in the context of fees and gates, that Greene Comment Letter. government money market fund that does not boards need not put significant emphasis on the 2030 See Fein Comment Letter. impose fees and gates. broader systemic effects of their decisions). 2031 See U.S. Bancorp Comment Letter. 2035 See rule 2a–7(c)(i) and (ii).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00183 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47918 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

may then choose to impose a of unredeemed shares carried to the redemption fee.2046 We understand that redemption gate. Accordingly, we next day until all redemption requests investors redeemed most of what was believe that providing funds and their have been met.2042 In contrast, other allowed under the partial gate without boards with the flexibility to choose on commenters were opposed to the idea of triggering the redemption fee, which an ongoing basis between fees and gates partial redemption gates, citing meant the partial gate not only did not best meets our policy goals of reducing significant operational challenges and stop the run, but may have triggered money market funds’ susceptibility to costs,2043 as well as the potential for redemptions up to that limit.2047 heavy redemptions and helping funds arbitrary and inconsistent application Second, partial gates based on the size manage and mitigate potential contagion among funds and inequitable treatment of redemptions may also be easily from such redemptions. among shareholders.2044 manipulated unless appropriate, but costly and complex, procedures are put e. Partial Gates We have determined not to permit in place to prevent such gaming. For We are adopting amendments to rule partial redemption gates under amended example, a partial gate that allowed 2a–7 that, like the proposal, will allow rule 2a–7. An important policy goal of small redemptions could result in a fund board to impose a gate on all this reform is to improve funds’ ability investors redeeming small amounts over redemptions, but that will not allow for to manage and mitigate potential a number of days, essentially achieving partial redemption gates.2036 A number contagion from such redemptions. large redemptions through multiple of commenters advocated allowing the Partial gates do not fully stop runs, smaller redemption transactions.2048 board greater discretion to impose because shareholders can continue to Funds could prevent this sort of gaming partial gates.2037 For example, some redeem shares. Although board by limiting each shareholder’s commenters noted partial gates would discretion to impose partial gates may redemptions to a certain amount, but provide investors with some immediate be effective for individual funds, it may this type of restriction would only serve liquidity, but allow funds time to not address our larger concerns about to increase the costs and complexity of regenerate liquidity or service contagion resulting from rapid heavy such a gate. Third, a partial gate based redemptions under improved market on the size of redemptions could 2038 redemptions. There may exist times conditions. In addition, a when full gates are required to limit the effectively exempt certain types of funds commenter stated that partial gates contagion effects of heavy redemptions and their shareholders (e.g., retail funds would, ‘‘make it easier for a board to on remaining investors and the short- and their shareholders) from a gating determine that a gate is in the best term financing markets, but individual requirement. interests of the fund because a partial Fourth, we also believe partial gates gate would impose a lesser hardship on firms may choose instead to impose would complicate the fees and gates investors.’’ 2039 partial gates. We also note that a number requirements as an operational matter. If Commenters suggested a variety of of commenters opposed partial gates, partial gates were assessed on a approaches for imposing partial gates. noting significant operational challenges redemption-by-redemption basis (e.g., For example, a commenter proposed and costs, which are not associated with the size of a shareholder’s redemption), allowing shareholders to redeem ‘‘at full gates.2045 We also believe the we believe, as one commenter stated, least 50% of their remaining balance at benefits of allowing partial gating is ‘‘[t]he systems enhancements necessary the then basis-point rounded NAV plus further diminished now that we are to track holdings for purposes of a 1% fee.’’ 2040 Others proposed adopting only a 10 business day determining each shareholder’s imposing partial gates with greater maximum gate period, because 10 redemption limit would be more restrictions on shareholders making business days (rather than the 30-day complicated, cumbersome, and costly larger redemptions and lower or no gate under the proposal) may be a more than the changes required to implement restrictions on shareholders making reasonably manageable period of time the full gate.’’ 2049 Similarly, complexity smaller redemptions.2041 Another during which investors may not need would be compounded by the existence commenter suggested limiting the safety valve that a partial gate might of omnibus accounts, as funds would redemptions to 10% of outstanding afford. need to track all redemptions made by shares per day and applying this There are several additional potential a single investor through multiple limitation pro rata among all redeeming accounts over the course of a day to shareholders that day, with the balance issues with partial gates. First, we understand it may be difficult for funds prevent investors from making redemptions in excess of the limit 2036 to achieve desired outcomes with partial See rule 2a–7(c)(2)(i)(B). imposed by a partial gate in a single day 2037 gates, and partial gates may create See, e.g., Wilmington Trustees Comment by spreading them over multiple Letter; UBS Comment Letter; Chamber II Comment unintended consequences. For example, omnibus accounts. Letter; ABA Business Law Section Comment Letter; when a Florida LGIP suspended see also Comment Letter of HSBC Global Asset Management on the European Commission’s Green redemptions in 2007 in response to a f. In-Kind Redemptions Paper on Shadow Banking (May 28, 2012) (stating run, it re-opened with a combined As discussed in the Proposing that a money market fund should be able to limit partial gate and liquidity fee—local the total number of shares that the fund is required Release, we requested comment in 2009 to redeem on any trading day to 10% of the shares governments could take out the greater in issue, that any such gate be applied pro rata to of 15% of their holdings or $2 million 2046 See David Evans and Darrell Preston, Florida redemption requests, and that any redemption without penalty, and the remainder of Investment Chief Quits; Fund Rescue Approved, requests not met be carried over to the next any redemptions was subject to a 2% Bloomberg (Dec. 4, 2007). business day and so forth until all redemption 2047 See, e.g., Neil Weinberg, Florida Fund requests have been met). Meltdown: Bad to Worse, Forbes (Dec. 6, 2007) 2038 See, e.g., Wilmington Trustee Comment 2042 See HSBC Comment Letter. (noting that investors withdrew $1.2 billion from Letter; ABA Business Law Section Comment Letter; 2043 See Fidelity Comment Letter; Fin. Info. the $14 billion pool after it re-opened, while Deutsche Comment Letter. Forum Comment Letter; Federated V Comment depositing only $7 million, but that only 3 out of 2039 See ABA Business Law Section Comment Letter. about 1,700 participants in the pool withdrew Letter. 2044 See Fidelity Comment Letter. assets subject to the redemption fee). 2040 See Capital Advisors Comment Letter. 2045 See, e.g., Fidelity Comment Letter; Fin. Info. 2048 See supra section III.A.1.c herein discussing 2041 See UBS Comment Letter; Chamber II Forum Comment Letter; Federated V Comment gaming of redemption restrictions. Comment Letter. Letter. 2049 See Fidelity Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00184 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47919

on a potential amendment that would comments and comments we previously deplete their funds’ liquidity to meet require funds to satisfy redemption received, we continue to believe redemptions. The costs of providing requests in excess of a certain size requiring in-kind redemptions could liquidity to redeeming shareholders through in-kind redemptions.2050 We create operational difficulties that might would fall on non-redeeming also requested comment on this type of prevent funds from treating investors shareholders, creating a financial redemption restriction when we fairly in practice. In contrast, we inequity between shareholder types. requested comment on the PWG anticipate reforms such as liquidity fees Similarly, without the possibility of Report.2051 Almost all commenters on and gates would fulfill many of our imposing gates, funds would lose an the PWG alternative opposed it.2052 policy goals in a manner that is important tool to manage redemptions Most commenters believed that operationally simpler and potentially during periods of stress. They would not requiring in-kind redemptions would be fairer to investors than in-kind be able to fully halt redemptions, which technically unworkable due to the redemptions. could affect funds’ ability to generate complex valuation and operational We also note requiring in-kind internal liquidity as assets mature, issues that would be imposed on both redemptions would not necessarily stop perhaps undermining capital formation. the fund and on investors receiving runs and the related adverse effects on Losing the time necessary to generate portfolio securities.2053 Several the short-term financing markets and internal liquidity would increase the commenters stated that investors would capital formation. Rather, we believe the likelihood funds would have to sell dislike the prospect of receiving liquidity fees and gates approach desirable assets, perhaps at ‘‘fire sale’’ redemptions in-kind and would described in section III.A would better prices. Funds would not have as much structure their holdings to avoid the achieve our policy goals, including time to identify solutions and requirement, but would nevertheless improving money market funds’ ability communicate with investors as they still collectively engage in redemptions to manage and mitigate potential would with gates. They would also lose if the money market funds were to come contagion from high levels of the ability to create a ‘‘cooling off’’ under stress with similar adverse redemptions and helping to preserve the period, which might temper the effects consequences for the funds and the benefits of money market funds for of short-term investor panic, possibly short-term financing markets.2054 investors and the short-term financing reducing investors’ incentives to redeem In connection with the current markets for issuers. We note that money shares. reforms, we again asked for comment market funds are already permitted to Precommiting to either a combination regarding possible in-kind redemption satisfy redemptions in kind if they of a floating NAV and fees or a restrictions. Two commenters noted the disclose such a possibility in the fund’s combination of a floating NAV and gates complexity of implementing this prospectus.2057 would reduce funds’ ability to manage mechanism.2055 One of these heavy redemptions relative to having a commenters suggested that the g. Standalone Floating NAV Combined floating NAV and both fees and gates. In Commission permit, but not require, With Only Liquidity Fees or addition, it would limit boards’ ongoing money market funds to meet Redemption Gates discretion to address potential redemptions by returning a pro rata The Commission also considered problems. A fund’s optimal response to share of the fund’s assets rather than combining a floating NAV with either a managing heavy redemptions would cash to investors.2056 In light of these liquidity fee or a redemption gate; that likely depend on its particular is, we considered an alternative where circumstance, market conditions, and 2050 See 2009 Proposing Release, supra note 66, money market funds would be required the appropriateness of imposing a fee or at section III.B; PWG Report, supra note 506, at gate. As discussed in section III.A section 3.c. An in-kind redemption occurs when a to maintain a floating NAV combined shareholder’s redemption request to a fund is with a liquidity fee but not a above, we believe funds are likely to satisfied by distributing to that shareholder redemption gate and an alternative first impose fees in times of market portfolio assets of that fund instead of cash. In-kind where money market funds would be stress and then to impose gates, but only redemptions might lessen the effect of large if fees fail to control redemptions. That redemptions on remaining money market fund required to maintain a floating NAV shareholders, and they would ensure that the combined with a redemption gate but said, the managers of a fund that redeeming investors bear part of the cost of their not a liquidity fee. Combining a floating experiences a credit event in an liquidity needs. During the financial crisis, one NAV with just a liquidity fee or just a otherwise healthy economy might money market fund stated that it would honor instead choose to gate their fund to certain large redemptions in-kind in an attempt to redemption gate would simplify the decrease the level of redemptions in that fund. See operational implementation of the rule staunch redemptions, forgoing a 2009 Proposing Release, supra note 66, at n.30. and perhaps make money market funds liquidity fee because liquidity costs are 2051 See PWG Report, supra note 506, at section more attractive to investors. low. By forcing funds to precommit to 3.c (discussing requiring that money market funds fees or gates (along with a floating satisfy certain redemptions in-kind). These more limited combinations, 2052 But see Proposing Release, supra note 25 at however, would likely fail to achieve NAV), this alternative limits funds’ n.472. the policy goals of the money market ability to manage and mitigate potential 2053 See Proposing Release, supra note 25 at 233– fund reform to the same extent as the contagion from such redemptions. 34 n.473. They also asserted that required in-kind redemptions could result in disrupting, rather than full set of reforms that we are adopting 2. Alternatives in the FSOC Proposed stabilizing, markets if redeeming shareholders today. Without liquidity fees, there Recommendations needing liquidity were forced to sell into declining would be heightened incentives for As discussed in the Proposing markets. See Proposing Release, supra note 25, at shareholders to redeem in times of n.474. Release, we considered a number of market stress before fund managers 2054 See Proposing Release, supra note 25 at alternatives for regulatory reform, n.475. including the reforms proposed by 2055 See State Street Comment Letter (‘‘State 2057 See section 2(a)(32) (defining a redeemable Street agrees with commenters that requiring security as a security where the holder is entitled FSOC. We received comment on several in-kind redemptions would be unworkable due to . . . to receive approximately his proportionate of these alternatives. After considering the complex valuation and operational issues that share of the issuer’s current net assets, or the cash the comments that FSOC received on would be imposed on both the fund and on equivalent thereof (italics added)). See also rule investors receiving portfolio securities.’’); HSBC 18f–1, which provides an exemption from certain their proposed reforms (the ‘‘FSOC Comment Letter. prohibitions of section 18(f)(1) of the Act with Proposed Recommendations’’), as well 2056 See HSBC Comment Letter. regard to redemptions in kind and in cash. as the comments we received on the

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00185 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47920 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Proposing Release and the economic A fund whose NAV buffer fell below essential activities, as further discussed analysis set forth in this Release, we the required minimum amount would below.2062 have concluded that these alternatives be required to limit its new investments The minimum balance at risk generally would not achieve our to cash, Treasury securities, and (‘‘MBR’’) would require that the last 3% regulatory goals as well as the reforms Treasury repos until its NAV buffer was of a shareholder’s highest account value we are adopting today. We are, however, restored. A fund that completely in excess of $100,000 during the today adopting a floating NAV for exhausted its NAV buffer would be previous 30 days (the shareholder’s institutional funds, which was one required to suspend redemptions and MBR or ‘‘holdback shares’’) be redeemable only with a 30-day proposed reform included in the FSOC liquidate or could continue to operate delay.2063 All shareholders may redeem Proposed Recommendations. We with a floating NAV indefinitely or until 97% of their holdings immediately discuss below these options, and our it restored its NAV buffer. principal reasons for not adopting them without being restricted by the MBR. If (other than the floating NAV for A money market fund could use any the money market fund suffers losses institutional prime money market funding method or combination of that exceed its NAV buffer, the losses funds). methods to build the NAV buffer, and would be borne first by the MBRs of In November 2012, the FSOC could vary these methods over time. shareholders who have recently proposed to recommend that we The FSOC Proposed Recommendations redeemed (i.e., their MBRs would be undertake structural reforms of money identified three funding methods that ‘‘subordinated’’). The extent of market funds. FSOC proposed three would be possible with Commission subordination of a shareholder’s MBR alternatives for consideration, which, it relief from certain provisions of the would be approximately proportionate stated, could be implemented Investment Company Act: (1) An escrow to the shareholder’s cumulative net individually or in combination. The first account that a money market fund’s redemptions during the prior 30 days— option 2058—requiring that money sponsor established and funded and that in other words, the more the market funds use a floating NAV—is was pledged to support the fund’s stable shareholder redeems, the more their holdback shares become ‘‘subordinated one of the reforms we are adopting share price; (2) the money market fund’s today for institutional prime money holdback shares.’’ issuance of a class of subordinated, non- The last option in the FSOC Proposed market funds. We discuss this option in redeemable equity securities (‘‘buffer section III.B below. The other two Recommendations would require money shares’’) that would absorb first losses in market funds to have a risk-based NAV options in the FSOC Proposed the funds’ portfolios; and (3) the money Recommendations each would require buffer of up to 3% (which otherwise market fund’s retention of some would have the same structure as that money market funds maintain a earnings that it would otherwise NAV buffer, or a specified amount of discussed above), and this larger NAV distribute to shareholders (subject to buffer could be combined with other additional assets available to absorb certain tax limitations).2060 We believe measures.2064 The other measures daily fluctuations in the value of the that the first funding method would be discussed in the FSOC Proposed fund’s portfolio securities. One option the most likely approach for funding the Recommendations include more would require that most money market buffer given the complexity of a fund stringent investment diversification funds have a risk-based NAV buffer of offering a new class of buffer shares requirements (which we are generally up to 1% to absorb day-to-day adopting, as discussed in section III.I fluctuations in the value of the funds’ (and the uncertainty of an active, liquid above), increased minimum liquidity portfolio securities and allow the funds market for buffer shares developing) and levels (which we are not adopting), and to maintain a stable NAV and that this the tax limitations on the third method.2061 We note, however, that we more robust disclosure requirements NAV buffer be combined with a (which we are generally adopting, as ‘‘minimum balance at risk.’’ 2059 The believe this funding method is the most expensive of the three because of the discussed in sections III.E and III.F required minimum size of a fund’s NAV above).2065 buffer would be determined based on opportunity costs the fund’s sponsor would bear to the extent that the firms the composition of the money market 2062 This funding method also could have the fund’s portfolio according to the redirect this funding from other greatest competitive impacts on the money market following formula: fund industry, as larger bank-affiliated sponsors • No buffer requirement for cash, 2060 See FSOC Proposed Recommendations, supra would have less costly access to funding for the Treasury securities, and repos note 1562, at section V.B. NAV buffer than independent asset management 2061 Under the Internal Revenue Code, each year, firm sponsors. See, e.g., Comment Letter of The collateralized solely by cash and mutual funds, including money market funds, must Systemic Risk Council (Jan. 18, 2013) (available in Treasury securities (‘‘Treasury repo’’); distribute to shareholders at least 90% of their File No. FSOC 2012–0003) (‘‘Systemic Risk Council • A 0.75% buffer requirement for annual earnings or lose the ability to deduct FSOC Comment Letter’’) (‘‘Capital requirements would likely encourage money market fund other daily liquid assets (or weekly dividends paid to their shareholders. See, e.g., Comment Letter of the Investment Company consolidation—particularly toward larger bank- liquid assets, in the case of tax-exempt Institute (May 16, 2012) (available in File No. 4– affiliated sponsors (who traditionally have, and can money market funds); and 619). We note that the retained earnings method is access, more capital than traditional, independent • A 1% buffer requirement for all similar to how some money market funds paid for asset managers). If so, this could further concentrate systemic risk from these institutions, and create other assets. insurance that was provided by ICI Mutual Insurance Company from 1993 to 2003. This conflicts of interest in the short-term financing insurance covered losses on money market fund markets (as fewer money funds would control a 2058 See FSOC Proposed Recommendations, supra portfolio assets due to defaults and but larger share of the short-term lending markets.’’)). note 1562, at section V.A. not from events such as a security downgrade or a 2063 See FSOC Proposed Recommendations, supra 2059 Under the FSOC Proposed rise in interest rates. Coverage was limited to $50 note 1562, at section V.C. Recommendations, Treasury money market funds million per fund, with a deductible of the first 10 2064 See id, at section V.C. would not be subject to a NAV buffer or a minimum to 40 basis points of any loss. Premiums ranged 2065 The FSOC Proposed Recommendations asked balance at risk. See FSOC Proposed from 1 to 3 basis points. See PWG Report, supra the Commission to consider increasing minimum Recommendations, supra note 1562, at sections V.B note 506, at n.24 and accompanying text. Because weekly liquidity requirements from 30% of total and V.C for a full discussion of these two of the tax disadvantages of this funding method, it assets to 40% of total assets. The justification alternatives. This section of the Release provides a would take a long time for a NAV buffer of any size provided by FSOC was that most funds already summary based on those sections of the FSOC to build, particularly in the current low interest rate have weekly liquidity in excess of this 40% Proposed Recommendation. environment. minimum level. We are not adopting this

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00186 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47921

In the sections that follow, we discuss satisfy different potential objectives. A would accommodate all but extremely our evaluation of a NAV buffer large buffer could protect shareholders large losses, such as those experienced requirement and an MBR requirement from losses related to defaults, such as during the crisis. However, a buffer that for money market funds. We also the one experienced by the Reserve was designed to absorb such large losses discuss comments FSOC received on Primary Fund following the Lehman may be too high and too costly because these recommendations, and that we Brothers bankruptcy. However, if the opportunity cost of this capital received on the Proposing Release. As complete loss absorption is the would be borne at all times even though we discuss in more detail below, the objective, a substantial buffer would be it was likely to be drawn upon to any Commission is not pursuing these required, particularly given that money degree only rarely. Two commenters alternatives because we continue to market funds can hold up to 5% of their disagreed, noting that a capital buffer in believe that the imposition of either a assets in a single security.2068 the range of three to four percent would NAV buffer combined with a minimum Alternatively, if a buffer were not reduce yields for ordinary investors by balance at risk or a stand-alone NAV intended for complete loss absorption, about five basis points.2071 However, buffer, while advancing some of our but rather designed primarily to absorb another commenter asserted that a goals for money market fund reform, day-to-day variations in the market- capital buffer would have a much more might prove costly for money market based value of money market funds’ dramatic effect on yields by effectively fund shareholders and could result in a portfolio holdings under normal market turning prime money market funds into contraction in the money market fund conditions, this would allow a fund to synthetic Treasury funds.2072 industry that could harm the short-term hold a significantly smaller buffer. Accordingly, as we discuss below, a financing markets and capital formation Accordingly, the relatively larger buffers buffer of the size contemplated by either to a greater degree than the reforms we contemplated in the FSOC Proposed alternative in the FSOC Proposed are adopting today. Recommendations 2069 must have been Recommendations appears to be too designed to absorb daily price costly to be practicable.2073 a. NAV Buffer fluctuations as well as relatively large Several commenters expressed security defaults.2070 In fact, a 3% buffer i. Benefits of a NAV Buffer support for a NAV buffer (which we did As discussed in the Proposing not propose), although no commenters 2068 Even commenters in favor of a buffer showed Release, the FSOC Proposed explicitly discussed an opposition to concern that FSOC’s proposed buffer size of 1% or 3% may be inadequate. See, e.g., Federal Reserve Recommendations discusses a number such a buffer as part of their comments of potential benefits that a NAV buffer 2066 Bank Presidents FSOC Comment Letter, supra note on this proposal. In particular, two 47 (‘‘For a poorly diversified fund with portfolio could provide to money market funds commenters argued that a capital buffer assets that carry relatively more credit risk, a 3% and their investors, many of which we (maximum) NAV buffer may not be sufficient.’’); would reduce the incentives for a fund discuss below.2074 As noted by to take excessive risk and for investors Harvard Business School FSOC Comment Letter, 2067 supra note 47 (‘‘For a well-diversified portfolio, we commenters, it would preserve money to run. As discussed in the estimate that MMFs should hold 3 to 4% capital market funds’ stable share price and Proposing Release, in considering a against unsecured paper issued by financial institutions, the primary asset held by MMFs. For NAV buffer such as those recommended agreements in place at the time, but in some cases by FSOC as a potential reform option for more concentrated portfolios, we estimate that the amount of capital should be considerably higher.’’); included sponsor-provided capital contributions to money market funds, we considered the Better Markets FSOC Comment Letter, supra note the fund. Not every money market fund that applied benefits that such a buffer could 59 (‘‘The primary shortcoming of [FSOC’s proposed to participate in the program reported shadow price buffer] is its low level of 1 or 3 percent.... [Any data for every day during the period between provide, as well as its costs. Our September 1, 2008 and October 17, 2008. See also evaluation of what could be a buffer] must be set at a level that is sufficient to cover all of these factors: Projected and historical Patrick E. McCabe et al., The Minimum Balance at reasonable size for a NAV buffer also losses; additional costs in the form of liquidity Risk: A Proposal to Mitigate the Systemic Risks factored into our analysis of the damages or government backstops; and investor Posed by Money Market Funds, at 31, Table 2 advantages and disadvantages of these psychology in the face of possible financial shocks Federal Reserve Bank of New York Staff Report No. or crises. [. . . .] Historical examples alone . . . 564, July 2012 (providing additional statistical options. A buffer can be designed to indicate that MMF losses have risen as high as 3.9 analysis of shadow price information reported by percent. This serves only as a floor regarding actual money market funds filing under the Treasury alternative. There is no evidence that current potential losses, clearly indicating that the Temporary Guarantee Program). During that period liquidity requirements are inadequate, and several necessary buffer must be substantially higher than there were over 800 money market funds based on commenters agreed. See, e.g., ICI Comment Letter, 3.9 percent.’’); Comment Letter of Occupy the SEC Form N–SAR data. U.S. Bancorp Comment Letter, Federated Comment (Feb. 15, 2013) (available in File No. FSOC–2012– 2071 See Americans for Fin. Reform Comment Letter. For example, the DERA Study notes that the 0003) (‘‘Occupy the SEC FSOC Comment Letter’’), Letter; Squam Lake Comment Letter. heightened redemption activity in the summer of supra note 52 (arguing that FSOC’s proposed buffer 2072 See Craig M. Lewis, The Economic 2011 did not place undue burdens on MMFs when does not go far enough in accounting for potential Implications of Money Market Fund Capital Buffers they sold assets to meet redemption requests. No risks in a fund’s portfolio. Instead, the approach (Nov. 2013), available at http://www.sec.gov/ fund lost more than 50 basis points during this should be a two-layer buffer, with a first layer of divisions/riskfin/workingpapers/rsfi-wp2014-01.pdf period nor did their shadow NAVs deviate up to 3% depending on the portfolio’s credit rating (‘‘Lewis’’). significantly from amortized cost. See DERA Study, and a second layer to be sized according to the 2073 There is another potential adverse effect of supra note 24. We have therefore determined not concentration of the portfolio). requiring large NAV buffers for money market funds to address additional minimum liquidity 2069 While the second alternative in the FSOC to address risk from systemic events. According to requirements at this time. Proposed Recommendation only includes a NAV the FSOC Proposed Recommendations, outflows 2066 See, e.g., Americans for Fin. Reform buffer of up to 1%, it was combined with a 3% from institutional prime money market funds Comment Letter; Comment Letter of Dorothy B. MBR, which would effectively provide the fund following the Lehman Brothers bankruptcy tended Sherry (Sept. 21, 2013) (‘‘Sherry Comment Letter’’); with a 4% buffer before non-redeeming to be larger among money market funds with Occupy the SEC Comment Letter. However, many shareholders in the fund suffered losses. sponsors that were themselves under stress, commenters opposed a NAV buffer when included 2070 For example, beginning in September 2008, indicating that investors redeemed shares when as an alternative in the FSOC recommendation. See, money market funds that chose to participate in the concerned about sponsors’ potential inability to e.g. Comment Letter of Invesco Ltd. (Feb. 15, 2013) Treasury Temporary Guarantee Program were support ailing funds. But these sponsors were the (available in File No. FSOC–2012–0003) (‘‘Invesco required to file with the Treasury their weekly ones most likely to need funding dedicated to the FSOC Comment Letter’’); Blackrock FSOC Comment shadow price if it was below $0.9975. Our staff has buffer for other purposes. As a result, larger buffers Letter; Comment Letter of Independent Directors reviewed the data, and found that through October may negatively affect other important activities of Council (Jan. 23, 2013) (available in File No. FSOC– 17, 2008, only three funds carried losses larger than money market fund sponsors and cause them to fail 2012–0003) (‘‘IDC FSOC Comment Letter’’). four percent, and only five funds carried losses faster. 2067 See, e.g., Hanson et al. Comment Letter; larger than three percent. Reported shadow prices 2074 See FSOC Proposed Recommendations, supra Squam Lake Comment Letter. excluded the value of any capital support 1562, at section V.B.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00187 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47922 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

potentially increase the stability of the cyclical capital to the money market funds and enhancing their ability to funds, but would likely reduce the fund industry. This is because once a absorb losses, a NAV buffer may benefit yields (and in the option that combines buffer is funded it remains in place capital formation in the long term. A a 1% NAV buffer with an MBR, the regardless of redemption activity. With more stable money market fund liquidity) that money market funds a buffer, redemptions increase the industry may produce more stable short- currently offer to investors.2075 Like the relative size of the buffer because the term financing markets, which would reforms we are adopting today, the NAV same dollar buffer now supports fewer provide more reliability as to the buffer presents trade-offs between assets.2078 As an example, consider a demand for short-term credit to the stability, yield, and liquidity. fund with a 1% NAV buffer that economy. In effect, depending on the size of the experiences a 25 basis point portfolio buffer, a buffer could provide various loss, which then triggers redemptions of ii. Costs of a NAV Buffer levels of coverage of losses due to both 20% of its assets. The NAV buffer, as a The Proposing Release also the illiquidity and credit deterioration proportion of fund assets and prior to recognized that there are significant of portfolio securities. Money market any replenishment, will increase from ongoing costs associated with a NAV funds that are supported by a NAV 75 basis points after the loss to 93.75 buffer. Some commenters agreed that a buffer would be more resilient to basis points after the redemptions. This capital buffer would impose a cost on redemptions and credit or liquidity illustrates how the NAV buffer funds and their investors, but these changes in their portfolios than stable strengthens the ability of the fund to commenters claimed that the magnitude value money market funds without a absorb further losses, reducing of the costs would be relatively buffer (the current baseline).2076 As long investors’ incentive to redeem shares. modest.2079 For the reasons discussed as the NAV buffer is funded at necessary This result contrasts to the current below, we disagree with these levels, each $1.00 in money market fund regulatory baseline under rule 2a–7 commenters that the costs would be shares is backed by $1.00 in fund assets, where redemptions amplify the impact relatively modest. Costs can be divided eliminating the incentive of of losses by distributing them over a into direct costs that affect money shareholders to redeem at $1.00 when smaller investor base. For example, market fund sponsors or investors and the market-based value of their shares is suppose a fund with a shadow price of indirect costs that impact capital worth less. This reduces shareholders’ $1.00 (i.e., no embedded losses) formation. In addition, a NAV buffer incentive to redeem shares quickly in experiences a 25 basis point loss, which does not protect shareholders response to small losses or concerns causes its shadow price to fall to completely from the possibility of about the quality and liquidity of the $0.9975. If 20% of the fund’s shares are heightened rapid redemption activity money market fund portfolio, discussed then redeemed at $1.00, its shadow during periods of market stress, in section II.B above, particularly during price will fall to $0.9969, reflecting a particularly in periods where the buffer periods when the underlying portfolio loss that is 24% greater than the loss is at risk of depletion. As the buffer has significant unrealized capital losses precipitating the redemptions. becomes impaired (or if shareholders and the fund has not broken the buck. Finally, by allowing money market believe the fund may suffer a loss that As long as the expected effect on the funds to absorb small losses in portfolio exceeds the size of its NAV buffer), portfolio from potential losses is smaller securities without affecting their ability shareholders have an incentive to than the NAV buffer, investors would be to transact at a stable price per share, a redeem shares quickly because, once the protected—they would continue to NAV buffer may facilitate and protect buffer fails, the fund will no longer be receive a stable value for their shares. capital formation in short-term able to maintain a stable value and A second benefit is that a NAV buffer financing markets during periods of shareholders will experience sudden would force money market funds to modest stress. Currently, money market losses.2080 Such rapid severe provide explicit capital support rather fund portfolio managers are limited in redemptions could impair the fund’s than the implicit and uncertain support their ability to sell portfolio securities business model and viability. that is permitted under the current when markets are under stress because Another possible implication is that regulatory baseline. This would require they have little ability to absorb losses money market funds with buffers may funds to internalize some of the cost of without causing a fund’s shadow NAV avoid holding riskier short-term debt the discretionary capital support to drop below $1.00 (or embed losses in securities (like commercial paper) and sometimes provided to money market the fund’s market-based NAV per share). instead hold a higher amount of low funds and to define in advance how As a result, managers tend to avoid yielding investments like cash, Treasury losses will be allocated. In addition, as trading when markets are strained, securities, or Treasury repos. This could noted by commenters, a NAV buffer contributing to further illiquidity in the lead money market funds to hold more could reduce fund managers’ incentives short-term financing markets in such conservative portfolios than investors to take risk beyond what is desired by circumstances. A NAV buffer should may prefer, given tradeoffs between fund shareholders because investing in enable funds to absorb small losses and principal stability, liquidity, and less risky securities reduces the thus could reduce this tendency. Thus, 2081 2077 yield. probability of buffer depletion. by adding resiliency to money market Another potential benefit is that a 2079 See Americans for Fin. Reform Comment NAV buffer might provide counter- 2078 See, e.g., Comment Letter of J.P. Morgan Letter; Hanson et al. Comment Letter; Squam Lake Asset Management (Jan. 14, 2013) (available in File Comment Letter. 2075 See Americans for Fin. Reform Comment No. FSOC–2012–0003) (‘‘J.P. Morgan FSOC 2080 See, e.g., Systemic Risk Council FSOC Letter; Squam Lake Comment Letter. Comment Letter’’) (‘‘[W]here capital support is Comment Letter (stating that capital is difficult to 2076 See, e.g., Occupy the SEC FSOC Comment utilized as a first loss position upon liquidation, the set and is imperfect, that ‘‘[g]iven the lack of data Letter, supra note 52. level of capital can be tied to a MMF’s highest asset and impossibility of modeling future events, even 2077 See, e.g., Harvard Business School FSOC levels. This can result in a structure whereby, as [a 3% NAV buffer] runs the risk of being too high, Comment Letter, supra note 47 (‘‘Capital buffers redemptions accelerate and cause the unrealized or too low to protect the system in the future’’ and also mean that there is an investor class that loss per share to increase further, the amount of that ‘‘too little capital could provide a false sense explicitly bears losses and has incentives to curb ex capital support available per share increases of security in a crisis’’). See also infra note 2091 and ante risk taking.’’); Americans for Fin. Reform accordingly, providing further capital support to the accompanying discussion. Comment Letter; Hanson et al. Comment Letter; and remaining shareholders that do not redeem their 2081 But see, e.g., U.S. Chamber FSOC Comment Squam Lake Comment Letter. shares.’’). Letter (arguing that ‘‘a NAV buffer is likely to

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00188 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47923

The most significant indirect cost of a similarities between money market leveraged position in the underlying NAV buffer is the opportunity cost funds with a NAV buffer and banks with assets of the fund that is designed to associated with maintaining a NAV capital. A traditional bank generally absorb interest rate risk and mitigate buffer.2082 Those contributing to the finances long-term assets (customer default risk, a provider of buffer funding buffer essentially deploy valuable scarce loans) with short-term liabilities should demand a return that reflects the resources to maintain a NAV buffer (demand deposits). The Federal Reserve fund’s aggregate cost of capital plus rather than being able to use the funds Board, as part of its prudential compensation for the fraction of default elsewhere. The cost of diverting funds regulation, requires banks to adhere to risk it is capable of absorbing. for this purpose represents a significant certain minimum capital The effectiveness of a NAV buffer to incremental cost of doing business for requirements.2087 Bank capital, among protect against large-scale redemptions those providing the buffer funding. We other functions, provides a buffer that during periods of stress is predicated cannot provide estimates of these allows banks to withstand a certain upon whether shareholders expect the opportunity costs because the relevant amount of sudden demands for liquidity decline in the value of the fund’s data is not currently available to the and losses without becoming insolvent portfolio to be less than the value of the Commission.2083 and thus needing to draw upon federal NAV buffer. Once investors anticipate The second indirect cost of a NAV deposit insurance or other aspects of the that the buffer will be depleted, they buffer is the equilibrium rate of return regulatory safety net for banks.2088 The have an incentive to redeem before it is that a provider of funding for a NAV fact that the bank assets have a long completely depleted.2091 In this sense, a buffer would demand.2084 An entity that maturity and are illiquid compared to NAV buffer that is not sufficiently large provides such funding, possibly the the bank’s liabilities results in a is incapable of fully mitigating the fund sponsor, would expect to be paid maturity and liquidity mismatch possibility of a liquidity run. The a return that sets the market value of the problem that creates the possibility of a drawback with increasing buffer size to buffer equal to the amount of the capital depositor run during periods of address this risk, however, is that the contribution. Since a NAV buffer is stress.2089 Capital is one part of a opportunity costs of operating a buffer designed to absorb the same amount of prudential regulatory framework increase as the size of the buffer risk regardless of its size, as noted by at employed to deter runs in banks and increases. Due to the correlated nature least one commenter, the promised generally protect the safety and of portfolio holdings across money yield, or cost of the buffer, increases soundness of the banking system. A market funds, this could amplify with the relative amount of risk it is money market fund with a NAV buffer market-wide run risk if NAV buffer expected to absorb.2085 This is a well- has been described as essentially a impairment also is highly correlated known leverage effect.2086 ‘‘special purpose bank’’ where fund across money market funds. The One could analogize a NAV buffer to shareholders’ equity is equivalent to incentive to redeem could be further bank capital by considering the demand deposits and a NAV buffer is amplified if, as contemplated in the analogous to the bank’s capital.2090 FSOC Proposed Recommendations, a incentivize sponsors to reach for yield.’’); Vanguard Since a NAV buffer is effectively a NAV buffer failure would require a FSOC Comment Letter (‘‘Capital buffers are also likely to carry unintended consequences, as some money market fund to either liquidate funds may purchase riskier, higher-yielding 2087 See the Federal Reserve Board’s Web site on or convert to a floating NAV. If investors securities to compensate for the reduction in yield. Capital Guidelines and Adequacy, available at anticipate this occurring, some investors As a result, capital buffers are likely to provide http://www.federalreserve.gov/bankinforeg/topics/ that value principal stability and investors with a false sense of security.’’); Federated capital.htm, for an overview of minimum capital V Comment Letter (‘‘If anything, creating a junior requirements. liquidity may no longer view money class of equity puts earnings pressure on an MMF 2088 See, e.g., Allen N. Berger et al., The Role of market funds as viable investments. to alter its balance sheet to decrease near-term Capital in Financial Institutions, 19 J. of Banking As noted above, substantial NAV liquid assets to generate investment returns and Fin. 393 (1995) (‘‘Berger’’) (‘‘Regulators require buffers may be able to absorb much, if available from longer-term, higher risk investments capital for almost all the same reasons that other in order to either build capital through retained uninsured creditors of banks ‘require’ capital—to not all, of the default risk in the earnings or to compensate investors who have protect themselves against the costs of financial underlying portfolio of a money market invested in the new class of subordinated equity distress, agency problems, and the reduction in fund. This implies that any capital of the MMF.’’). market discipline caused by the safety net.’’). compensation for bearing default risk 2082 See Lewis, supra note 2072. 2089 More generally, banks are structured to will be transferred from current money 2083 The opportunity costs would represent the satisfy depositors’ preference for access to their net present value of these forgone opportunities, an money on demand with businesses’ preference for market fund shareholders to those amount that cannot be estimated without relevant a source of longer-term capital. However, the financing the NAV buffer, effectively data about each firm’s productive opportunities. maturity and liquidity transformation provided by converting a prime money market fund However, a number of FSOC commenters have banks can also lead to runs. Deposit insurance, into a fund that mimics the return of a already cautioned that a NAV buffer could make access to a lender of last resort, and other bank money market funds unprofitable. See, e.g., Angel regulatory tools are designed to lessen the incentive Treasury fund for current money market FSOC Comment Letter (stating that ‘‘in today’s low of depositors to run. See, e.g., Douglas W. Diamond yield environment, even five basis points [of cost & Philip H. Dybvig, Bank Runs, Deposit Insurance, 2091 See, e.g., Federal Reserve Bank Presidents associated with a NAV buffer] would push most and Liquidity, 91 J. Pol. Econ 401 (June 1983) FSOC Comment Letter (‘‘The [FSOC] Proposal notes money market funds into negative yield territory.’’); (‘‘Diamond & Dybvig’’); Mark J. Flannery, Financial that a fund depleting its NAV buffer would be BlackRock FSOC Comment Letter (‘‘[A]ny capital Crises, Payment System Problems, and Discount required to suspend redemptions and liquidate over 0.75% will make the MMF product Window Lending, 28 Journal of Money, Credit and under rule 22e–3 or continue operating as a floating uneconomical for sponsors to offer.’’); Comment Banking 804 (1996); Jeffrey A. Miron, Financial NAV fund. However, this sequence of events could Letter of Federated Investors, Inc. (Feb. 15. 2013) Panics, the Seasonality of the Nominal Interest be destabilizing. Investors in 3% NAV buffer funds (available in File No. FSOC–2012–0003) Rate, and the Founding of the Fed, 76 American may be quite risk averse, even more so than floating (‘‘Federated Investors Feb. 15 FSOC Comment Economic Review 125 (1986); S. Bhattacharya & D. NAV MMF investors might be, given their revealed Letter’’) (calculating that ‘‘prime MMFs would no Gale, Preference Shocks, Liquidity, and Central preference for stable NAV shares. If they foresee a longer be economically viable products’’ based on Bank Policy, in New Approaches to Monetary possible conversion to floating NAV once the buffer cost estimates provided by the ICI.). Economics (eds., W. Barnnett and K. Singleton, is depleted, these risk-averse investors would have 2084 See Lewis, supra note 2072. 1987). an incentive to redeem prior to conversion. If, on 2085 See Squam Lake Comment Letter. 2090 See, e.g., Gary Gorton & George Pennacchi, the other hand, investors foresee a suspension of 2086 The leverage effect reflects the concept that Money Market Funds and Finance Companies: Are redemptions, they would presumably have an even higher leverage levels induce an equity holder to They the Banks of the Future?, in Structural Change stronger incentive to redeem before facing a demand higher returns to compensate for the higher in Banking (Michael Klausner & Lawrence J. White, liquidity freeze when the NAV buffer is completely risk levels. eds. 1993), at 173–214. depleted.’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00189 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47924 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

fund shareholders. If fund managers are flows and increase the resilience of the particularly costly. Such a requirement unable to pass through the yield NAV buffer. In both of these cases, there could create an incentive against associated with holding relatively may be an effect on the short-term shareholders participating in a run on a riskier securities (compared to financing markets if the decrease in fund facing potential losses of certain government securities), like commercial demand for short-term securities from sizes because shareholders will incur paper or short-term municipal money market funds results in an greater losses if they redeem.2096 It thus securities, to money market fund increase in the cost of capital for issuers may reduce the amount of less liquid shareholders, it is likely that they will of commercial paper and other securities that funds would need to sell reduce their investment in these securities. in the secondary markets at unfavorable securities.2092 While lower yields would We have carefully considered the prices to satisfy redemptions and reduce, but not necessarily eliminate, comments received on both the PWG therefore may increase stability in the the utility of the product to investors, it report and our Proposing Release short-term financing markets. could have a negative impact on capital regarding the NAV buffer alternative Second, it would allocate liquidity formation. Since the probability of and we continue to believe that our costs to investors demanding liquidity breaking the buck is higher for a money original analysis of the costs and when the fund itself is under severe market fund that invests in these benefits remains appropriate. stress. This would be accomplished relatively riskier securities (e.g., a fund Specifically, we continue to believe that primarily by making redeeming with a WAM of 90 days rather than one a NAV buffer should not be adopted shareholders bear first losses when the with a WAM of 60 days) 2093 and fund because we feel that a NAV buffer fund first depletes its buffer and then managers cannot pass through the would reduce yields on money market the fund’s value falls below its stable higher associated yields, it is likely that funds and would therefore render such share price within 30 days after their managers will reduce investments in funds to be unattractive to many redemption. Redeeming shareholders these securities because they cannot investors to a greater extent than the subject to the holdback are the ones differentiate their funds on the basis of reforms we are adopting. whose redemptions may have yield. In addition, many investors are b. Minimum Balance at Risk contributed to fund losses if securities attracted to money market funds As discussed above, under the second are sold at fire sale prices to satisfy because they provide a stable value but alternative in the FSOC Proposed those redemptions. If the fund sells have higher rates of return than Recommendations, a 1% capital buffer assets to meet redemptions, the costs of Treasury securities. These higher rates is paired with an MBR or a holdback of doing so would be incurred while the of return are intended to compensate for a certain portion of a shareholder’s redeeming investor is still in the fund exposure to greater credit risk and money market fund shares.2095 In the because of the delay in redeeming his or potential volatility than Treasury event of fund losses, this alternative her holdback shares. Essentially, securities. As a result of funding the effectively would create a ‘‘waterfall’’ investors would face a choice between buffer, the returns to money market with the NAV buffer bearing first losses, redeeming to preserve liquidity and fund shareholders are likely to decline, subordinated holdback shares bearing remaining invested in the fund to potentially reducing demand from second losses, followed by non- protect their principal. investors who are attracted to money subordinated holdback shares, and Third, an MBR would provide the market funds for their higher yield than finally by the remaining shares in the fund with 30 days to obtain cash to alternative stable value investments.2094 fund (and then only if the loss exceeded satisfy the holdback portion of a Taken together, the demand by the aggregate value of the holdback shareholder’s redemption. This may investors for some yield and the shares). This allocation of losses, in give the fund time for distressed incentives for fund managers to reduce effect, would impose a ‘‘liquidity fee’’ securities to recover when, for example, portfolio risk may impact competition on redeeming shareholders if the fund the market has acquired additional and capital formation in two ways. First, experiences a loss that exceeds the NAV information about the ability of the investors seeking higher yield may buffer. The value of the holdback shares issuer to make payment upon maturity. move their funds to other alternative effectively provides the non-redeeming As of February 28, 2014, 43% of prime investment vehicles resulting in a shareholders with an additional buffer money market fund assets had a contraction in the money market fund cushion when the NAV buffer is maturity of 30 days or less.2097 Thus, an industry. In addition, fund managers exhausted. The Commission did not MBR would provide time for potential may have an incentive to reduce the receive any comments on this losses in fund portfolios to be avoided funds’ investment in commercial paper alternative, and, as discussed below, we since distressed securities could trade at or short-term municipal securities in continue to believe that a minimum a heavy discount in the market but may order to reduce the volatility of cash balance at risk is not the most ultimately pay in full at maturity. This appropriate alternative to meet the added resiliency could not only benefit 2092 But see supra note 2081. the fund and its investors, but it also 2093 policy goals of our reforms. See DERA Study, supra note 24, at 28–31. could reduce the contagion risk that a 2094 See, e.g., Invesco FSOC Comment Letter (‘‘As i. Benefits of a Minimum Balance at run on a single fund can cause when a result of the ongoing ultra-low interest rate Risk environment, MMF yields remain at historic lows assets are correlated across the money . . . A requirement to divert a portion of a MMF’s As discussed in the Proposing market fund industry. earnings in order to build a NAV buffer would Release, an MBR requirement could result in prime MMF yields essentially equaling those of Treasury MMFs (which would not be provide some benefits to money market 2096 See, e.g., Comment Letter of Jeffrey Gordon required to maintain a buffer under the Proposal). funds. First, it would force redeeming (Feb. 28, 2013) (available in File No. FSOC–2012– Faced with the choice of equivalent yields but shareholders to pay for the cost of 0003) (‘‘Gordon FSOC Comment Letter’’) (‘‘[T]he asymmetrical risks, logical investors would liquidity during periods of severe Minimum Balance at Risk feature is a novel way to abandon prime funds for Treasury funds, reduce MMF run risk by imposing some of the run potentially triggering the very instability that market stress when liquidity is costs on the users of MMFs.’’). reforms are intended to prevent and vastly reducing 2097 Based on Form N–MFP data, with maturity corporate borrowers’ access to short-term 2095 See FSOC Proposed Recommendations, supra determined in the same manner as it is for purposes financing.’’). note 1562, at section V.B. of computing the fund’s weighted average life.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00190 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47925

ii. Costs of a Minimum Balance at Risk redemptions. A reduction in the number governing documents would vary based However, we also recognized that of money market funds and/or the on the jurisdiction in which the fund is there are a number of drawbacks to an amount of money market fund assets organized and the amendment processes MBR requirement. It forces shareholders under management as a result of any enumerated in the fund’s governing that redeem more than 97% of their further money market fund reforms documents, including whether board or assets to pay for any losses, if incurred, would have a greater negative impact on shareholder approval is necessary.2103 on the entire portfolio on a ratable basis. money market fund sponsors whose The costs of obtaining shareholder Rather than simply delaying redemption fund groups consist primarily of money approval, amending governing requests, the contingent nature of the market funds, as opposed to sponsors documents, or changing domicile would way losses are distributed among that offer a more diversified range of depend on a number of factors, shareholders forces early redeeming mutual funds or engage in other including the size and the number of investors to bear the losses they are financial activities (e.g., brokerage). shareholders of the fund.2104 Given that money market funds’ largest trying to avoid. As noted above, we did not receive As discussed in section III.A.1 above, commercial paper exposure is to there may be a tendency for a money issuances by financial institutions,2099 a any comments on the MBR alternative market fund to meet redemptions by reduction in the demand of money based on our discussion of it in the selling assets that are the most liquid market instruments may have an impact Proposing Release and we continue to and have the smallest capital losses. on the ability of financial institutions to believe that overall, the complexity of Liquid assets may be sold first because issue commercial paper.2100 an MBR may be more costly for managers can trade at close to their non- The MBR would introduce additional unsophisticated investors because they distressed valuations because they do complexity to what to-date has been a may not fully appreciate the not typically experience large liquidity relatively simple product for investors implications. In addition, money market discounts. Managers also tend to sell to understand. For example, requiring funds and their intermediaries (and assets whose market-based values are shareholders that redeem more than money market fund shareholders that close to or exceed amortized cost 97% of their balances to bear the first have in place cash management because realized capital gains and losses loss creates a cash flow waterfall that is systems) could incur potentially will be reflected in a fund’s shadow complex and that may be difficult for significant operational costs to modify price. Assets that are highly liquid will unsophisticated investors to understand their systems to reflect a MBR 2101 not be sold at significant discounts to fully. requirement. We believe that an MBR Implementing an MBR could involve fair value. Since the liquidity discount coupled with a NAV buffer would turn associated with the sale of liquid assets significant operational costs. These would include costs to convert existing money market funds into a more is smaller than that for illiquid assets, complex instrument whose valuation shareholders can continue to shares or issue new holdback and subordinated holdback shares and may become more difficult for investors immediately redeem shares at $1.00 per to understand. share under an MBR provided the fund changes to systems that would allow is capable of selling liquid assets. Once record-keepers to account for and track 3. Alternatives in the PWG Report a fund exhausts its supply of liquid the MBR and allocation of unrestricted, assets, it will sell less liquid assets to holdback or subordinated holdback As discussed in the Proposing meet redemption requests, possibly at a shares in shareholder accounts. We Release, we considered each option loss. If in fact assets are sold at a loss, expect that these costs would vary discussed in the President’s Working the stable value of the fund’s shares significantly among funds depending on Group on Financial Markets, which could be impaired, motivating a variety of factors. In addition, funds published a report on money market shareholders to be the first to leave. subject to an MBR may have to amend fund reform options in 2010 (the ‘‘PWG Therefore, even with a NAV buffer and or adopt new governing documents to an MBR there continues to be an issue different classes of shares with Inc. (Mar. 16, 2012) (available in File No. 4–619). incentive to redeem in times of fund different rights: unrestricted shares, Multiple class structures are common among funds and market stress.2098 holdback shares, and subordinated offering different arrangements for the payment of 2102 distribution costs and related shareholder services. The MBR, which applies to all holdback shares. The costs to amend Funds have also developed the operational capacity redemptions without regard to the to track and convert certain share classes to others fund’s circumstances at the time of 2099 See supra section III.K.3. based on the redemption activity of the shareholder. redemption, constantly restricts some 2100 See, e.g., Wells Fargo FSOC Comment Letter See Mutual Fund Distribution Fees; Confirmations, (‘‘the MBR requirement would have the anticipated Investment Company Act Release No. 29367 (July portion of an investor’s holdings. Under impact of driving investors and sponsors out of 21, 2010) [75 FR 47064 (Aug. 4, 2010)], at section the resulting continuous impairment of money market funds. We expect that the resulting III.D.1.b. full liquidity, many current investors contraction of assets in the money market fund 2103 See Comment Letter of Federated Investors, who value liquidity in money market industry would, in turn, have disruptive effects on Inc. (Re: Alternative 2) (Jan. 25. 2013) (available in funds may shift their investment to the short-term money markets, decrease the supply File No. FSOC–2012–0003); March 2012 PWG of capital and/or raise the cost of borrowing for Comment Letter. other short-term investments that offer businesses, states, municipalities and other local 2104 Other factors may include the concentration higher yields or fewer restrictions on governments that rely on money market funds, and of fund shares among certain shareholders, the jeopardize the fragile state of the economy and its number of objecting beneficial owners and non- long-term growth prospects.’’). 2098 See, e.g., Comment Letter of Federated objecting beneficial owners of street name 2101 Investors, Inc. (Dec. 17, 2012) (available in File No. Several commenters have noted that the MBR shareholders, whether certain costs can be shared FSOC–2012–0003) (‘‘The data, analyses, surveys would be confusing to retail investors. See, e.g., among funds in the same family, whether the fund and other commentary in the SEC’s docket show Comment Letter of Fidelity Investments (Feb. 14, employs a proxy solicitor and the services the proxy convincingly that the MBR/capital proposal’s 2013) (available in File No. FSOC–2012–0003); solicitor may provide, and whether the fund, in impact in reducing runs is speculative and Comment Letter of T. Rowe Price (Jan. 30, 2013) connection with sending a proxy statement to unproven and in fact could and likely would (available in File No. FSOC–2012–0003). shareholders, uses the opportunity to have precipitate runs under certain circumstances.’’); 2102 One commenter on the PWG Report shareholders vote on other matters. Other matters Comment Letter of Charles Schwab (Jan. 17, 2013) suggested that the MBR framework may be achieved that may be set forth in the proxy materials include (available in File No. FSOC–2012–0003) (‘‘[I]t is not by issuing different classes of shares with the election of directors, a change in investment clear to us that holding back a certain percentage conversion features triggered by shareholder objectives or fundamental investment restrictions, of a client’s funds would reduce run risk.’’) activity. See Comment Letter of Federated Investors, and fund reorganization or re-domicile.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00191 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47926 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Report’’).2105 We discussed these fund would be able to obtain a cooperatively to solve a systemic alternatives in the Proposing Release, maximum amount of cash from the LF. crisis.’’ 2111 This commenter also stated and the comments that we had received The LF would not provide credit that shared capital ‘‘poses the danger of on several of these alternatives, as support. It would not provide liquidity increased risk-taking by industry discussed below. We have decided not to a fund that had ‘‘broken the buck’’ or participants who believe that they have to pursue these options because we would ‘‘break the buck’’ after using the access to a large collective pool of believe, after considering the comments LF. There also would be eligibility capital.’’ 2112 Another commenter, we received on the PWG Report, as well requirements for money market fund although ‘‘receptive to a private as the comments we received on the access to the LF. liquidity facility,’’ expressed concern Proposing Release and the economic Participating funds would elect a that the facility itself might be analysis set forth in this Release, that board of directors that would oversee vulnerable to runs if the facility raises they would not achieve our regulatory the LF, with representation from large, funding through the short-term goals as well as the package of reforms medium, and smaller money market financing markets.2113 This commenter that we are adopting today. We discuss fund complexes. The LF would have also noted other challenges in designing below these options, and our principal restrictions on the securities that it such a facility, including governance reasons for not adopting them.2106 could purchase from funds seeking issues and ‘‘the fact that because of its liquidity and on the LF’s investment a. Private Emergency Liquidity Facility size, the liquidity facility would only be portfolio. The LF would be able to able to address the liquidity needs of a As discussed in the Proposing pledge approved securities (less a very limited number of funds and Release, one option outlined by the haircut) to the Federal Reserve discount would not be able to meet the needs of PWG Report, is a private emergency window. We note that the interaction the entire industry in the event of a liquidity facility (‘‘LF’’) for money with the Federal Reserve discount run.’’ 2114 Another commenter expressed 2107 market funds. One comment letter window (as well as the bank structure concerns that ‘‘the costs, infrastructure on the PWG Report proposed a structure of the LF) means that the Commission 2108 and complications associated with for such a facility in some detail. does not have regulatory authority to private liquidity facilities are not worth Under this proposal, the LF would be create the LF. the minimal liquidity that would be organized as a state-chartered bank or An LF could lessen and internalize provided.’’ 2115 Finally, another trust company. Sponsors of prime some of the liquidity risk of money commenter echoed this concern, stating: money market funds would be required market funds that contributes to their to provide initial capital to the LF in an vulnerability to liquidity runs by acting [a private liquidity facility] cannot possibly amount based on their assets under as a purchaser of last resort if a liquidity eliminate completely the risk of breaking the management up to 4.9% of the LF’s total buck without in effect eliminating maturity event is triggered. It also could create transformation, for instance through the initial equity, but with a minimum efficiency gains by pooling this liquidity imposition of capital and liquidity standards investment amount. The LF also would risk within the money market fund on the private facilities. Thus, in the case of charge participating funds commitment industry.2109 Commenters on the PWG a pervasive financial shock to asset values, fees of 3 basis points per year on fund Report addressing this option generally [money market fund] shareholders will assets under management. Finally, at supported the concept of the LF, stating almost certainly view the presence of private the end of its third year, the LF would that it would facilitate money market facilities as a weak reed and widespread runs issue to third parties time deposits funds internalizing the costs of liquidity are likely to develop. In turn, government aid paying a rate approximately equal to the and other risks associated with their is likely to flow. Because shareholders will 3-month bank CD rate. The LF would be operations through the cost of expect government aid in a pervasive financial crisis, shareholder and [money designed to provide initially $7 billion participation. In addition, such a facility market fund] investment decisions will be in backup redemption liquidity to prime could reduce contagion effects by distorted. Therefore, we view emergency money market funds, $12.3 billion at the limiting the need for fire sales of money facilities as perhaps a valuable enhancement, end of the first year, $30 billion at the market fund assets to satisfy redemption but not a reliable overall solution either to end of five years, and $50–55 billion at pressures.2110 the problem of runs or to the broader the end of year 10 (these figures take However, several commenters problem of distorted investment into account the LF’s ability to expand expressed reservations regarding this decisions.2116 its capacity by borrowing through the reform option. For example, one A private liquidity facility was also Federal Reserve’s discount window). commenter supported ‘‘the idea’’ of discussed at the 2011 Roundtable, The LF would be leveraged at inception, such a facility ‘‘in that it could provide where many participants made points but would seek to achieve and maintain an incremental liquidity cushion for the a minimum leverage ratio of 5%. Each industry,’’ but noted that ‘‘it is difficult 2111 Comment Letter of BlackRock Inc. (Jan. 10, to ensure that [a liquidity facility] with 2011) (available in File No. 4–619) (‘‘BlackRock 2105 Report of the President’s Working Group on finite purchasing capacity is fairly PWG Comment Letter’’). Financial Markets, Money Market Fund Reform administered in a crisis . . . , [which] 2112 Id. In the case of deposit insurance, bank Options (Oct. 2010) (‘‘PWG Report’’) available at could lead to [money market funds] capital is used to overcome the http://www.treasury.gov/press-center/press- problem of excessive risk taking. See, e.g., Berger, releases/Documents/ attempting to optimize the outcome for supra note 2088; Michael C. Keeley & Frederick T. 10.21%20PWG%20Report%20Final.pdf. The themselves, rather than working Furlong, A Reexamination of Mean-Variance members of the PWG included the Secretary of the Analysis of Bank Capital Regulation, 14 J. of Banking and Fin. 69 (1990). Treasury Department (as chairman of the PWG), the 2109 The liquidity facility would function in a 2113 Chairman of the Board of Governors of the Federal fashion similar to private deposit insurance for Comment Letter of Wells Fargo Funds Reserve System, the Chairman of the SEC, and the banks. For the economics of using a liquidity Management, LLC (Jan. 10, 2011) (available in File Chairman of the Commodity Futures Trading facility to stop runs, see Diamond & Dybvig, supra No. 4–619) (‘‘Wells Fargo PWG Comment Letter’’). Commission. note 2089. 2114 Id. 2106 We note we may not have the legal authority 2110 See, e.g., ICI Jan 2011 PWG Comment Letter; 2115 Comment Letter of Fidelity Investments (Jan. to implement some of the alternatives discussed Letter of the Dreyfus Corporation (Jan. 10, 2011) 10, 2011) (available in File No. 4–619) (‘‘Fidelity Jan below, even were we to find that they might help (available in File No. 4–619) (‘‘Dreyfus PWG 2011 PWG Comment Letter’’). achieve our regulatory goals. Comment Letter’’); Comment Letter of Federated 2116 Comment Letter of Federal Reserve Bank of 2107 See PWG Report, supra note 506, at 23–25. Investors, Inc. (Jan. 7, 2011) (available in File No. Richmond (Jan. 10, 2011) (available in File No. 2108 See ICI Jan 2011 PWG Comment Letter. 4–619). 4–619) (‘‘Richmond Fed PWG Comment Letter’’).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00192 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47927

and expressed concerns similar to those prevent widespread liquidity-induced replace money market funds’ historical discussed above.2117 runs on money market funds. reliance on discretionary sponsor The Commission did not receive any We also continue to be concerned support, which has covered capital comments regarding this alternative about the conflicts of interest inherent losses in money market funds in the after we proposed our reforms. in any such facility given that it would past but, as discussed above, also However, as noted in the Proposing be managed by a diverse money market contributes to these funds’ vulnerability Release, we have considered comments fund industry, not all of whom may to liquidity runs. on the PWG Report, and our staff has have the same interests at all times. As noted in the Proposing Release, spent considerable time evaluating Participating money market funds although a few commenters on the PWG whether an LF would successfully would be of different sizes and the Report expressed some support for a mitigate the risk of liquidity runs in governance arrangements would system of insurance for money market money market funds and change the represent some fund complexes and not funds,2121 most opposed this potential economic incentives of market others. There may be conflicts relating reform option.2122 Those commenters participants. We continue to believe that to money market funds whose nature or expressed concern that government this alternative should not be adopted portfolio makes them more or less likely insurance would create moral hazard for the reasons discussed in the to ever need to access the LF. The LF and encourage excessive risk taking by Proposing Release, including, foremost may face conflicts allocating limited funds.2123 They also asserted that such because we are concerned that a private liquidity resources during a crisis, and insurance could distort capital flows liquidity facility would not have choosing which funds gain access and from bank deposits or government sufficient purchasing capacity in the which do not. To be successful, an LF money market funds into prime money event of a widespread run without would need to be managed such that it market funds, and that this access to the Federal Reserve’s discount sustains its credibility, particularly in a disintermediation could and likely window and we do not have legal crisis, and does not distort incentives in would cause significant disruption to authority to grant discount window the market to favor certain business the banking system and the money access to an LF. Access to the discount models or types of funds. market.2124 For example, one These potential issues collectively window would raise complicated policy commenter stated that: created a concern that such a facility considerations and likely would require ‘‘If the insurance program were partial (for legislation.2118 In addition, such a may not prove effective in a crisis and thus we would not be able to achieve example, capped at $250,000 per account), facility would not protect money market many institutional investors likely would funds from capital losses triggered by our regulatory goals of reducing money market funds’ susceptibility to liquidity invest in this partially insured product rather credit events as the facility would than directly in the market or in other cash runs and the corresponding impacts on purchase securities at the prevailing pools because the insured funds would offer investor protection and capital market price. Thus, we are concerned liquidity, portfolios that were somewhat less formation. Combined with our lack of that such a facility without additional risky than other pools, and yields only authority to create an LF bank with loss protection would not sufficiently slightly lower than alternative cash pools. access to the Federal Reserve’s discount Without insurance covering the full value of

2117 window, these concerns ultimately have investors’ account balances, however, there See, e.g., Roundtable Transcript, supra note would still be an incentive for these investors 63. (Brian Reid, Investment Company Institute) led us to not pursue this alternative. (discussing the basic concept for a private liquidity to withdraw the uninsured portion of their facility as proposed by the Investment Company b. Insurance assets from these funds during periods of Institute and its potential advantages providing As discussed in the Proposing severe market stress.’’ 2125 additional liquidity to money market funds when Release, we also considered whether market makers were unwilling or unable to do so); Treasury from using the Exchange Stabilization (Paul Tucker, Bank of England) (discussing the money market funds should be required Fund for the establishment of any future guaranty potential policy issues involved in the Federal to carry some form of public or private programs for the U.S. money market fund industry). Reserve extending discount window access to such insurance, similar to bank accounts that 2121 See, e.g., Richmond Fed PWG Comment a facility); (Daniel K. Tarullo, Federal Reserve carry Federal Deposit Insurance Board) (discussing the potential policy issues Letter (stating that insurance would be a second involved in the Federal Reserve extending discount Corporation deposit insurance, which best solution for mitigating the risk of runs in window access to such a facility); (Jeffrey A. has played a central role in mitigating money market funds after a floating net asset value Goldstein, Department of Treasury) (questioning 2119 because insurance premiums and regulation are the risk of runs on banks. The difficult to calibrate correctly, so distortions would whether there were potential capacity issues with Treasury’s Temporary Guarantee such a facility); (Sheila C. Bair, Federal Deposit likely remain); Comment Letter of Paul A. Volcker Insurance Corporation) (stating her belief that ‘‘the Program helped slow the run on money (Feb. 11, 2011) (available in File No. 4–619) better approach would be to try to reduce or market funds in September 2008, and (‘‘Volcker PWG Comment Letter’’) (stating that eliminate the systemic risk, as opposed to just kind money market funds wishing to retain a stable net thus we naturally considered whether asset value should reorganize as special purpose of acknowledge it’’ and institutionalize a ‘‘bailout some form of insurance for money facility’’ in a way that would exacerbate moral banks or ‘‘submit themselves to capital and hazard). market fund shareholders might supervisory requirements and FDIC-type insurance on the funds under deposit’’). 2118 See, e.g., id. (Paul Tucker, Bank of England) mitigate the risk of liquidity runs in 2122 (‘‘As I understand it, this is a bank whose sole money market funds and their See, e.g., Comment Letter of the American purpose is to stand between the Federal Reserve Bankers Association (Jan. 10, 2011) (available in detrimental impacts on investors and File No. 4–619) (‘‘American Bankers PWG Comment and the money market mutual fund industry. If I 2120 think about that as a central banker, I think ‘So, I’m capital formation. Insurance might Letter’’); BlackRock PWG Comment Letter; Dreyfus lending to the money market mutual fund industry.’ PWG Comment Letter; Fidelity Jan 2011 PWG What do I think about the regulation of the money 2119 See generally Charles W. Calomiris, Is Comment Letter; Wells Fargo PWG Comment Letter; market mutual fund industry? . . . And the other Deposit Insurance Necessary? A Historical Comment Letter of John M. Winters (Jan. 5, 2011) thought I think I would have is . . .‘If the money Perspective, 50 J. Econ. Hist. 283 (1990); Rita (available in File No. 4–619) (‘‘Winters PWG market mutual fund industry can do this, what’s to Carisano, Deposit Insurance: Theory, Policy and Comment Letter’’). stop other parts of our economy doing this and Evidence (1992); Diamond & Dybvig, supra note 2123 See, e.g., American Bankers PWG Comment tapping into the special ability of the central bank 2089. Letter; BlackRock PWG Comment Letter; ICI Jan to create liquidity’ . . . It’s almost to bring out the 2120 Authority for a guarantee program like the 2011 PWG Comment Letter; Wells Fargo PWG enormity of the idea that you have floated . . . it’s Temporary Guarantee Program for Money Market Comment Letter. posing very big questions indeed, about who should Funds has since been removed. See Emergency 2124 See, e.g., ICI Jan 2011 PWG Comment Letter; have direct access and to the nature of the monetary Economic Stabilization Act of 2008 § 131(b), 12 Wells Fargo PWG Comment Letter. economy.’’) U.S.C. 5236 (2008) (prohibiting the Secretary of 2125 See ICI Jan 2011 PWG Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00193 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47928 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Commenters stated that with respect c. Special Purpose Bank money market fund regulatory regime to private insurance, it has been made In the Proposing Release, we also and creating additional systemic 2135 available in the past but the product evaluated whether money market funds risk. For example, one of these proved unsuccessful due to its cost and should be regulated as special purpose commenters stated that transforming in the future would be too costly.2126 banks. Stable net asset value money money market funds into special They also stated that they did not market fund shares can bear some purpose banks would create believe any private insurance coverage similarity to bank deposits.2130 Some homogeneity in the financial regulatory would have sufficient capacity.2127 aspects of could be used scheme by relying on the bank business However, some commenters on our to mitigate some of the risks described model for all short-term cash Proposing Release supported a system of in section II above.2131 Money market investments and that ‘‘[g]iven the insurance for money market funds, funds could benefit from access to the unprecedented difficulties the banking noting that historically insurance has special purpose bank’s capital, industry has experienced recently, it provided stability during times of government deposit insurance and seems bizarre to propose that [money stress.2128 emergency liquidity facilities from the market funds] operate more like banks, which have absorbed hundreds of We have carefully considered the Federal Reserve on terms codified and well understood in advance, and thus billions of dollars in government loans comments on the PWG Report and our 2136 with a clearer allocation of risks among and handouts.’’ Some pointed to the Proposing Release. However, market participants. We did not receive differences between banks and money considering foremost that we do not any comments on this alternative. market funds as justifying different have regulatory authority to create a As the PWG Report noted, and as regulatory treatment, and expressed public insurance scheme for money commenters reinforced, there are a concern that concentrating investors’ market funds, we are not pursuing this number of drawbacks to regulating cash management activity in the option. Separately, we continue to money market funds as special purpose banking sector could increase systemic believe that it would not achieve our banks. Although a few commenters risk.2137 goal, among others, of materially expressed some support for this Foremost, we are not pursuing this reducing the contagion effects from option,2132 almost all commenters on option because we lack regulatory heavy redemptions at money market the PWG Report addressing this possible authority to transform money market funds without undue costs. We have reform option opposed it.2133 Some funds into special purpose banks. made this determination based on commenters stated that the costs of Separately, however, we continue to money market fund insurance’s converting money market funds to believe that the potential costs involved potential for creating moral hazard and special purpose banks would likely be in creating a new special purpose bank encouraging excessive risk-taking by large relative to the costs of simply regulatory framework to govern money money market funds, given the allowing more of this type of cash market funds are not justified. In difficulties and costs involved in management activity to be absorbed into addition, given our view that money creating effective risk-based pricing for the existing banking sector.2134 Others market funds have some features similar insurance and additional regulatory expressed concern that regulating to banks but other aspects quite structure to offset this incentive.2129 If money market funds as special purpose different from banks, applying insurance actually increases moral banks would radically change the substantial parts of the bank regulatory hazard and decreases corresponding product, make it less attractive to regime to money market funds would not be well tailored to the structure of market discipline, it may in fact investors and thereby have unintended and risks involved in money market increase rather than decrease money consequences potentially worse than the funds compared to the reforms we are market funds’ susceptibility to liquidity mitigated risk, such as leading adopting in this Release. As noted runs. If the only way to counter these sophisticated investors to move their above, we received no comments on this incentives was by imposing a very funds to unregulated or offshore money alternative after the Proposing Release costly regulatory structure and risk- market fund substitutes and thereby limiting the applicability of the current was issued. After considering our lack based pricing system our reforms of regulatory authority to transform potentially offer a better ratio of benefits 2130 money market funds into special to associated costs. Finally, we were See supra note 2090 and accompanying text. 2131 Id. purpose banks as well as the views concerned with the difficulty of creating 2132 See Volcker PWG Comment Letter (‘‘MMMFs expressed in the PWG comment letters private insurance at an appropriate cost that desire to offer their clients bank-like and for the reasons set forth above, we and of sufficient capacity for a several transaction services . . . and promises of continue to believe that transforming trillion-dollar industry that tends to maintaining a constant or stable net asset value (NAV), should either be required to organize money market funds into special have highly correlated tail risk. All of themselves as special purpose banks or submit purpose banks is not the most these considerations have led us to not themselves to capital and supervisory requirements appropriate reform. pursue this option further. and FDIC-type insurance on funds under deposit.’’); Winters PWG Comment Letter (supporting it as the d. Dual Systems of Money Market Funds third best option, stating that ‘‘[a]s long as the 2126 See, e.g., BlackRock PWG Comment Letter; federal government continues to be the only viable In the Proposing Release, we Fidelity Jan 2011 PWG Comment Letter; Dreyfus source of large scale back-up liquidity for MMFs, evaluated options that would institute a PWG Comment Letter; Wells Fargo PWG Comment it is intellectually dishonest to pretend that MMFs dual system of money market funds, Letter; Winters PWG Comment Letter. are not the functional equivalent of deposit-taking 2127 See, e.g., BlackRock PWG Comment Letter; banks. Thus, inclusion in the federal banking where either institutional money market Fidelity Jan 2011 PWG Comment Letter; Wells system is warranted.’’). Fargo PWG Comment Letter; Winters PWG 2133 See, e.g., BlackRock PWG Comment Letter; 2135 See, e.g., Comment Letter of the Mutual Fund Comment Letter. Fidelity Jan 2011 PWG Comment Letter; ICI Jan Directors Forum (Jan. 10, 2011) (available in File 2128 See Comment Letter of John Chang (June 27, 2011 PWG Comment Letter; Comment Letter of the No. 4–619) (‘‘MFDF PWG Comment Letter’’); 2013) (‘‘Chang Comment Letter’’); Comm. on Cap. Institutional Money Market Funds Association (Jan. Fidelity Jan 2011 PWG Comment Letter; ICI Jan Mkt. Reg. Comment Letter. 10, 2011) (available in File No. 4–619) (‘‘IMMF 2011 PWG Comment Letter. 2129 See, e.g., Yuk-Shee Chan et al., Is Fairly Comment Letter’’). 2136 See Fidelity Jan 2011 PWG Comment Letter. Priced Deposit Insurance Possible?, 47 J. Fin. 227 2134 See, e.g., Richmond Fed PWG Comment 2137 See, e.g., Fidelity Jan 2011 PWG Comment (1992). Letter; ICI Jan 2011 PWG Comment Letter. Letter; ICI Jan 2011 PWG Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00194 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47929

funds or money market funds using a fees and gates only for some types of commenters stated that they supported stable share price would be subject to money market funds, however, could be our clarifying amendments but did not more stringent regulation than others. imposed under our current authority comment on any specific provisions of As discussed in the PWG Report,2138 and are being adopted today. the amendments.2141 One of these money market fund reforms could focus Each of these dual systems generally commenters generally supported our on providing enhanced regulation solely has the same advantages and amendments but did not address or for money market funds that seek to disadvantages as the potential enhanced discuss any costs or benefits.2142 The maintain a stable net asset value, rather regulatory constraints that would be second commenter stated that it than a floating NAV. Enhanced applied, described above. In addition, believed the clarifying amendments regulations could include any of the for any two-tier system of money market conform with current fund practices, regulatory reform options discussed fund regulation to be effective in that there would be no costs to funds above such as mandatory insurance, a reducing the risk of contagion effects that may not currently conform to these private liquidity facility, or special from heavy redemptions, investors amendments, and that there would be purpose bank regulation. Money market would need to fully understand the little to no effect on market efficiency, funds that did not comply with these difference between the two types of competition or capital formation.2143 A enhanced constraints would have a funds and their associated risks. If they third commenter stated that most, if not floating NAV (though they would still did not, they may indiscriminately flee all, money market funds currently be subject to the other risk-limiting both types of money market funds even conform to the proposed clarifying conditions contained in rule 2a–7). if only one type experiences amendments, and stated that it does not There also may be other enhanced difficulty.2139 anticipate a significant cost burden to forms of regulation or other types of However, given the difficulties, the industry in conforming with any of dual systems. For example, an drawbacks, and limitations on our the proposed amendments.2144 This alternative formulation of this regulatory authority associated with commenter specifically supported regulatory regime would apply the dual systems involving a special certain of the amendments and provided enhanced regulatory constraints purpose bank, private liquidity facility comment on certain specific provisions discussed above (e.g., a private liquidity and insurance, we continue to believe of the amendments.2145 We discuss facility or insurance) only to that a dual system of money market these comments below. No commenters ‘‘institutional’’ money market funds, fund regulation involving these objected to the proposed clarifying and ‘‘retail’’ money market funds would enhanced regulatory constraints should amendments. continue to be subject to rule 2a–7 as it not be adopted. We did not receive any As stated in the Proposing Release, we exists today. We note that our decision comments on these types of dual believe that for funds that are already to not subject retail and government systems. However, as noted above, our acting consistently with our money market funds to a floating NAV current reforms would to some extent amendments, there will be no associated requirement and to not subject create a dual system of money market costs. We requested comment as to government money market funds to a funds, and we discuss in greater detail whether there would be any costs to fees and gates requirement in effect our rationale for that approach, together funds that may not currently conform to creates a dual system, which we discuss with an analysis of commenter’s views the clarifying amendments. As noted in greater detail in section III.C.1. and the economic effects of that above, no commenter provided any These dual system regulatory regimes approach, in section III.C.1. quantification of potential costs or for money market funds could provide benefits but one commenter suggested several important benefits. They attempt M. Clarifying Amendments that there would be no costs to funds to apply the enhanced regulatory Since our adoption of amendments to that may not currently conform to the constraints on those aspects of money rule 2a–7 in 2010, a number of clarifying amendments 2146 and one market funds that most contribute to questions have arisen regarding the commenter stated that it does not their susceptibility to liquidity runs— application of certain of those changes. anticipate a significant cost burden to whether it is institutional investors that As stated in the Proposing Release, we the industry in conforming with the have shown a tendency to run or a are taking this opportunity to amend proposed amendments.2147 As stated in stable net asset value created through rule 2a–7 to clarify the operation of the Proposing Release, we understand the use of amortized cost valuation that these provisions. In addition, we are that most funds currently comply with can create a first mover advantage for also amending rule 2a–7 to state more our clarifying amendments and did not those investors that redeem at the first clearly a limit we imposed on money receive comments stating otherwise, signs of potential stress. A dual system market funds’ investments in second except that one commenter noted that that imposes enhanced constraints on tier securities in 2010.2140 Two funds do not always include open sales stable net asset value money market receivables as liquid assets, and do not funds would allow investors to choose 2139 For example, when the Reserve Primary Fund necessarily determine maturity for their preferred mixture of stability, risk, broke the buck in September 2008, all money short-term floating rate securities in the and return. market funds managed by Reserve Management Company, Inc. experienced runs, even the Reserve Because insurance, special purpose 419(b)(2)(iv) under the Securities Act of 1933 (17 U.S. Government Fund, despite the fact that the CFR 230.419(b)(2)(iv)), which references certain banks, and the private liquidity facility Reserve U.S. Government Fund had a quite paragraphs in rule 2a–7 the location of which is generally are beyond our regulatory different risk profile. See Press Release, A changing under our amendments. Specifically, we authority to create, these particular dual Statement Regarding The Reserve Primary and U.S. are replacing references to ‘‘paragraphs (c)(2), (c)(3), options, which would impose one of Government Funds (Sept. 19, 2008) available at and (c)(4)’’ with ‘‘paragraph (d)’’. http://www.primary-yieldplus-inliquidation.com/ 2141 See U.S. Bancorp Comment Letter; Fidelity these regulatory constraints on a subset pdf/PressReleasePrimGovt2008_0919.pdf (‘‘The Comment Letter. of money market funds, could not be U.S. Government Fund, which had approximately 2142 $10 billion in assets under management at the See Fidelity Comment Letter. created under our current regulatory 2143 opening of business on September 15, 2008, has See U.S. Bancorp Comment Letter. authority. Other options, such as 2144 received redemption requests this week of See State Street Comment Letter. requiring a floating NAV or liquidity approximately $6 billion.’’). 2145 Id. 2140 In addition, we are adopting as proposed, 2146 See U.S. Bancorp Comment Letter. 2138 See PWG Report, supra note 506, at 29–32. technical, conforming amendments to rule 2147 See State Street Comment Letter.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00195 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47930 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

manner proposed by the requirements, which are designed to one commenter noted that it is not amendment.2148 This commenter did increase a fund’s ability to pay always typical for money market funds note however, that it agreed that most, redeeming shareholders in times of to include open sales receivables as if not all money market funds currently market stress when the fund cannot rely liquid assets, this commenter also stated conform to the proposed clarifying on the market or a dealer to provide that most, if not all, money market amendments.2149 We therefore expect immediate liquidity.2153 funds currently conform to the proposed that the clarifying amendments will Second, we are adopting as proposed, amendments.2159 The first two likely not result in any significant amendments to require that an agency clarifying amendments discussed above economic effects or quantifiable costs or discount note with a remaining maturity are designed to make clear that benefits. of 60 days or less qualifies as a ‘‘weekly securities with maturities determined liquid asset’’ only if the note is issued according to interest rate resets and 1. Definitions of Daily Liquid Assets and without an obligation to pay additional interest bearing agency notes issued at Weekly Liquid Assets interest on the principal amount.2154 a discount do not qualify as daily or We are adopting, as proposed, Our amendment clarifies that interest- weekly liquid assets, as applicable.2160 amendments to clarify certain bearing agency notes that are issued at Because both of these types of securities characteristics of instruments that a discount do not qualify.2155 We are less liquid than the limited types of qualify as a ‘‘daily liquid asset’’ or understand that these interest-bearing instruments that do qualify, any funds ‘‘weekly liquid asset’’ for purposes of agency notes issued at a discount are that alter their future portfolio the rule. First, we are making clear that extremely rare and do not believe that investments to conform to these money market funds cannot use the interest-bearing agency notes are among requirements would benefit from maturity-shortening provisions in the very short-term agency discount increased liquidity and ability to absorb current paragraph (d) of rule 2a–7 notes that appeared to be relatively larger amounts of redemptions. We regarding interest rate readjustments 2150 liquid during the 2008 market events continue to believe that by including when determining whether a security and that we determined could qualify as certain receivables as daily and weekly satisfies the maturity requirements of a weekly liquid assets.2156 assets, funds will benefit because the daily liquid asset or weekly liquid Finally, we are amending as types of assets that can satisfy those asset,2151 which include securities that proposed, rule 2a–7 to include in the liquidity requirements will be will mature within one or five business definitions of daily and weekly liquid increased. days, respectively.2152 Using an interest assets amounts receivable that are due We also continue to believe that there rate readjustment to determine maturity unconditionally within one or five would not be any significant costs as permitted under current paragraph business days, respectively, on pending associated with our amendments to the (d) for these purposes allows funds to sales of portfolio securities.2157 These definitions of daily and weekly liquid include as daily or weekly liquid assets receivables, like certain other securities assets. We do not anticipate that there securities that the fund would not have that qualify as daily or weekly liquid will be operational costs for any funds a legal right to convert to cash in one or assets, provide liquidity for the fund that currently hold securities that will five business days. This is not because they give a fund the legal right no longer qualify as daily or weekly consistent with the purposes of the to receive cash in one to five business assets because those securities likely minimum daily and weekly liquidity days. A fund (or its adviser) could would mature before the compliance include these receivables in daily and date for our amendments.2161 Because 2148 Id. weekly liquid assets if the fund (or its we continue to believe that most money 2149 Id. adviser) has no reason to believe that market funds are currently acting 2150 See current rule 2a–7(d) (providing a number the buyer might not perform. of exceptions to the general requirement that the consistently with the amendments that maturity of a portfolio security be deemed to be the We continue to understand that the clarify assets that qualify as daily and period remaining (from the trade date) until the instruments that most money market weekly assets, we do not anticipate that date on which, in accordance with the terms of the funds currently hold as daily and the amendments will have any effect on security, the principal amount must weekly liquid assets currently conform unconditionally be paid; the exceptions generally efficiency or capital formation. To the provide that a fund may shorten the maturity date to the amendments and that these extent that some funds’ practices do not of certain securities to the period remaining until practices are consistent with positions already conform, however, the the next readjustment of the interest rate or the our staff has taken in informal guidance clarifications may eliminate any period remaining until the principal amount can be to money market funds.2158 Although recovered through demand). competitive advantages that may have 2151 See rule 2a–7(a)(8); rule 2a–7(a)(34). The resulted from those practices, although 2153 See 2010 Adopting Release, supra note 17, at amended definitions require funds to determine a we expect that any such advantages text following n.213. security’s maturity in the same way they must 2154 would have been small because the calculate for purposes of determining WAL under See rule 2a–7(a)(34)(iii). 2155 amendments make minor clarifying amended rule 2a–7(d)(1)(iii). We understand that an interest-bearing 2152 Current rule 2a–7(a)(8) defines ‘‘daily liquid agency note might be issued at a discount to changes to the assets that qualify as assets’’ to include (i) cash, (ii) direct obligations of facilitate a rounded coupon rate (i.e., 2.75% or daily and weekly liquid assets but do the U.S. government, or (iii) securities that will 3.5%) when yield demanded on the note would not otherwise remove a significant otherwise require a coupon rate that is not rounded. mature or are subject to a demand feature that is portion of assets that would otherwise exercisable and payable within one business day. 2156 See 2010 Adopting Release, supra note 17, at Current rule 2a–7(a)(32) defines ‘‘weekly liquid text accompanying and following nn.251–55. Our assets’’ to include (i) cash; (ii) direct obligations of determination was informed by average daily yields 2010) (http://www.sec.gov/divisions/investment/ the U.S. government; (iii) securities that will mature of 30 day and 60 day agency discount notes during guidance/mmfreform-imqa.htm) (‘‘Staff Responses or are subject to a demand feature that is exercisable the fall of 2008. We believe that interest-bearing to MMF Questions’’), Questions II.1, II.2, II.4. and payable within five business days; or (iv) agency notes issued at a discount were not included 2159 See State Street Comment Letter. Government securities (as defined in section in the indices of the agency discount notes on 2160 See rule 2a–7(a)(8)(iii) (definition of daily 2(a)(16) of the Act) that are issued by a person which we based our analysis or if they were liquid assets); rule 2a–7(a)(34)(iii) and (iv) controlled or supervised by and acting as an included, there were too few to have affected the (definition of weekly liquid assets). instrumentality of the U.S. government that are indices’ averages. 2161 See current rule 2a–7(a)(12)(i) (An eligible issued at a discount to the principal amount to be 2157 See rule 2a–7(a)(8)(iv); rule 2a–7(a)(34)(v). security must have a remaining maturity of no more repaid at maturity and have a remaining maturity 2158 See Staff Responses to Questions about than 397 days); see infra section III.N.4 (discussing date of 60 days or less. Money Market Fund Reform, (revised Nov. 24, the compliance date for the clarifying amendments).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00196 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47931

qualify as daily or weekly liquid assets. the liquidity of money market funds, we 3. Short-Term Floating Rate Securities We did not receive comments continue to believe it is unnecessary to We are also amending rule 2a–7 as suggesting otherwise. continue to require that demand proposed to clarify the method for 2. Definition of Demand Feature features be exercised at any time on no determining WAL for short-term floating more than 30 days’ notice.2166 rate securities.2170 WAL is similar to a We are amending the definition of Therefore, the demand feature fund’s WAM, except that WAL is demand feature in rule 2a–7 as definition will focus on funds’ ability to determined without reference to interest proposed to mean a feature permitting receive payment within 397 calendar rate readjustments.2171 Under current the holder of a security to sell the days of exercise of the demand feature. rule 2a–7, a short-term variable rate security at an exercise price equal to the security, the principal of which must approximate amortized cost of the As stated in the Proposing Release, we unconditionally be paid in 397 calendar security plus accrued interest, if any, at believe that eliminating the 30-day days or less, is ‘‘deemed to have a the time of exercise, paid within 397 notice requirement may improve maturity equal to the earlier of the calendar days of exercise.2162 Our efficiency by simplifying the operation period remaining until the next amendment eliminates the requirement of rule 2a-7 regarding demand features readjustment of the interest rate or the that a demand feature be exercisable at and providing issuers with more period remaining until the principal any time on no more than 30 calendar flexibility. One commenter agreed that 2163 amount can be recovered through days’ notice. limiting the 30-day notice requirement 2172 One commenter addressed this may improve efficiency by simplifying demand.’’ A short-term floating rate proposed clarifying amendment, stating the operation of rule 2a–7.2167 As noted security, the principal amount of which that it agreed that eliminating the in the Proposing Release, our must unconditionally be paid in 397 calendar days or less, is ‘‘deemed to requirement that a demand feature be amendment will permit funds to have a maturity of one day’’ because the exercisable at any time on no more than purchase securities with demand interest rate for a floating rate security 30 days’ notice would clarify the features from a larger pool of issuers. 2164 will change on any date there is a operation of rule 2a–7. Eliminating We continue to believe that permitting 2173 the requirement that a demand feature change in the specified interest rate. funds to purchase securities with Despite the difference in wording of be exercisable at any time on no more demand features from a larger pool of the maturity-shortening provisions for than 30 days’ notice removes from rule issuers may promote competition among floating rate and variable rate securities, 2a–7 a provision that has become issuers and facilitate capital formation the Commission has always intended for obsolete. In 1986, the Commission because issuers will have a higher these provisions to work in parallel and expanded the notice period from seven number of other issuers to compete provide the same results.2174 The days to 30 days for all types of demand against in selling securities to funds, omission of an explicit reference to features and emphasized that the notice which in turn may incentivize issuers to demand features in the maturity- requirement was at least in part develop new or additional securities shortening provision for short-term designed to ensure that money market with demand features. We also continue floating rate securities, however, has funds maintain adequate liquidity.2165 to believe that our amendment will not created uncertainty in determining the Because, as discussed in section II.E.1 impose costs on funds, and did not maturity of short-term floating rate above, the 2010 amendments added receive comment indicating securities with a demand feature for significant new provisions to enhance otherwise.2168 One commenter agreed purposes of calculating a fund’s that it did not anticipate any additional 2175 2162 WAL. Therefore, we are amending See rule 2a–7(a)(9). cost to the industry in connection with 2163 A demand feature is currently defined to rule 2a–7(d)(4) to provide that, for 2169 mean (i) a feature permitting the holder of a security this amendment. purposes of determining WAL, a short- to sell the security at an exercise price equal to the term floating rate security shall be approximate amortized cost of the security plus 2166 Our amendments are also consistent with a deemed to have a maturity equal to the accrued interest, if any, at the time of exercise. A position our staff has taken in the past. See, e.g., demand feature must be exercisable either: (a) At period remaining until the principal SEC No-Action Letter to Citigroup Global Markets, any time on no more than 30 calendar days’ notice; amount can be recovered through Inc. (May 28, 2009), available at http:// or (b) At specified intervals not exceeding 397 2176 www.sec.gov/divisions/investment/noaction/2009/ demand. calendar days and upon no more than 30 calendar As stated in the Proposing Release, we days’ notice; or (ii) A feature permitting the holder citigroupglobal052809-2a7.htm. 2167 of an ABS unconditionally to receive principal and See State Street Comment Letter. understand that most money market interest within 397 calendar days of making 2168 We note that demand features and guarantees funds currently determine maturity for demand. See current rule 2a–7(a)(9). are referenced in rule 12d3–1(d)(7)(v) (providing 2164 that, subject to a diversification limitation, the See State Street Comment Letter. 2170 See rule 2a–7(i)(4). acquisition of a demand feature or guarantee is not 2165 See Acquisition and Valuation of Certain 2171 See current rule 2a–7(c)(2)(iii). an acquisition of securities of a securities related Portfolio Instruments by Registered Investment 2172 See current rule 2a–7(d)(2). Companies, Investment Company Act Release No. business (that would otherwise be prohibited pursuant to section 12(d)(3) of the Act)) and rule 2173 See current rule 2a–7(d)(4). Rule 2a–7 14983 (Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)] distinguishes between floating rate and variable rate (‘‘The Commission still believes that some limit 31a–1(b)(1) (requiring that a fund’s detailed records of daily purchase and sale records include the name securities based on whether the securities’ interest must be placed on the extent to which funds relying rate adjusts (i) when there is a change in a specified on the rule will have to anticipate their cash and and nature of any demand feature provider or interest rate (floating rate securities), or (ii) on set investment needs more than seven days in advance. guarantor). We do not believe that our amendment dates (variable rate securities); current rule 2a– However, the Commission believes that funds will provide any benefits or impose any costs with 7(a)(15) (defining ‘‘floating rate security’’); current should be able to invest in the demand instruments respect to these rules, other than those described rule 2a–7(a)(31) (defining ‘‘variable rate security’’). that are being marketed with notice periods of up above. We also are updating the cross references to 2174 to 30 days, as long as the directors are cognizant the definition of the terms ‘‘demand feature’’ and See 1996 Adopting Release, supra note 1735, of their responsibility to maintain an adequate level ‘‘guarantee’’ in rule 12d3–1(d)(7)(v), which defines at n.154 (the maturity of a floating rate security of liquidity.’’). Liquidity was also a concern when these terms by reference to rule 2a–7 (replacing the subject to a demand feature is the period remaining the Commission added the definition of demand references to ‘‘rule 2a–7(a)(8)’’ and ‘‘rule 2a– until principal can be recovered through demand). feature for asset-backed securities and noted that it 7(a)(15)’’ with ‘‘§ 270.2a–7(a)(9)’’ and ‘‘§ 270.2a– 2175 Long-term floating rate securities that are was done, in part, to make clear the date on which 7(a)(18)’’) and rule 31a–1(b)(1) (replacing the subject to a demand feature are deemed to have a there was a binding obligation to pay (and not just references to ‘‘rule 2a–7(a)(8)’’ and ‘‘rule 2a– maturity equal to the period remaining until the the scheduled maturity). See 1996 Adopting 7(a)(15)’’ with ‘‘§ 270.2a–7(a)(9)’’ and ‘‘§ 270.2a– principal amount can be recovered through Release, supra note 1735, at accompanying nn.151– 7(a)(18)’’). demand. See current rule 2a–7(d)(5). 152. 2169 See State Street Comment Letter. 2176 See rule 2a–7(i)(4).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00197 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47932 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

short-term floating rate securities believe that our amendments will not disclosure, Form PF, Form N–MFP, and consistent with our amendment.2177 result in a significant, if any, impact on clarifying amendments is April 14, Although one commenter noted that it efficiency or capital formation. We did 2016. If any provision of these rules, or does not determine maturity for short- not receive any comments suggesting the application thereof to any person or term floating rate securities in the otherwise. circumstance, is held to be invalid, such manner consistent with the proposed 4. Second Tier Securities invalidity shall not affect other amendment and instead uses the rate provisions or application of such reset date regardless of the type of In 2010, we amended rule 2a–7 to provisions to other persons or security, this commenter did state that limit money market funds to acquiring circumstances that can be given effect most, if not all, money market funds second tier securities with remaining without the invalid provision or currently conform to the proposed maturities of 45 days or less.2180 As application. clarifying amendments.2178 This discussed in the Proposing Release, our commenter also noted that it agreed that analysis in adopting this requirement 1. Compliance Date for Amendments there would be minimal cost related to was focused primarily on second tier Related to Liquidity Fees and Gates the proposed amendment.2179 securities’ credit risk, credit spread risk, The compliance date for our Accordingly, we continue to believe that and liquidity, all of which are more amendments related to liquidity fees the amendment will likely not result in appropriately measured by the and gates, including any related costs to most funds and that to the security’s final legal maturity, rather amendments to disclosure, is October extent a fund may not already act than its maturity recognizing interest 14, 2016.2183 We are adopting a consistently with our amendment, the rate readjustments, which focuses on compliance period of 2 years for money amendment will likely not result in interest rate risk. Thus to state more market funds to implement the fees and significant costs to such a fund. Any clearly the way in which this limitation gates amendments instead of the funds that currently limit or avoid operates, we are amending rule 2a–7 as proposed one-year compliance period. investments in short-term floating rate proposed to state specifically that the One commenter argued that the securities because they would look to 45-day limit applicable to second tier compliance period for our fees and gates the security’s stated final maturity date securities must be determined without amendments should be reduced.2184 rather than the demand feature for reference to the maturity-shortening Several commenters, however, argued purposes of determining WAL (which provisions in rule 2a–7 for interest rate that our fees and gates amendments could significantly increase the WAL) readjustments.2181 require at least 2 years to may benefit if they increase investments We continue to believe that most implement.2185 For example, one in short-term floating rate securities that money market funds currently commenter stated that the multiple are higher yielding than alternative determine the remaining maturity for programming requirements and costs investments in the fund’s portfolio. To second tier securities consistent with involved suggest that 2 years is a the extent that those funds may have this amendment. Accordingly, we reasonable amount of time to require experienced any competitive yield continue to believe that our amendment implementation of fees and gates.2186 In disadvantage because they limited or will likely not result in costs to funds addition, a few commenters avoided these investments, the or impact competition, efficiency, or recommended extending the amendments should address those capital formation. In cases where the 45- compliance period for fees and gates to effects. Because we continue to believe day limit applicable to second tier 3 years.2187 After further consideration, securities is determined with reference that most funds currently interpret the we have decided to extend the to the maturity-shortening provisions maturity requirements as we provide in compliance period to 2 years. our amendments, we believe that for interest rate adjustments for certain We expect that providing a longer although our changes may produce funds, such funds that alter their future compliance period will allow additional benefits, these benefits are not portfolio investments to conform to this time for money market funds and their quantifiable because we cannot predict amendment may benefit from increased sponsors and service providers to the extent to which, absent our liquidity. In addition, as we noted in the conduct the requisite operational amendments, funds may have decided Proposing Release, any funds that changes to their systems to implement currently hold securities that would no to interpret the maturity requirements these provisions, and for fund sponsors longer qualify as second tier securities differently in the future. For those funds to restructure or establish new money would not incur costs because those that do not currently interpret the market funds if they choose to rely on securities likely would mature before maturity requirements as we provide in an available exemption.2188 It also will the compliance date for our our amendments, we are unable to provide a substantial amount of time for amendments.2182 We did not receive estimate any quantifiable benefits money market fund shareholders to any comments suggesting otherwise. because we are unable to predict the consider the reforms and make any extent to which a fund may increase N. Compliance Dates investments in short-term floating rate The compliance dates for our 2183 We expect a fund to make any related changes to disclosure at the time the fund securities that are higher yielding than amendments are set forth below. The alternative investments in the fund’s implements the amendments related to fees and compliance date for our floating NAV gates. portfolio, and did not receive any and liquidity fees and gates 2184 See Santoro Comment Letter. comments on such issue. We also amendments is October 14, 2016. The 2185 See, e.g., Dreyfus Comment Letter; UBS compliance date for new Form N–CR is Comment Letter. 2177 2186 Such a determination would be consistent July 14, 2015 and the compliance date See Dreyfus Comment Letter. with informal guidance that the staff has provided. 2187 for our diversification, stress testing, See Fidelity Comment Letter. See Investment Company Institute, Request for 2188 See, e.g., Fidelity Comment Letter (stating Interpretation under rule 2a–7 (Aug. 10, 2010) that, as the SEC acknowledges, in addition to the (incoming letter and response) at http:// 2180 See 2010 Adopting Release, supra note 17, at requisite systems modifications that fund sponsors www.sec.gov/divisions/investment/noaction/2010/ nn.65–69 and accompanying text. and service providers must implement, many fund ici081010.htm. 2181 See rule 2a–7(d)(2)(ii). sponsors may need to restructure or establish new 2178 See State Street Comment Letter. 2182 See infra section III.N.4 (discussing the money market funds if they chose to rely on any 2179 Id. compliance date for the clarifying amendments). exemptions available).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00198 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47933

corresponding changes to their that, the Treasury Department and the duplicate Part B (default or event of investments. In addition, we have IRS today will propose new regulations insolvency of portfolio security issuer) decided to adopt a two-year compliance and issue a revenue procedure (with an of Form N–CR.2197 We are also period in order to provide a uniform effective date of 60 days after eliminating, as proposed, the provision compliance date for the floating NAV publication of today’s reforms in the in current rule 2a–7 that requires money and fees and gates amendments, which Federal Register) that address relevant market funds to disclose to the we believe will provide money market tax and accounting issues associated Commission by email instances when a funds with a smoother transition and with our amendments.2195 A two-year sponsor supports a fund by purchasing prevent funds from having to make compliance period also will allow time a security pursuant to rule 17a–9, various operational and compliance for the Commission to consider because it would duplicate Part C changes multiple times. Accordingly, finalizing rules removing NRSRO (provision of financial support to fund) the compliance date is 2 years after the ratings from rule 2a–7, so that funds of Form N–CR.2198 Money market funds effective date of the adoption of the could make many of the compliance- will continue to be required to comply amendments to rule 2a–7(c)(2) and other related changes at one time. with these email notification related provisions of rule 2a–7 that After further consideration, we requirements in rule 2a–7 until the date apply to the liquidity fees and gates believe it is appropriate to adopt a in which money market funds are amendments, rule 22e–3(a)(1) and (d), compliance period of 2 years. We expect required to comply with Part B and Part rule 30b1–7, rule 30b1–8, rule that a two-year compliance period will C of Form N–CR. Accordingly, the 482(b)(3)(i) and (b)(4), Parts E–G of provide time for funds and their effective date of removal of the email Form N–CR, Form N–MFP and Items 3, shareholders to make any operational notification requirements in rule 2a–7 is 4(b)(1), and 16(g)(1) of Form N–1A. modifications necessary to transition to 9 months after the effective date of the a floating NAV. In addition, we expect adoption of Part B and Part C of Form 2. Compliance Date for Amendments that a two-year compliance period will N–CR.2199 Related to Floating NAV allow time for funds to implement any We note that Part E (imposition of The compliance date for our needed changes to their investment liquidity fee), Part F (suspension of fund amendments related to floating NAV, policies and train staff, and also provide redemptions) and Part G (removal of including any related amendments to time for investors to analyze and liquidity fees and/or resumption of fund disclosure, is October 14, 2016.2189 We consider how they might wish to adjust redemptions) of Form N–CR are are adopting, as proposed, a compliance their cash management strategies. A disclosure items specifically related to period of 2 years for money market two-year compliance period also will our liquidity fees and gates amendments funds to implement the floating NAV allow funds to reorganize their and therefore would also have a amendments. A few commenters stated operations and establish new funds to conforming compliance period of 2 that they agreed that the transition meet the definition of a retail money years. Accordingly, the compliance date period for the floating NAV market fund, to the extent necessary. for Parts E–G of Form N–CR and the amendments should be at least 2 Accordingly, the compliance date is 2 related Web site disclosure years.2190 Most commenters, however, years after the effective date of the requirements pursuant to rule 2a– argued for a compliance period longer adoption of the amendments to rule 2a– 7(h)(10)(v) is 2 years after the effective than the proposed two-year period,2191 7(c) and other related provisions of rule date of the adoption of Part E–G of Form with some commenters specifically 2a–7 that apply to the floating NAV N–CR and rule 2a–7(h)(10)(v). The arguing that the floating NAV amendments, rule 22e–3(a)(1) and (d), compliance date for all other Parts of amendments require at least 3 years to rule 30b1–7, rule 482(b)(3)(i) and (b)(4), Form N–CR is 9 months. Accordingly, implement.2192 Several commenters Form N–MFP and Item 4(b)(1) of Form the compliance date for rule 30b1–8, suggesting a longer compliance period N–1A. Parts A–D and Part H of Form N–CR, argued that adopting a floating NAV and the related Web site disclosure would require significant operational 3. Compliance Date for Rule 30b1–8 and requirements pursuant to rule 2a– modifications.2193 In addition, many of Form N–CR 7(h)(10)(v) is 9 months after the effective the commenters recommending a longer The compliance date for rule 30b1–8, date of the adoption of rule 30b1–8, compliance period argued that the Form N–CR, and the related Web site Parts A–D and Part H of Form N–CR and relevant tax and accounting issues disclosure 2196 is July 14, 2015. We rule 2a–7(h)(10)(v). should be resolved by the appropriate received no comments specifically 4. Compliance Date for Diversification, regulator well before the compliance addressing the compliance date for rule Stress Testing, Disclosure, Form PF, date of any final money market fund 30b1–8, Form N–CR or the related Web Form N–MFP, and Clarifying 2194 reform. As we discuss above in site disclosure. After reviewing the Amendments section III.B.6, we have been informed operational considerations as well as the significant interest of investors and the The compliance date for amendments 2189 We expect a fund to make any related Commission in receiving this that are not specifically related to either changes to disclosure at the time the fund information, we are adopting, as floating NAV or liquidity fees and gates, implements the amendments related to floating proposed, a compliance period of 9 including amendments to NAV. diversification, stress testing, disclosure 2190 See, e.g., T. Rowe Price Comment Letter; months. HSBC Comment Letter; Northern Trust Comment We are eliminating, as proposed, the that are not specifically related to either Letter. provision in current rule 2a–7 that floating NAV or liquidity fees and gates, 2191 See, e.g., BlackRock II Comment Letter; requires money market funds to report Dreyfus Comment Letter; Fidelity Comment Letter. defaults or events of insolvency to the 2197 See current rule 2a–7(7)(iii)(A). 2192 See, e.g., ICI Comment Letter; Goldman Sachs 2198 Commission by email, because it would See current rule 2a–7(7)(iii)(B). Comment Letter; Legg Mason Comment Letter. 2199 We note that a money market fund need not 2193 See, e.g., ICI Comment Letter; Legg Mason & comply with the email notification requirements Western Asset Comment Letter. 2195 See supra section III.B.6. prior to the effective date of removal if the money 2194 See, e.g., BlackRock II Comment Letter; 2196 See rule 2a–7(h)(10)(v) (Web site disclosure market fund instead elects to comply with the Fidelity Comment Letter; J.P. Morgan Comment of certain information required to be reported in requirements of Part B and Part C of Form N–CR, Letter; ABA Business Law Section Comment Letter. Form N–CR). as applicable.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00199 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47934 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Form PF, Form N–MFP, and clarifying The compliance date for disclosure Investment Company Act of 1940.2204 amendments is April 14, 2016. We are amendments not specifically related to The Commission submitted these adopting an 18 month compliance either floating NAV or liquidity fees and collections of information to the OMB period for money market funds to gates is 18 months after the effective for review in accordance with 44 U.S.C. implement these amendments instead of date of the amendments to Item 16(g)(2) 3507(d) and 5 CFR 1320.11. An agency the proposed 9 month compliance of Form N–1A and rule 2a–7(h)(10). The may not conduct or sponsor, and a period. As discussed above, disclosure compliance date for amendments to rule person is not required to respond to, a amendments that relate to the floating 204(b)–1 under the Advisers Act and collection of information unless it NAV or liquidity fees and gates Form PF is 18 months after the effective displays a currently valid control amendments will have a two-year date of the amendments to rule 204(b)– number. compliance period. For disclosure 1 under the Advisers Act and Form PF. Today the Commission is adopting amendments that are not specifically The compliance date for amendments to amendments intended to address money related to the floating NAV or liquidity rule 30b1–7 and Form N–MFP is 18 market funds’ susceptibility to heavy fees and gates amendments, we are months after the effective date of the redemptions, improve their ability to adopting an 18 month compliance amendments to rule 30b1–7 and Form manage and mitigate potential contagion period. These disclosure amendments N–MFP. The compliance date for the from such redemptions, and increase include amendments to Form N–1A clarifying amendments is 18 months the transparency of their risks. Our requiring historical disclosure of after the effective date of the amendments will (i) permit all money affiliate financial support,2200 and amendments to rule 2a–7 pertaining to market funds to impose a liquidity fee amendments to rule 2a–7 requiring the clarifying amendments. and/or ‘‘gate’’ the fund if a fund’s certain Web site disclosure of portfolio weekly liquidity level falls below the IV. Paperwork Reduction Act holdings and other fund required regulatory amount; (ii) require information.2201 Several commenters Certain provisions of the proposed all non-government money market argued that the compliance period for amendments contain ‘‘collections of funds to impose a liquidity fee if the amendments not relating to floating information’’ within the meaning of the fund’s weekly liquidity level falls below NAV or liquidity fees and gates should Paperwork Reduction Act of 1995 a designated regulatory threshold, be extended in order for funds to (‘‘PRA’’).2203 The titles for the existing unless the fund’s board determines that implement the amendments and make collections of information are: ‘‘Rule 2a– imposing such a fee is not in the best any necessary operational changes.2202 7 under the Investment Company Act of interests of the fund; (iii) require, as a After further consideration, we expect 1940, money market funds’’ (Office of targeted reform, that institutional non- that 18 months will allow additional Management and Budget (‘‘OMB’’) government money market funds sell time for money market funds and their Control No. 3235–0268); ‘‘Rule 22e–3 and redeem shares based on the current sponsors and service providers to under the Investment Company Act of market-based value of the securities in implement any applicable requirements 1940, Exemption for liquidation of their underlying portfolios, rounded to and conduct any requisite operational money market funds’’ (OMB Control No. four decimal places (e.g., $1.0000), i.e., changes to their systems to implement 3235–0658); ‘‘Rule 30b1–7 under the transact at a floating NAV; and (iv) these provisions. Investment Company Act of 1940, require that money market funds adopt Accordingly, the compliance date for Monthly report for money market other amendments designed to make amendments relating to diversification funds’’ (OMB Control No. 3235–0657); money market funds more resilient, is 18 months after the effective date of ‘‘Rule 34b–1(a) under the Investment including increasing diversification of the amendments to rule 2a–7(a)(18) and Company Act of 1940, Sales Literature their portfolios, enhancing their stress (d)(3) and other related provisions of Deemed to be Misleading’’ (OMB testing, and improving transparency rule 2a–7 that apply to the Control No. 3235–0346); ‘‘Rule 204(b)– through enhanced disclosure. The diversification amendments. The 1 under the Investment Advisers Act of amendments further require investment compliance date for amendments 1940, Reporting by investment advisers advisers to certain unregistered liquidity related to stress testing is 18 months to private funds’’ (OMB Control No. funds, which can resemble money after the effective date of the 3235–0679); ‘‘Rule 482 under the market funds, to provide additional amendments to rule 2a–7(g)(8) and other Securities Act of 1933, Advertising by information about those funds to the related provisions of rule 2a–7 that an Investment Company as Satisfying SEC. We discuss below the collection of apply to the stress testing amendments. Requirements of Section 10’’ (OMB information burdens associated with Control No. 3235–0565); ‘‘Form N–1A these amendments. 2200 See Item 16(g)(2) of Form N–1A (historical under the Securities Act of 1933 and disclosure of affiliate financial support). For under the Investment Company Act of A. Rule 2a–7 purposes of the required historical disclosure of 1940, Registration statement of open- A number of the amendments we are affiliate financial support, funds will be required only to disclose events that occur on or after the end management investment adopting today, including our liquidity compliance date. See supra section III.E.5. companies’’ (OMB Control No. 3235– fees and gates reform, as well as our 2201 See rules 2a–7(h)(10)(i)–(iv). For purposes of 0307); ‘‘Form N–MFP, Monthly floating NAV reform, affect rule 2a–7. the required Web site disclosure of portfolio schedule of portfolio holdings of money These amendments to rule 2a–7 also holdings and other fund information, funds will be required to disclose such information for the prior market funds’’ (OMB Control No. 3235– amend or establish new collection of six months, even if such information is from prior 0657); and ‘‘Form PF, Reporting Form information burdens by: (a) Requiring to the compliance date. See supra section III.E.9. for Investment Advisers to Private money market funds to be diversified 2202 See, e.g., ICI Comment Letter (recommending Funds and Certain Commodity Pool with respect to the sponsors of asset- a minimum of 18 months for funds to comply with the disclosure amendments); UBS Comment Letter Operators and Commodity Trading backed securities by deeming the (recommending a 12 to 18 month compliance Advisers’’ (OMB Control No. 3235– period for all proposed regulatory changes that are 0679). We are also submitting new 2204 We also are proposing additional not specifically related to either floating NAV or collections of information for new rule amendments that do not affect the relevant rules’ liquidity fees and gates); Dreyfus Comment Letter paperwork collections (e.g., we propose to amend (recommending a two-year compliance period for 30b1–8 and new Form N–CR under the Investment Company Act rule 12d3–1 solely to amendments that are not specifically related to update cross references in that rule to provisions of either floating NAV or liquidity fees and gates). 2203 44 U.S.C. 3501 through 3521. rule 2a–7).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00200 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47935

sponsor to guarantee the asset-backed limitations are achieved. The new Commission estimated in the Proposing security unless the fund’s board of collection of information is mandatory Release that there would have been no directors makes a finding otherwise; (b) for money market funds that rely on rule external costs associated with this requiring that ‘‘retail money market 2a–7, and to the extent that the collection of information. funds’’ adopt and implement policies Commission receives confidential The Commission did not receive any and procedures reasonably designed to information pursuant to the collection comments on the estimated hour and limit beneficial ownership of the fund to of information, such information will be cost burdens. The Commission has natural persons; (c) requiring that kept confidential, subject to the modified the estimated increase in ‘‘government money market funds’’ provisions of applicable law.2208 annual burden hours and total time amend policies and procedures to In the Proposing Release, the costs that will result from the reflect the 0.5% de minimis non- Commission estimated that amendment based on updated industry conforming basket; (d) requiring money approximately 183 money market funds data. The Commission believes that the market funds’ boards to make and held asset-backed securities and would written procedures will be developed document a number of determinations have been required to adopt written for all the money market funds in a fund regarding the imposition of fees and procedures regarding the periodic complex by the fund adviser, and that gates when weekly liquid assets fall evaluation of determinations made by a fund complex will have economies of below a certain threshold; (e) replacing the fund as to ABS not subject to scale to the extent that there may be the requirement that funds promptly guarantees. The Commission estimated more than one money market fund in a notify the Commission via electronic the one-time burden to prepare and complex. Based on its review of reports mail of defaults and other events with adopt these procedures would have on Form N–MFP as of February 28, disclosure on new Form N–CR; (f) been 1,647 hours 2209 at approximately 2014, the Commission estimates that amending the stress testing $1.2 million in total time costs for all approximately 152 money market funds requirements; and (g) amending the money market funds.2210 Amortized hold asset-backed securities and will be disclosures that money market funds are over a three-year period, this would required to adopt written procedures required to post on their Web sites. have resulted in an average annual regarding the periodic evaluation of Unless otherwise noted, the estimated burden of 549 hours and time costs of determinations made by the fund as to burden hours discussed below are based approximately $400,000 for all money ABS not subject to guarantees. The on estimates of Commission staff with market funds.2211 The Commission Commission continues to estimate that experience in similar matters. Several of estimated that the average annual it will take approximately eight hours of the amendments create new collection burden to prepare materials and written a fund attorney’s time to prepare the of information requirements. The records for the boards’ required review procedures and one hour for a board to respondents to these collections of of new and existing determinations adopt the procedures. Therefore, the information are money market funds, would have been 732 burden hours 2212 Commission estimates the one-time investment advisers and other service and approximately $940,071 in total burden to prepare and adopt these providers to money market funds, time costs for all money market procedures will be approximately nine including financial intermediaries, as funds.2213 Averaging the initial burden hours per money market fund, at a time noted below. The currently approved plus the average annual burdens over cost of $7,440 per fund.2214 The burden for rule 2a–7 is 517,228 hours. three years would have resulted in an Commission further estimates the one- 1. Asset-Backed Securities average annual burden of 1,281 hours time burden to prepare and adopt these and time costs of approximately $1.3 procedures will be 1,368 hours 2215 at Under the amendments we are million for all money market funds. The $1,130,880 in total time costs for all adopting today, we are requiring that a money market funds.2216 Amortized money market fund treat the sponsors of 2208 See, e.g., 5 U.S.C. 552 (Exemption 4 of the over a three-year period, this will result ABS as guarantors subject to rule 2a–7’s Freedom of Information Act provides an exemption 10% diversification limit applicable to for ‘‘trade secrets and commercial or financial 2214 This estimate is based on the following guarantee and demand features, unless information obtained from a person and privileged calculation: (8 Hours × $380 per hour for an the fund’s board of directors (or its or confidential.’’ 5 U.S.C. 552(b)(4). Exemption 8 of attorney = $3,040) + (1 hour × $4,400 per hour for the Freedom of Information Act provides an delegate) determines that the fund is not a board of 8 directors = $4,400) = $7,440. The staff exemption for matters that are ‘‘contained in or previously estimated in 2009 that the average cost relying on the sponsor’s financial related to examination, operating, or condition of board of director time was $4,000 per hour for strength or its ability or willingness to reports prepared by, or on behalf of, or for the use the board as a whole, based on information received provide liquidity, credit or other of an agency responsible for the regulation or from funds and their counsel. Adjusting for supervision of financial institutions.’’ 5 U.S.C. inflation, the staff estimates that the current average support to determine the ABS’s quality 552(b)(8)). 2205 cost of board of director time is approximately or liquidity. The board of directors 2209 This estimate was based on the following $4,400. All other estimated wage figures discussed must adopt written procedures requiring calculation: 8 Burden hours to prepare written here and throughout section IV of this Release are periodic evaluation of this procedures + 1 burden hour to adopt procedures = based on published rates have been taken from determination.2206 Furthermore, for a 9 burden hours per money market fund required to SIFMA’s Management & Professional Earnings in adopt procedures; 9 burden hours per money the Securities Industry 2013, available at http:// × period of not less than three years from market fund 183 funds expected to adopt www.sifma.org/research/item.aspx?id=8589940603, the date when the evaluation was most procedures = 1,647 total burden hours. modified by Commission staff to account for an recently made, the fund must preserve 2210 This estimate was based on the following 1,800-hour work-year and multiplied by 5.35 to × and maintain, in an easily accessible calculation: 183 Money market funds $7,032 in account for bonuses, firm size, employee benefits, total costs per fund = $1.2 million. place, a written record of the and overhead. 2211 This estimate was based on the following 2215 This estimate is based on the following 2207 evaluation. These requirements are calculations: 1,647 Burden hours ÷ 3 = 549 average calculation: 8 Burden hours to prepare written collections of information under the annual burden hours; $1.2 million burden costs ÷ procedures + 1 burden hour to adopt procedures = PRA, and are designed to help ensure 3 = $400,000 average annual burden cost. 9 burden hours per money market fund required to that the objectives of the diversification 2212 This estimate was based on the following adopt procedures; 9 burden hours per money calculation: 4 Burden hours per money market fund market fund × 152 funds expected to adopt × 183 funds = 732 total burden hours. procedures = 1,368 total burden hours. 2205 See rule 2a–7(a)(18)(ii). 2213 This estimate was based on the following 2216 This estimate is based on the following 2206 See rule 2a–7(g)(7). calculation: 183 Money market funds × $5,137 in calculation: 152 Money market funds × $7,440 in 2207 See rule 2a–7(h)(6). total costs per fund = $940,071. total costs per fund complex = $1,130,880.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00201 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47936 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

in an average annual burden of 456 means a money market fund that adopts 715 hours 2229 at $492,800 in total time hours and time costs of $376,960 for all and implements policies and costs for all fund complexes.2230 funds.2217 The Commission continues to procedures reasonably designed to limit Amortized over a three year period, this estimate that a money market fund that beneficial owners to natural persons— will result in an average annual burden will be required to adopt such written will be allowed to continue to maintain of 238 hours and time costs of $164,267 procedures will spend, on an annual a stable NAV through the use of for all funds.2231 We estimate that there basis, (i) two hours of a fund attorney’s amortized cost valuation and/or penny- are no external costs associated with time to prepare materials for the board’s rounding pricing. The requirement that this collection of information. review of new and existing retail money market funds adopt determinations, (ii) one hour for the policies and procedures is a collection ii. Government Funds board to review those materials and of information under the PRA. The new Under today’s amendments, make the required determinations, and collections of information are government money market funds will (iii) one hour of a fund attorney’s time mandatory for money market funds that not be required to implement a floating per year, on average, to prepare the seek to qualify as ‘‘retail money market NAV or fees and gates. We define a written records of such funds’’ under rule 2a–7 as amended,2224 government money market fund to mean determinations.2218 Therefore, the and to the extent that the Commission a fund that invests at least 99.5% of its Commission estimates that the average receives confidential information total assets in cash, government annual burden to prepare materials and pursuant to this collection of securities, and/or repurchase written records for a board’s required information, such information will be agreements collateralized by cash or review of new and existing kept confidential, subject to the government securities. Currently, a determinations will be approximately provisions of applicable law.2225 government money market fund is four hours per fund2219 at a time cost of For purposes of the PRA, the permitted to invest up to 20% of its total approximately $5,540 per fund.2220 The Commission estimates that assets in non-government assets.2232 Commission therefore estimates the approximately 55 money market fund Under our amendments, a government annual burden will be 608 burden complexes will seek to qualify as retail money market fund will no longer be hours2221 and $842,080 in total time money market funds under rule 2a–7 permitted to invest up to 20% of its total costs for all money market funds.2222 and therefore be required to adopt assets in non-government assets; rather, Adding the one-time burden, amortized written policies and procedures these funds will be permitted a 0.5% de over three years, to prepare and adopt reasonably designed to limit beneficial minimis non-conforming basket in procedures with the annual burden to owners to natural persons.2226 We which the fund may invest in non- prepare materials for determinations continue to estimate, as we did in the government assets. Accordingly, we will result in a total amortized annual Proposing Release, that it will take anticipate that government money burden of 1,064 hours and time costs of approximately 12 hours of a fund market funds will need to amend their $1,219,040 for all funds.2223 We attorney’s time to prepare the existing policies and procedures to estimate that there are no external costs procedures and one hour for a board to reflect the new 0.5% de minimis basket. associated with this collection of adopt the procedures.2227 The For purposes of the PRA, the information. Commission did not receive any Commission estimates that comments on the estimated hour and 2. Retail and Government Funds approximately 60 money market fund cost burdens. Accordingly, we have complexes will seek to qualify as i. Retail Funds modified our estimate of the total time government money market funds under Under our floating NAV reform, a cost that will result from the rule 2a–7 and therefore be required to retail money market fund—which amendments based on updated industry amend their written policies and data and estimate an initial time cost of procedures to reflect the 0.5% de 2217 This estimate is based on the following approximately $8,960 per fund minimis basket.2233 We estimate that it ÷ calculations: 1,368 Burden hours 3 = 456 average complex.2228 Therefore, we estimate the will take approximately one hour of a annual burden hours; $1,130,880 burden costs ÷ 3 one-time burden to prepare and adopt = $376,960 average annual burden cost. fund attorney’s time to amend the 2218 This estimate includes documenting, if these procedures will be approximately procedures and 0.5 hours for a board to applicable, the fund board’s determination that the adopt the amended procedures. fund is not relying on the fund sponsor’s financial 2224 See rule 2a–7(a)(25); 2a–7(c)(1)(i). Accordingly, we estimate the total strength or its ability or willingness to provide 2225 See supra note 2208. initial time cost that will result from the liquidity or other credit support to determine the 2226 For purposes of the PRA, staff estimates that ABS’s quality or liquidity. See rule 2a–7(a)(18)(ii) those money market funds that self-reported as and rule 2a–7(h)(6). ‘‘retail’’ funds as of February 28, 2014 (based on 2229 This estimate is based on the following 2219 This estimate is based on the following iMoneyNet data) will likely seek to qualify as retail calculation: 12 Burden hours to prepare written calculation: 2 Hours to adopt + 1 hour for board money market funds under amended rule 2a–7. procedures + 1 burden hour to adopt procedures = review + 1 hour for record preparation = 4 hours Based on iMoneyNet data, these 55 fund complexes 13 burden hours per money market fund complex; × per year. managed 195 self-reported ‘‘retail’’ money market 13 burden hours per fund complex 55 fund 2220 This estimate is based on the following funds. complexes = 715 total burden hours for all fund × calculations: (3 Hours $380 per hour for an 2227 Staff believes that the burden associated with complexes. × 2230 attorney = $1,140) + (1 hour $4,400 per hour for drafting and adopting policies and procedures This estimate is based on the following × a board of 8 directors = $4,400) = $5,540. reasonably designed to limit beneficial ownership calculation: 55 Fund complexes $8,960 in total 2221 This estimate is based on the following to natural persons will be approximately the same costs per fund complex = $492,800. calculation: 4 Burden hours per money market fund as the burden that would have been required under 2231 This estimate is based on the following × 152 funds = 608 total burden hours. our proposal (requiring that funds adopt and calculation: 715 Burden hours ÷ 3 = 238 average 2222 This estimate is based on the following implement procedures reasonably designed to allow annual burden hours; $492,800 burden costs ÷ 3 = calculation: 152 Money market funds × $5,540 in the conclusion that the omnibus account holder $164,267 average annual burden cost. total costs per fund = $842,080. does not permit any beneficial owner, directly or 2232 See supra note 628 (defining ‘‘non- 2223 This estimate is based on the following indirectly, to redeem more than the daily permitted government assets’’); see also supra note 629 calculation: (1,368 Burden hours ÷ 3 = 456 average amount). (noting that the ‘‘names rule’’ effectively limits annual burden hours) + 608 annual burden hours 2228 This estimate is based on the following government funds from investing more than 20% of = 1,064 hours; ($1,130,880 burden costs ÷ 3 = calculation: ([12 Hours × $380 per hour for an total assets in non-government assets). $376,960 average annual burden cost) + $842,080 attorney = $4,560] + [1 hour × $4,400 per hour for 2233 This estimate is based on Form N–MFP data annual time costs = $1,219,040. a board of 8 directors = $4,400] = $8,960). as of February 28, 2014.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00202 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47937

amendments will be approximately information, such information will be proposed, at a time cost of $2,580 per fund complex.2234 Therefore, kept confidential, subject to the approximately $10,700 per fund.2247 we estimate the one-time burden to provisions of applicable law.2240 The estimated time cost has increased amend these procedures will be As proposed, the fees and gates from the proposal, which estimated approximately 90 hours 2235 at $154,800 amendments would have required the $9,895 per fund, as a result of updated in total time costs for all fund same collection of information if a industry data.2248 Based on a total of 83 complexes.2236 Amortized over a three- money market fund’s weekly liquid funds per year that will have weekly year period, this will result in an assets fell below 15% of its total assets. liquid assets below 30% of total average annual burden of approximately As discussed in the Proposing Release, assets,2249 the Commission estimates the 30 hours and time costs of $51,600 for Commission staff analysis of Form N– annual burden will be approximately all funds.2237 We estimate that there are MFP data showed that, between March 581 burden hours,2250 and $888,100 in no external costs associated with this 2011 and October 2012, five prime total time costs for all money market collection of information. money market funds had weekly liquid funds.2251 assets below 15% of total assets.2241 As The increases in annual burden hours 3. Board Determinations—Fees and set forth in the Proposing Release, the Gates and total time costs from the proposal same Commission staff analysis of Form are largely due to the increase in the Under the fees and gates amendments, N–MFP data shows that 138 prime estimated number of funds that will be if a money market fund’s weekly liquid money market funds had weekly liquid subject to collection of information assets fall below 30% or 10%, assets below 30% of total assets during (from four to 83) as a result of the higher respectively, of its total assets, the this same period.2242 In the proposal, weekly liquid assets threshold for fund’s board may be required to make the Commission estimated imposition of fees and gates. We and document a number of approximately 28 annual burden estimate that there are no external costs determinations regarding the imposition hours,2243 and a total time cost of associated with this collection of 2238 of fees and gates, including (i) $39,580 for all money market funds.2244 information. whether to impose a liquidity fee, and We did not receive any comments on if so, what the amount of the liquidity the estimated hour and cost burdens 4. Notice to the Commission fee should be (not to exceed 2%); (ii) related to board determinations under Our amendments also eliminate, as whether to impose a redemption gate; the fees and gates amendments. proposed, the requirements under rule (iii) when to remove a liquidity fee put The Commission continues to 2a–7 relating to notifications money in place (subject to other rule estimate that the affected money market market funds must make to the requirements); and (iv) when to lift a funds that will satisfy the triggering Commission upon the occurrence of redemption gate put in place (subject to event will spend, on an annual basis, (i) certain events. Specifically, the other rule requirements).2239 This four hours of a fund attorney’s time to amendments eliminate the requirements requirement is a collection of prepare materials for the board’s for money market funds to promptly information under the PRA, and is determinations, (ii) two hours for the notify the Director of Investment designed to ensure that a fund that board to review those materials and Management or its designee by imposes a fee or gate does so when it is make the required determinations, and electronic mail (i) of any default or in its best interests (as determined by its (iii) one hour of a fund attorney’s time event of insolvency with respect to the board). This new collection of per year, on average, to prepare the issuer of one or more portfolio securities information is mandatory for money written records of such (or any issuer of a demand feature or market funds that rely on rule 2a–7, and determinations.2245 Therefore, the guarantee), where immediately before to the extent that the Commission Commission estimates that the average the default the securities comprised one receives confidential information annual burden to prepare materials and pursuant to these collections of written records for a board’s required for board review + 1 hour for record preparation = determinations will be approximately 7 hours per year. 2234 This estimate is based on the following seven hours per fund,2246 the same as 2247 This estimate is based on the following calculation: ([1 Hours × $380 per hour for an calculation: [5 Hours × $380 per hour for an attorney = $380] + [0.5 hours × $4,400 per hour for × 2240 See supra note 2208. attorney = $1900] + [2 hours $4,400 per hour for a board of 8 directors = $2,200] = $2,580). a board of 8 directors = $8,800] = $10,700. 2241 See Proposing Release, supra note 25, at 548– 2235 This estimate is based on the following 2248 49 (showing that, during the period, four funds The proposal estimated $379 per hour for an calculation: 1 Burden hours to amend written dropped below 15% weekly liquid assets and one attorney based on published rates that had been procedures + 0.5 burden hours to adopt procedures fund dropped below 10% weekly liquid assets). taken from SIFMA’s Management and Professional = 1.5 burden hours per money market fund 2242 See Proposing Release, supra note 25, at 177. Earnings in the Securities Industry 2012, available complex; 1.5 burden hours per fund complex × 60 This same analysis shows that one prime money at http://www.sifma.org/research/ fund complexes = 90 total burden hours for all fund market fund had weekly liquid assets below 10% item.aspx?id=8589940603, modified by complexes. between March 2011 and October 2012. Because Commission staff to account for an 1,800-hour 2236 This estimate is based on the following 30% is the higher threshold, the fund that dropped work-year and multiplied by 5.35 to account for × calculation: 60 Fund complexes $2,580 in total below 10% weekly liquid assets during the period bonuses, firm size, employee benefits, and costs per fund complex = $154,800. would also be included within the 138 funds that overhead. The proposal also estimated that the 2237 This estimate is based on the following crossed below 30% weekly liquid assets during the average cost of board of director time was $4,000 calculation: 90 Burden hours ÷ 3 = 30 average period. per hour for the board as a whole based on annual burden hours; $154,800 burden costs ÷ 3 = 2243 This estimate was based on the following information received from funds and their counsel. $51,600 average annual burden cost. calculation: 7 Burden hours per money market fund Adjusting for inflation, the staff estimates that the 2238 As discussed in section III.A above, after a × 4 funds = 28 total burden hours. current average cost of board of director time is fund’s weekly liquid assets have dropped below 2244 This estimate was based on the following approximately $4,400. 30%, a fund’s board may determine that it is in the calculation: 4 Money market funds × $9,895 in total 2249 This estimate is based on the following best interests of the fund to impose a liquidity fee costs per fund complex = $39,580. calculation: (138 Funds ÷ 20 months) × 12 months or redemption gate. After a fund’s weekly liquid 2245 This estimate includes preparing and = 83 funds per year. assets have dropped below 10%, a fund must evaluating materials relevant to the determinations 2250 This estimate is based on the following impose a 1% a liquidity fee on all redemptions, required in imposing (and removing) either or both calculation: 7 Burden hours per fund × 83 funds = unless its board determines it is not in the best liquidity fees and redemption gates. See supra note 581 burden hours. interests of the fund to do so. See rule 2a–7(c)(2)(i) 2239. 2251 This estimate is based on the following and (ii). 2246 This estimate is based on the following calculation: $10,700 In total costs per fund × 83 2239 See id. calculation: 4 Hours to prepare materials + 2 hours money market funds = $888,100.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00203 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47938 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

half of one percent or more of the fund’s cost reduction of $9,500.2257 Therefore, stress testing provisions of rule 2a–7 to total assets; 2252 and (ii) of any purchase the total reduction in burden is 35 hours enhance the hypothetical events for of a security from the fund by an at a total time cost of $13,300.2258 We which a fund (or its adviser) is required affiliated person in reliance on rule 17a– estimate that there are no external costs to stress test, including: (i) Increases 9 under the Investment Company associated with this collection of (rather than changes) in the general Act.2253 The Proposing Release also information. level of short-term interest rates; (ii) estimated that approximately 20 money 5. Stress Testing downgrades or defaults of portfolio market funds per year previously would securities, and the effects these events have been required to provide the We are adopting amendments to the could have on other securities held by notification of an event of default or stress testing requirements under rule the fund; (iii) ‘‘widening or narrowing of insolvency, and that each such 2a–7. Specifically, we are adopting spreads among the indexes to which notification would entail 0.5 burden reforms to the current stress testing interest rates of portfolio securities are hours. The Commission also estimated provisions that will require funds to test tied’’; (iv) other movements in interest that approximately 25 money market their ability to maintain weekly liquid rates that may affect the fund’s portfolio fund complexes per year previously assets of at least 10% and to minimize securities, such as shifts in the yield would have been required to provide principal volatility in response to curve; and (v) combinations of these and notification of a purchase of a portfolio specified hypothetical events that any other events the adviser deems security in reliance on rule 17a–9, and include (i) increases in the level of relevant, assuming a positive correlation each such notification would entail one short-term interest rates, (ii) a of risk factors.2262 Under our proposed burden hour. Based on these estimates, downgrade or default of particular amendments, floating NAV money we calculated that the elimination of portfolio security positions, each market funds would have been required these requirements would reduce the representing various portions of the to replace their current stress test for the current annual burden by approximately fund’s portfolio, and (iii) the widening ability to maintain a stable price per 10 hours for notices of default or of spreads in various sectors to which share with a test of the fund’s ability to insolvency, at a total time cost savings the fund’s portfolio is exposed, each in maintain 15% of its total assets in of $3,790,2254 and by approximately 25 combination with various increases in weekly liquid assets. hours for notices of purchases in shareholder redemptions. A written Based on the proposed amendments reliance on rule 17a–9, at a total time copy of the procedures and any to stress testing, the Commission cost savings of $9,475.2255 modifications thereto, must be estimated in the Proposing Release that maintained and preserved for a period No commenters addressed the number each fund that would have been of not less than six years following the of money market funds that would be required to implement the proposed replacement of such procedures with affected by the proposal or the estimated stress testing changes would have to new procedures, the first two years in reduction in annual burden hours or incur an average one-time burden of 92 an easily accessible place.2259 In total time cost savings that would result hours at a time cost of $42,688.2263 addition, the written procedures must from the proposed amendments. Based on an estimate of 92 funds that provide for a report of the stress testing Accordingly, the Commission has not would incur this one-time burden,2264 results to be presented to the board of modified the estimated reduction in the Commission estimated that the directors at its next regularly scheduled annual burden hours associated with aggregate one-time burden for all money the amendments, although it has meeting (or sooner, if appropriate in light of the results).2260 These market funds to implement the modified its estimate of the total hour proposed amendments to stress testing burden reduction that will result from requirements are collections of information under the PRA, and are would have been 8,464 hours at a total the amendments based on updated 2265 designed, in part, to address disparities time cost of $3.9 million. Amortized industry data. Given these estimates, the over a three year period, this would amendments will reduce the current in the quality and comprehensiveness of stress tests. The collection of have resulted in an average annual annual burden by approximately 10 information is mandatory for money burden of 2,821 burden hours and $1.3 hours for notices of default or market funds that rely on rule 2a–7, and insolvency, at a total time cost reduction 2262 to the extent that the Commission See proposed (FNAV) rule 2a–7(g)(7). of $3,800,2256 and by approximately 25 2263 receives confidential information Staff estimated that these systems hours for notices of purchases in modifications would include the following costs: (i) pursuant to this collection of reliance on rule 17a–9, at a total time Project planning and systems design (24 hours × information, such information will be $291 (hourly rate for a senior systems analyst) = kept confidential, subject to the $6,984); (ii) systems modification integration, 2252 See current rule 2a–7(c)(7)(iii)(A) (requiring provisions of applicable law.2261 testing, installation, and deployment (32 hours × that the notice include a description of the actions $282 (hourly rate for a senior programmer) = the money market fund intends to take in response In the Proposing Release, we noted $9,024); (iii) drafting, integrating, implementing to the event). that we were proposing to amend the procedures and controls (24 hours × $327 (blended 2253 See current rule 2a–7(c)(7)(iii)(B) (requiring hourly rate for assistant general counsel ($467), that the notice include identification of the security, 2257 This estimate is based on the following chief compliance officer ($441), senior EDP auditor its amortized cost, the sale price, and the reasons calculations: 25 Fund complexes × 1 hour reduction ($273) and operations specialist ($126)) = $7,848); for the purchase). in hours per fund = reduction of 25 hours; 25 and (iv) preparation of training materials (8 hours 2254 This estimate was based on the following burden hours × $380 per hour for an attorney = × $354 (hourly rate for an assistant compliance calculations: 20 Funds × 0.5 hour reduction in $9,500. director) = $2,832) + (4 hours (4 hour training hours per fund = reduction of 10 hours; 10 burden 2258 This estimate is based on the following session for board of directors) × $4,000 (hourly rate hours × $379 per hour for an attorney = $3,790. calculation: 10 Hours (reduction for notices of for board of 8 directors) = $16,000) = $18,832). 2255 This estimate was based on the following default or insolvency) + 25 hours (reduction for Therefore, staff estimated an average one-time calculations: 25 Fund complexes × 1 hour reduction notices of purchases in reliance on rule 17a–9) = 35 burden of 92 hours (24+32+24+8+4), at a total cost in hours per fund = reduction of 25 hours; 25 hours total reduction; $3,800 (reduction for notices per fund of $42,688 burden hours × $379 per hour for an attorney = of default or insolvency) + $9,500 (reduction for ($6,984+$9,024+$7,848+$18,832). $9,475. notices of purchases in reliance on rule 17a–9) = 2264 This estimate was based on staff experience 2256 This estimate is based on the following $13,300 total reduction. and discussions with industry. calculations: 20 Funds × 0.5 hour reduction in 2259 See rule 2a–7(h)(8). 2265 This estimate was based on the following hours per fund = reduction of 10 hours; 10 burden 2260 See rule 2a–7(g)(8)(ii). calculations: 92 Funds × 92 hours per fund = 8,464 hours × $380 per hour for an attorney = $3,800. 2261 See supra note 2208. hours; 92 funds × $42,688 = $3.9 million.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00204 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47939

million total time cost for all funds.2266 Based on an estimate of 559 money monthly. With an average of six board The Commission estimated in the market funds that will incur this one- meetings each year, the Commission Proposing Release that there would have time burden,2268 the Commission estimates that the annual burden for been no external costs associated with estimates that the aggregate one-time regularly scheduled reports will be 27 this collection of information. The burden for all money market funds to hours per money market fund.2272 Commission did not receive any implement the amendments to stress Under the rule, a report must be comments on the estimated hour and testing will be 51,428 hours at a total provided earlier if appropriate in light cost burdens. time cost of $24,524,448.2269 Amortized of the results of the test. The Although we are adopting over a three year period, this will result Commission estimates that as a result of amendments to the stress testing in an average annual burden of unanticipated changes in market requirements with modifications from approximately 17,143 burden hours and conditions or other events, stress testing the proposal, the Commission does not $8,174,816 total time cost for all results are likely to prompt additional believe that the changes from the funds.2270 We estimate that there are no reports on average four times each proposed amendments will directly external costs associated with this year.2273 Thus, the Commission affect the burden hours or total time collection of information. estimates reports will result in an costs associated with the requirement Each report to the board of directors additional 18 hours for an individual that money market funds maintain a will include an assessment of the money fund each year.2274 The Commission written copy of their stress testing market fund’s ability to have invested at estimates the total annual burden for all procedures, and any modifications least 10% of its total assets in weekly money market funds will be an thereto, and preserve for a period of not liquid assets and to minimize principal additional 25,155 hours at a total time less than six years following the volatility, and an assessment by the cost of $7,278,180.2275 replacement of such procedures with fund’s adviser of the fund’s ability to Adding the one-time burden, new procedures, the first two years in withstand the events that are reasonably amortized over three years, to an easily accessible place. However, the likely to occur within the following implement the stress testing Commission has modified the estimated year. Under current rule 2a–7, money amendments with the annual burden to increase in annual burden hours and market funds are required to have report the results of the stress tests to total time costs that will result from the written procedures that provide for a the board of will result in a total amendment based on updated industry report of the stress testing results to be amortized annual burden of 42,298 data. presented to the board of directors at its hours and time costs of $15,452,996 for We understand that most money next regularly scheduled meeting (or all funds.2276 We estimate that there are market funds, in their normal course of sooner, if appropriate in light of the no external costs associated with this risk management, include many of the results). However, because we are collection of information. elements we are adopting in their stress amending the type of information that testing. Nevertheless, we expect that must be included in the report to the 6. Web Site Disclosure funds may incur a one-time internal board, we have estimated the collection The amendments we are adopting burden to reprogram an existing system of information burden hours increase today require money market funds to to provide the required reports of stress and the total time cost increase. disclose certain additional information testing results based on our The Commission estimates that it will on their Web sites. These amendments amendments. We believe that the stress take on average an additional: (i) Two promote transparency to investors of testing procedures will be modified for hours of portfolio management time, (ii) money market funds’ risks and risk all the money market funds in a fund one hour of compliance time, (iii) one management by: complex by the fund adviser, and that hour of professional legal time and (iv) • Harmonizing the specific portfolio a fund complex will have economies of 0.5 hours of support staff time, requiring holdings information that rule 2a–7 scale to the extent that there may be an additional 4.5 burden hours at a time requires a fund to disclose on the fund’s more than one money market fund in a cost of approximately $1,302 per complex. The Commission estimates fund.2271 Under normal circumstances, 2272 This estimate is based on the following that each fund that will have to the report must be provided at the next calculation: (2 Hours (portfolio management) + 1 hour (compliance) + 1 hour (legal) + 0.5 hours implement the stress testing changes scheduled board meeting, and the (support staff)) = 4.5 hours × 6 meetings = 27 hours. will incur an average one-time burden Commission estimates that the report 2273 The Commission anticipates that in many of 92 hours at a time cost of $43,872.2267 and the adviser’s assessment will cover years there will be no need for special reports, but all money market funds in a complex. that in a year in which there is severe market stress, 2266 This estimate is based on the following For purposes of these calculations, the a fund may report to the board weekly for a period calculations: 8,464 Hours ÷ 3 = 2,821 burden hours; of 3 to 6 months. Such reporting will generate 9 to ÷ Commission assumes that funds will 18 reports in addition to the regular monthly $3.9 million 3 = $1.3 million burden cost. conduct stress tests no less than 2267 The Commission estimates that these systems reports. Assuming that this type of event may occur modifications will include the following costs: (i) once every five years, and additional reports will Project planning and systems design (24 hours × total cost per fund of $43,872 be generated for 6 months, a fund will produce an ($6,240+$9,696+$7,656+$20,280). average of four additional reports per year (18 $260 (hourly rate for a senior systems analyst) = ÷ $6,240); (ii) systems modification integration, 2268 We increased the estimated number of funds additional reports 5 = 3.6 reports). testing, installation, and deployment (32 hours × from the Proposing Release based on staff 2274 This estimate is based on the following × $303 (hourly rate for a senior programmer) = experience and discussions with industry. calculation: 4.5 Hours 4 = 18 hours. $9,696); (iii) drafting, integrating, implementing 2269 This estimate is based on the following 2275 This estimate is based on the following procedures and controls (24 hours × $319 (blended calculations: 559 Funds × 92 hours per fund = calculation: (27 Hours + 18 hours = 45 hours) × 559 hourly rate for assistant general counsel ($426), 51,428 hours; 559 funds x $43,872 = $24,524,448 money market funds = 25,155 hours and ($1,302 × chief compliance officer ($485), senior EDP auditor 2270 This estimate is based on the following (6 regularly scheduled reports + 4 additional reports ($241) and operations specialist ($125)) = $7,656); calculations: 51,428 Hours ÷ 3 = approximately = 10 reports per year) = $13,020 per fund) × 559 and (iv) preparation of training materials (8 hours 17,143 burden hours; $24,524,448 ÷ 3 = $8,174,816. funds = $7,278,180. × $335 (hourly rate for an assistant compliance 2271 This estimate is based on the following 2276 This estimate is based on the following director) = $2,680) + (4 hours (4 hour training calculation: (2 Hours × $301 per hour for a portfolio calculation: (51,428 Burden hours ÷ 3 = 17,143 session for board of directors) × $4,400 (hourly rate manager = $602) + (1 hour × $283 for a compliance average annual burden hours) + 25,155 annual for board of 8 directors) = $17,600) = $20,280). manager = $283) + (1 hour × $380 for an attorney burden hours = 42,298 hours; ($24,524,448 burden Therefore, the Commission estimates an average = $380) + (0.5 hours × $74 per hour for an costs ÷ 3 = $8,174,816 average annual burden cost) one-time burden of 92 hours (24+32+24+8+4), at a administrative assistant = $37) = $1,302. + $7,278,180 annual time costs = $15,452,996.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00205 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47940 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Web site with the corresponding additional hours of internal staff time costs.2285 As described above, the portfolio holdings information required per year (one hour per monthly filing), portfolio holdings disclosure to be reported on Form N–MFP; 2277 at a time cost of $2,484, to update the requirements we are adopting have • Requiring that a fund disclose on its Web site to include the new disclosure, changed slightly from those that we Web site a schedule, chart, graph, or for a total of 7,032 aggregate hours per proposed, in order to conform to other depiction showing the percentage year, at a total aggregate time cost of modifications we are making to the of the fund’s total assets that are $1,455,624. proposed Form N–MFP disclosure invested in daily and weekly liquid Certain commenters generally noted requirements.2286 The Commission assets, as well as the fund’s daily net that complying with the new Web site estimates that the number of money inflows or outflows, as of the end of disclosure requirements would add market funds is currently 559 and that each business day during the preceding costs for funds, including costs to the hour burden per fund remains the six months (which depiction must be upgrade internal systems and software same as previously estimated.2287 updated each business day as of the end relevant to the Web site disclosure Because the 2010 money market fund of the preceding business day); 2278 requirements (which possibly could reforms already require money market • Requiring that a fund disclose on its include costs to engage third-party funds to post monthly portfolio Web site a schedule, chart, graph, or service providers for those money information on their Web sites,2288 other depiction showing the fund’s market fund managers that do not have funds should not need to upgrade their daily current NAV per share, as of the existing relevant systems).2282 One end of each business day during the commenter, however, noted that the systems and software, or develop preceding six months (which depiction portfolio holdings disclosure relevant systems (either in-house or must be updated each business day as requirements should not cause a with the assistance of a third-party of the end of the preceding business significant cost increase as long as the service provider) to comply with the day); 2279 and information is made available from new portfolio holdings information • Requiring a fund to disclose on its relevant accounting systems,2283 and disclosure requirements. The Web site certain information that the another commenter stated that the Commission therefore does not believe fund is required to report to the proposed disclosure requirements that comments about the costs required Commission on Form N–CR regarding generally should not produce any to upgrade relevant systems and the imposition and removal of liquidity meaningful costs.2284 Another software should affect its estimates of fees, the suspension and resumption of commenter urged the Commission to the burdens and costs associated with fund redemptions, and the provision of harmonize new disclosure requirements the portfolio holdings disclosure 2280 financial support to the fund. so that funds would face lower requirements. Taking this into These new collections of information administrative burdens, and investors consideration, the Commission has not are mandatory for money market funds would bear correspondingly fewer modified its previous hour burden that rely on rule 2a–7 and are not kept estimates. Although we have slightly confidential. 2282 See, e.g., UBS Comment Letter (‘‘The SEC revised the portfolio holdings disclosure a. Disclosure of Portfolio Holdings also proposed additional information regarding the requirements since proposing the posting of: (i) The categories of a money fund’s Information portfolio securities; (ii) maturity date information requirements, we believe that these We are adopting, largely as proposed, for each of the fund’s portfolio securities; and (iii) revisions do not produce additional market-based values of the fund’s portfolio burdens for funds and thus does not the requirement for a money market securities at the same time as this information fund to disclose on its Web site certain becomes publicly available on Form N–MFP. We affect previous hour burden estimates. portfolio holdings information that the believe this information is too detailed to be useful Based on an estimate of 559 money fund also will be required to disclose on to most investors and would be cost prohibitive to provide. Complying with these new Web site market funds posting their portfolio Form N–MFP. This requirement will disclosure requirements would add notable costs holdings on their Web pages, we harmonize the holdings information that for each money fund that UBS Global AM estimate that, in the aggregate, the a fund is required to disclose on its Web advises.’’); Chamber II Comment Letter (‘‘With respect to the Web site disclosure requirements, amendment will result in a total of site with the corresponding portfolio 6,708 burden hours per year,2289 at a holdings information required to be internal systems and software would need to be upgraded or, for those MMF managers that do not total aggregate time cost of reported on Form N–MFP. We have existing systems, third-party service providers $1,522,716.2290 We estimate that there anticipate that the burden for each fund would need to be engaged. The costs (which are no external costs associated with to draft and finalize the disclosure that ultimately would be borne by investors through higher fees or lower yields) could potentially be this collection of information. appears on its Web site will largely be significant to an MMF and higher than those incurred when the fund files Form N– estimated in the Proposal.’’); Dreyfus Comment MFP.2281 In the Proposing Release, the Letter (noting that ‘‘several of the new Form Commission estimated that a fund reporting and Web site and registration statement 2285 See Fin. Svcs. Roundtable Comment Letter. disclosure requirements . . . come with . . . 2286 See supra section III.E.9.h (Costs of would incur an additional burden of material cost to funds and their sponsors’’); see also harmonization of rule 2a–7 and Form N–MFP one hour each time that it updates its Fin. Svcs. Roundtable Comment Letter (noting that portfolio holdings disclosure requirements). Web site to include the new disclosure. the disclosure requirements would produce 2287 Using an estimate of 586 money market ‘‘significant cost to the fund and ultimately to the The estimate regarding the number of money fund’s investors’’); SSGA Comment Letter (urging market funds is based on a review of reports on funds that would be required to include the Commission to consider the ‘‘substantial Form N–MFP filed with the Commission for the the proposed new portfolio holdings administrative, operational, and expense burdens’’ month ended on February 28, 2014. disclosure on the fund’s Web site, we of the proposed disclosure-related amendments); 2288 See 2010 Adopting Release, supra note 17, at estimated that each fund would incur 12 Chapin Davis Comment Letter (noting that the section II.E.1. disclosure- and reporting-related amendments will 2289 result in increased costs in the form of fund staff This estimate is based on the following 2277 × See rule 2a–7(h)(10)(i). salaries, or consultant, accountant, and lawyer calculation: 12 Hours per year 559 money market 2278 See rule 2a–7(h)(10)(ii). hourly rates, that will ultimately be borne in large funds = 6,708 hours. 2279 See rule 2a–7(h)(10)(iii). part by investors and portfolio issuers). 2290 This estimate is based on the following 2280 See rule 2a–7(h)(10)(v). 2283 See State Street Comment Letter. calculation: 6,708 Hours × $227 per hour for a 2281 See infra section IV.C. 2284 See HSBC Comment Letter. webmaster = $1,522,716.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00206 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47941

b. Disclosure of Daily Weekly Assets market fund] and higher than those with these Web site disclosure and Weekly Liquid Assets and Net estimated in the Proposing requirements. Amortized over a three- Shareholder Flow Release.’’ 2292 Another commenter year period, this will result in an We are adopting, as proposed, the suggested that obtaining the daily and average annual burden of approximately requirement for a money market fund to weekly liquid asset data for purposes of 13,043 hours and time costs of disclose on its Web site a schedule, complying with the disclosure approximately $3,778,840 for all money chart, graph, or other depiction showing requirements would result in additional market funds.2298 the percentage of the fund’s total assets costs that the Commission did not The Commission agrees that money that are invested in daily and weekly include in its estimate in the Proposing market funds may incur additional costs liquid assets, as well as the fund’s net Release, namely, the costs associated associated with the enhanced controls inflows or outflows, as of the end of with the enhanced controls required to required to publicly disseminate daily each business day during the preceding disseminate this information publicly and weekly liquid asset data, which six months. The burdens associated each day.2293 However, one commenter costs were not estimated in the with this requirement include one-time stated that the proposed disclosure Proposing Release. Incorporating these burdens as well as ongoing burdens. In requirements should not produce any additional costs into new estimates, we the Proposing Release, the Commission meaningful costs.2294 estimate that each fund will incur an estimated that a money market fund The Commission estimates that the ongoing annual burden of 36 hours,2299 would incur a one-time burden of 70 number of money market funds is at a time cost of $10,274,2300 to update hours, at a time cost of $20,150, to currently 559. We agree that the one- the depiction of daily and weekly liquid design the required schedule, chart, time costs for certain money market assets and the fund’s net inflows or graph, or other depiction, and to make funds to upgrade internal systems and outflows on the fund’s Web site each the necessary software programming software, and/or develop such systems business day during that year. Based on changes to the fund’s Web site to if a money market fund does not have an estimate of 559 money market funds disclose the percentage of the fund’s existing relevant systems, could be posting information about their daily total assets that are invested in daily higher than those average one-time costs and weekly liquid assets (as well as liquid assets and weekly liquid assets, estimated in the Proposing Release. their net inflows or outflows) on their as well as the fund’s net inflows or However, because the estimated one- Web pages, we estimate that the outflows, as of the end of each business time costs were based on the mid-point amendment will result in an average day during the preceding six months. of a range of estimated costs, the higher aggregate ongoing annual burden of Using an estimate of 586 money market costs that may be incurred by certain funds, the Commission estimated that industry participants have already been per fund. See Proposing Release, supra note 25, at nn.1044 and 1045. money market funds would incur, in 2295 factored into our estimates. Our 2298 This estimate was based on the following aggregate, a total one-time burden of assumptions in estimating one-time calculations: 39,130 Burden hours ÷ 3 = 13,043 41,020 hours, at a time cost of hour and cost burdens therefore have average annual burden hours; $11,336,520 burden $11,807,900, to comply with these Web not changed from those discussed in the costs ÷ 3 = $3,778,840 average annual burden cost. site disclosure requirements. We Proposing Release. Based on an estimate 2299 The Commission estimates that the lower bound of the range of the ongoing annual hour estimated that each fund would incur an of 559 money market funds posting burden to update the required Web site information ongoing annual burden of 32 hours, at information about their daily and will be 21 hours per year (5 minutes per day × 252 a time cost of $9,184, to update the weekly liquid assets, as well as their net business days in a year = 1,260 minutes, or 21 depiction of daily and weekly liquid inflows or outflows, on their Web pages, hours). We estimate that the upper bound of the range of the ongoing annual hour burden to update assets and the fund’s net inflows or we estimate that, in the aggregate, the the required Web site information will be 42 hours outflows on the fund’s Web site each amendment will result in a total one- per year (10 minutes per day × 252 business days business day during that year. We time burden of 39,130 hours,2296 at a in a year = 2,520 minutes, or 42 hours). further estimated that, in the aggregate, time cost of $11,336,520,2297 to comply Additionally, we estimate that each fund will money market funds would incur an incur an additional ongoing annual hour burden of between 3 hours and 6 hours associated with 2292 average ongoing annual burden of See Chamber II Comment Letter. implementing enhanced controls required to 18,752 hours, at a time cost of 2293 See State Street Comment Letter at Appendix publicly disseminate the data at issue. Specifically, $5,381,824, to comply with this A (‘‘Due to the inherent risks associated with public depending on the controls the fund already has in disclosure, there will be enhanced controls required disclosure requirement. place, the Commission estimates that it will take a with respect to the daily public dissemination of compliance manager and an attorney between 3 and As discussed above, certain daily and weekly liquid assets and the risks of 6 hours to review and update (or if necessary, to commenters generally noted that shareholders making redemption decisions in develop and implement) the controls associated complying with the new Web site reliance on that information . . . adds to staff to with the public dissemination of daily liquid asset disclosure requirements would add calculate and review the daily and weekly liquid and weekly liquid asset data each year. assets.’’). Because we do not have the information costs for funds, including costs to 2294 See HSBC Comment Letter. necessary to provide a point estimate of the costs upgrade internal systems and software 2295 See Proposing Release, supra note 25, at to modify a particular fund’s systems we thus have relevant to the Web site disclosure n.1044. provided ranges of estimated costs in our economic requirements (which possibly could 2296 This estimate is based on the following analysis. See supra section III.E.9.h. Likewise, for × include costs to engage third-party calculation: 70 Hours 559 money market funds = purposes of our estimates for the PRA analysis, we 39,130 hours. have taken the mid-point of the range discussed service providers for those money 2297 This estimate is based on the following above (mid-point of 24 hours (21 hours + 3 hours) market fund managers that do not have calculation: $20,280 Per fund × 559 money market and 48 hours (42 hours + 6 hours) = 36 hours). existing relevant systems).2291 One funds = $11,336,520. The $20,280 per fund figure 2300 This estimate is based on the following commenter noted that these costs could is, in turn, based on the following calculations: (20 calculation: (31.5 Hours (mid-point of 21 hours and Hours (mid-point of 16 hours and 24 hours for 42 hours for updating the required Web site potentially be ‘‘significant to [a money project assessment) × $309 (blended hourly rate for information) × $282 (blended rate for a senior a compliance manager ($283) and a compliance systems analyst and senior programmer) = $8,883) 2291 See UBS Comment Letter (‘‘We do not attorney ($334)) = $6,180) + (50 hours (mid-point + (4.5 hours (mid-point of 3 hours and 6 hours for support these changes, because they would require of 40 hours and 60 hours for project development, implementing enhanced controls associated with a significant restructuring of the money funds’ Web implementation, and testing) × $282 (blended public dissemination of data) × $309 (blended rate sites, which would be expensive to complete and hourly rate for a senior systems analyst ($260) and for a compliance manager and a compliance maintain.’’); see also supra note 2282. a senior programmer ($303)) = $14,100) = $20,280 attorney) = $1,391) = $10,274 per fund.

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00207 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47942 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

20,124 hours,2301 at a time cost of money market funds would incur an $11,336,520,2310 to comply with these $5,743,166,2302 to comply with this average ongoing annual burden of Web site disclosure requirements. As disclosure requirement. 18,752 hours, at a time cost of discussed above, we received no Adding the one-time burden, $5,381,824, to comply with this comments providing specific amortized over three years, to prepare disclosure requirement. suggestions or critiques about our and adopt procedures with the annual As discussed above, certain assumptions in estimating ongoing hour burden to prepare materials for commenters generally noted that and cost burdens associated with the determinations will result in a total complying with the new Web site disclosure of a fund’s current NAV per amortized annual burden of 33,167 disclosure requirements would add share, and therefore our methods of hours and time costs of $9,522,006 for costs for funds, including costs to estimating these burdens also have not all funds.2303 We estimate that there are upgrade internal systems and software changed from those discussed in the no external costs associated with this relevant to the Web site disclosure Proposing Release. Based on an estimate collection of information.2304 requirements (which possibly could of 559 money market funds posting c. Disclosure of Daily Current NAV include costs to engage third-party information about their daily current service providers for those money NAV per share on their Web pages, we We are adopting, as proposed, the market fund managers that do not have estimate that, in the aggregate, the requirement for a money market fund to existing relevant systems).2305 One amendment will result in an average disclose on its Web site a schedule, commenter noted that these costs could ongoing annual burden of 17,888 chart, graph, or other depiction showing potentially be ‘‘significant to [a money hours,2311 at a time cost of the fund’s current NAV per share as of market fund] and higher than those $5,044,416,2312 to comply with this the end of each business day during the estimated in the Proposal.’’ 2306 disclosure requirement. preceding six months. The burdens However, another commenter stated that Amortizing these hourly and cost associated with this requirement it agrees that those money market funds burdens over three years results in an include one-time burdens as well as that presently publicize their current average annual increased burden of ongoing burdens. In the Proposing NAV per share daily on the fund’s Web 30,931 burden hours 2313 at a time cost Release, the Commission estimated that site will incur few additional costs to of $8,823,256.2314 We estimate that a money market fund would incur a comply with the proposed disclosure there are no external costs associated one-time burden of 70 hours, at a time requirements, and also that it agrees with this collection of information.2315 cost of $20,150, to design the required with the Commission’s estimates for the Adding the one-time burden, amortized schedule, chart, graph, or other ongoing costs of providing a depiction over three years, to prepare and adopt depiction, and to make the necessary of the fund’s current NAV each business procedures with the annual burden to software programming changes to the day.2307 fund’s Web site to disclose the fund’s prepare materials for determinations The Commission estimates that the will result in a total amortized annual current NAV per share as of the end of number of money market funds is each business day during the preceding currently 559. We agree that the one- 2310 This estimate is based on the following six months. Using an estimate of 586 time costs for certain money market calculation: $20,280 Per fund x 559 money market money market funds, we estimated that funds to upgrade internal systems and funds = $11,336,520. The $20,280 per fund figure money market funds would incur, in is, in turn, based on the following calculations: (20 software, and/or develop such systems aggregate, a total one-time burden of Hours (mid-point of 16 hours and 24 hours for if a money market fund does not have project assessment) × $309 (blended hourly rate for 41,020 hours, at a time cost of existing relevant systems, could be a compliance manager ($283) and a compliance $11,807,900, to comply with these Web higher than those average one-time costs attorney ($334)) = $6,180) + (50 hours (mid-point site disclosure requirements. We of 40 hours and 60 hours for project development, estimated in the Proposing Release. estimated that each fund would incur an implementation, and testing) × $282 (blended However, because the estimated one- hourly rate for a senior systems analyst ($260) and ongoing annual burden of 32 hours, at time costs were based on the mid-point senior programmer ($303)) = $14,100) = $20,280 per a time cost of $9,184, to update the of a range of estimated costs, the higher fund. See Proposing Release, supra note 25, at depiction of the fund’s current NAV per nn.1044 and 1045. costs that may be incurred by certain share on the fund’s Web site each 2311 This estimate is based on the following industry participants have already been × business day during that year. We calculation: 32 Hours 559 money market funds = factored into our estimates.2308 Our 17,888 hours. further estimated that, in the aggregate, assumptions in estimating one-time 2312 This estimate is based on the following × hour and cost burdens therefore have calculation: (32 Hours $282 (blended hourly rate 2301 This estimate is based on the following for a senior systems analyst ($260) and a senior calculation: 36 Hours × 559 money market funds = not changed from those discussed in the programmer ($303)) = $9,024) × 559 money market 20,124 hours. Proposing Release. Based on an estimate funds = $5,044,416. 2302 This estimate is based on the following of 559 money market funds posting 2313 This estimate is based on the following calculation: $10,274 Per fund × 559 money market information about their current NAV per calculation: [(39,130 Initial burden hours + 17,888 funds = $5,743,166. share on their Web pages, we estimate annual burden hours (year 1)) + 17,888 burden 2303 This estimate is based on the following hours (year 2) + 17,888 burden hours (year 3)] ÷ 3 calculation: (39,130 Burden hours ÷ 3 = 13,043 that, in the aggregate, the amendment = 30,931 hours. average annual burden hours) + 20,124 annual will result in a total one-time burden of 2314 This estimate is based on the following burden hours = 33,167 hours; ($11,336,520 burden 39,130 hours,2309 at a time cost of calculation: [($11,336,520 Initial monetized burden costs ÷ 3 = $3,778,840 average annual burden cost) + $5,044,416 monetized burden (year 1)) + + $5,743,166 annual time costs = $9,522,006. $5,044,416 monetized burden (year 2) + $5,044,416 2305 See supra note 2282. 2304 While a money market fund could rely on monetized burden (year 3)] ÷ 3 = $8,823,256. 2306 third-party service providers to assist in developing See Chamber II Comment Letter. 2315 While a money market fund could rely on systems relevant to the Web site disclosure 2307 See State Street Comment Letter at Appendix third-party service providers to assist in developing requirements (see supra note 2282 and A; see also HSBC Comment Letter (stating that the systems relevant to the Web site disclosure accompanying text; infra note 2305 and proposed disclosure requirements should not requirements (see supra notes 2282 and 2305 and accompanying text), a fund also could rely on in- produce any ‘‘meaningful cost’’). accompanying text), a fund also could rely on in- house capability to develop such systems. Our cost 2308 See Proposing Release, supra note 25 at house capability to develop such systems. Our cost estimates assume that funds will use in-house n.1044. estimates assume that funds will use in-house resources to develop such systems except where it 2309 This estimate is based on the following resources to develop such systems except where it is more economical to use third-party service calculation: 70 Hours × 559 money market funds = is more economical to use third-party service providers. 39,130 hours. providers.

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00208 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47943

burden of 30,931 hours and time costs stated that the proposed disclosure e. Change in Burden 2316 of $8,823,256 for all funds. requirements should not produce any The aggregate additional annual meaningful costs.2320 As described d. Disclosure Regarding Financial burden associated with the Web site above, we have modified the required Support Received by the Fund, the disclosure amendments discussed above Imposition and Removal of Liquidity time frame for disclosing information is 70,840 hours 2324 at a time cost of Fees, and the Suspension and about financial support received by a $19,875,605.2325 There is no change in Resumption of Fund Redemptions fund on the fund’s Web site, and have the external cost burden associated with also modified the financial support this collection of information. We are adopting, substantially as disclosure requirement to require a fund proposed, the requirement for a money to post only a subset of the information 7. Total Burden for Rule 2a–7 market fund to disclose on its Web site required to be filed in response to Part The currently approved burden for certain information that the fund is C of Form N–CR. However, this rule 2a–7 is 517,228 hours. The net required to report on Form N–CR modification does not produce aggregate additional burden hours regarding the provision of financial additional burdens for funds because it associated with the amendments to rule support to the fund, as well as the merely allows more time for the same 2a–7 increase the burden estimate to imposition and removal of liquidity disclosure and thus does not affect 632,244 hours annually for all fees, and the suspension and previous hour burden estimates. The funds.2326 2317 resumption of fund redemptions. In Commission also has determined not to B. Rule 22e–3 the Proposing Release, the Commission change the assumptions used in our estimated that the Commission would estimates in response to the comments As outlined above, rule 22e–3 under receive 40 reports per year filed in we received, as the comments provided the Investment Company Act exempts response to an event specified on Part no specific suggestions or critiques money market funds from section 22(e) C (‘‘Provision of financial support to regarding our methods for estimating of the Act to permit them to suspend Fund’’) of Form N–CR. We further the hour burdens and costs associated redemptions and postpone payment of estimated that the Commission would with the Form N–CR-linked Web site redemption proceeds in order to receive 8 reports per year filed in disclosure requirements. We have, facilitate an orderly liquidation of the response to events specified on Part E however, modified our estimates of the fund, provided that certain conditions (‘‘Imposition of liquidity fee’’), Part F number of reports that will be filed each are met. The rule requires a money (‘‘Suspension of Fund redemptions’’), year on Part C, Part E, Part F, and Part market fund to provide prior and Part G (‘‘Removal of liquidity fee G of Form N–CR, and these modified notification to the Commission of its and/or resumption of Fund estimates have affected our estimates of decision to suspend redemptions and redemptions’’). Using these numbers, the burdens associated with the related liquidate.2327 This requirement is a we estimated that the requirement to Web site disclosure requirements.2321 collection of information under the disclose information about financial Given these estimates, the requirement PRA, and is designed to assist support received by a money market to disclose information about financial Commission staff in monitoring a fund on the fund’s Web site would support received by a money market result in a total aggregate burden of 40 fund on the fund’s Web site will result 2324 This estimate is based on the following calculation: 6,708 Hours (annual aggregate burden hours per year, at a total aggregate time in a total aggregate burden of 30 hours cost of $8,280. We further estimated that for the disclosure of portfolio holdings information) per year, at a total aggregate time cost of + 33,167 (average annual aggregate burden for the the requirement to disclose information $6,810.2322 In addition, the requirement disclosure of daily liquid assets and weekly liquid about the imposition and removal of to disclose information about the assets and net shareholder flow) + 30,931 (average annual aggregate burden for the disclosure of daily liquidity fees, and the suspension and imposition and removal of liquidity resumption of fund redemptions, on the current NAV) + 30 hours (annual aggregate burden fees, and the suspension and for the disclosure of financial support provided to fund’s Web site would result in a total resumption of fund redemptions, on the money market funds) + 3.6 hours (annual aggregate aggregate burden of eight hours per year, fund’s Web site will result in a total burden for the imposition and removal of liquidity fees, and suspension and resumption of fund at a total aggregate time cost of $1,656. aggregate burden of 3.6 hours per year, Although certain commenters redemptions) = 70,840 hours. This calculation at a total aggregate time cost of $817.2323 generally noted, as discussed above, that reflects hourly burdens that have been amortized We estimate that there are no external over three years, where appropriate. complying with the new Web site 2325 costs associated with this collection of This estimate is based on the following disclosure requirements would add calculation: $1,522,716 (Annual aggregate costs information. costs for funds,2318 one commenter associated with the disclosure of portfolio holdings stated that the costs of disclosing information) + $9,522,006 (average annual aggregate 2320 See HSBC Comment Letter. costs associated with the disclosure of daily liquid liquidity fees and gates and instances of 2321 See infra section IV.D.2. assets and weekly liquid assets and net shareholder financial support on the fund’s Web site 2322 This estimate is based on the following flow) + $8,823,256 (average annual aggregate costs would be minimal when compared to calculation: 30 Hours per year (1 hour per Web site associated with the disclosure of daily current other costs,2319 and another commenter update × 30 total Web site updates per year) × $227 NAV) + $6,810 (annual aggregate costs associated per hour for a webmaster = $6,810. Because all with the disclosure of financial support provided to money market funds are required to have a Web site money market funds) + $817 (annual aggregate costs 2316 This estimate is based on the following (see rule 2a–7(h)(10)), and because the disclosure at associated with the imposition and removal of ÷ calculation: (39,130 Burden hours 3 = 13,043 issue does not require any particular formatting or liquidity fees, and suspension and resumption of average annual burden hours) + 17,888 annual computational capacity, we assume that money fund redemptions) = $19,875,605. This calculation burden hours = 30,931 hours; ($11,336,520 burden market funds will not need to create a Web site or reflects hourly burdens that have been amortized ÷ costs 3 = $3,778,840 average annual burden cost) update their current systems capability to disclose over three years, where appropriate. + $5,044,416 annual time costs = $8,823,256. the relevant information, and therefore we estimate 2326 This estimate is based on the following 2317 As discussed in section III.E.9, the final that there are no one-time costs associated with this calculation: 517,228 Hours (currently approved amendments include certain changes to the Web disclosure requirement. burden) + 1,064 hours (ABS determination & site disclosure requirements from the proposal, 2323 This estimate is based on the following recordkeeping) + 238 hours (retail funds) + 30 hours largely designed to track the information on the calculation: 3.6 Hours per year (1 hour per Web site (government funds) + 581 hours (board Web site with the initial filings that will be update × 3.6 total Web site updates per year) × $227 determinations)¥35 hours (notice to the provided on Form N–CR. per hour for a webmaster = approximately $817. We Commission) + 42,298 hours (stress testing) + 2318 See supra note 2282. estimate that there are no one-time costs associated 70,840 (Web site disclosure) = 632,244 hours. 2319 See State Street Comment Letter. with this disclosure requirement. 2327 See rule 22e–3(a)(3).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00209 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47944 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

money market fund’s suspension of six years; 2331 (2) there are an average of collections of information. As discussed redemptions. The collection of two conduit funds that may be invested in more detail in section III.G. above, we information is mandatory for any fund in a money market fund that breaks the have revised the final amendments from that holds itself out as a money market buck; 2332 and (3) each money market our proposal in a number of ways in fund in reliance on rule 2a–7 and any fund and conduit fund will spend order to reduce costs to the extent conduit funds that rely on the rule,2328 approximately one hour of an in-house feasible and still achieve our goals of and to the extent that the Commission attorney’s time to prepare and submit enhancing and improving the receives confidential information the notice required by the rule.2333 As monitoring of money market fund risks. pursuant to this collection of discussed in the Proposing Release, While the final form amendments differ information, such information will be there will be no change in the external in some respects from what we kept confidential, subject to the cost burden associated with this proposed, we are adopting many of the provisions of applicable law. collection of information. We did not other proposed amendments To provide shareholders with receive any comments on the estimated unchanged.2335 protections comparable to those hour and cost burdens related to These amendments include: currently provided by the rule while amended rule 22e–3. Amendments Related to Rule 2a–7 also updating the rule to make it C. Rule 30b1–7 and Form N–MFP Reforms. As discussed in more detail in consistent with our amendments to rule section III.G. above, we proposed a Rule 30b1–7 under the Investment 2a–7, we are amending rule 22e–3 to number of changes to Form N–MFP Company Act currently requires money permit a money market fund to invoke designed to conform it with the general market funds to file electronically a the exemption in rule 22e–3 if the fund, reforms of rule 2a–7. We are adopting monthly report on Form N–MFP within at the end of a business day, has them largely as proposed, with some five business days after the end of each invested less than 10% of its total assets revisions to reflect the revised approach month. The information required by the in weekly liquid assets.2329 As under form must be data-tagged in XML format we are taking to the primary the current rule, a money market fund 2336 and filed through EDGAR. The rule is reforms. that maintains a stable NAV will designed to improve transparency of New Reporting Requirements. We are continue to be able to invoke the information about money market funds’ also adopting several new items to Form exemption in rule 22e–3 if it has broken portfolio holdings and facilitate N–MFP that we believe will improve the the buck or is about to ‘‘break the Commission oversight of money market Commission’s (and investors’) ability to buck.’’ 2330 funds. Preparing a report on Form N– monitor money market funds. As The amendments to rule 22e–3 are MFP is a collection of information discussed in more detail in section III.G. designed to permit a money market fund under the PRA.2334 This collection of above, these final amendments include to suspend redemptions when the fund information will be mandatory for some, but not all, of the new reporting is under significant stress, as the funds money market funds that rely on rule requirements that we had proposed. For may do today under rule 22e–3. We do 2a–7 and the information will not be example, as proposed, the final not expect that money market funds will kept confidential. amendments include additional invoke the exemption provided by rule reporting on fair value categorization 22e–3 more frequently under our 1. Discussion of Final Amendments and LEI information (if available).2337 amendments than they do today. We are adopting a number of We are also adopting, with some Although the amendments change the amendments to Form N–MFP which changes from the proposal, revisions to circumstances under which a money will include new and amended several other items, including revised market fund may invoke the exemption investment categories for portfolio provided by rule 22e–3, the amended 2331 This estimate is based upon the securities and repurchase agreement rule still will permit a money market Commission’s experience with the frequency with collateral. However, we are not adopting fund to invoke the exemption only which money market funds have historically the lot level portfolio security required sponsor support. Although many money when the fund is under significant market fund sponsors have supported their money disclosure, top 20 shareholder stress, and we estimate that a money market funds in times of market distress, for information, and security identifier market fund is likely to experience that purposes of this estimate the Commission level reporting on repo collateral that level of stress and choose to suspend conservatively estimates that one or more sponsors we had proposed. may not provide support. redemptions in reliance on rule 22e–3 2332 These estimates are based on a staff review Clarifying and Other Amendments. with the same frequency that funds of filings with the Commission. Generally, rule 22e– We are adopting, as proposed, several today may do so. Therefore, as we 3 permits conduit funds to suspend redemptions in amendments to clarify current indicated in the Proposing Release, we reliance on rule 22e–3 and requires that they notify instructions and items of Form N– the Commission if they elect to do so. are not revising rule 22e–3’s current 2338 2333 This estimate is based on the following MFP. We are also making certain approved annual aggregate collection of calculations: (1 Hour ÷ 6 years) = 10 minutes per other, non-substantive, structural information. year for each fund and conduit fund that is required changes to Form N–MFP.2339 The rule’s current approved annual to provide notice under the rule; 10 minutes per year × 3 (combined number of affected funds and 2335 aggregate burden is approximately 30 conduit funds) = 30 minutes. The estimated cost We provide a more detailed discussion of our minutes and is based on estimates that: associated with the estimated burden hours ($189) final amendments and commenters’ comments in (1) On average, one money market fund is based on the following calculations: $378/Hour section III.G above. 2336 will break the buck and liquidate every (hourly rate for an in-house attorney based on the See supra section III.G. Securities Industry and Financial Markets 2337 Id. Association, Management & Professional Earnings 2338 See supra section III.G for a more detailed 2328 The rule permits funds that invest in a money in the Securities Industry 2011, modified to account discussion of these clarifications. market fund pursuant to section 12(d)(1)(E) of the for an 1,800-hour work year and multiplied by 5.35 2339 As proposed, the amendments will renumber Act (‘‘conduit funds’’) to rely on the rule, and to account for bonuses, firm size, employee benefits the items of Form N–MFP to separate the items into requires the conduit fund to notify the Commission and overhead.) × 30 minutes = $189. four separate sections to allow the Commission to of its reliance on the rule. See rule 22e–3(b). 2334 For purposes of the PRA analysis, the current reference, add, or delete items in the future without 2329 See rule 22e–3(a)(1). burden associated with the requirements of rule having to re-number all subsequent items in the 2330 See id.; see also supra section III.A.4 30b1–7 is included in the collection of information form. See supra section III.G for a more detailed (discussing amended rule 22e–3). requirements of Form N–MFP. discussion of this restructuring.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00210 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47945

2. Current Burden well as the updated total number of at a time cost of $15,569 per fund 2349 2350 The current approved collection of money market funds that will be each year thereafter. 2344 information for Form N–MFP is 45,214 affected. In the Proposing Release, we also annual aggregate hours and $4,424,480 The Commission understands that discussed that software service in external costs. approximately 35% of the 559 2345 (for providers (whether provided by a a total of 1962346) money market funds licensor or third-party service provider) 3. Change in Burden that report information on Form N–MFP would be likely to incur additional The Commission estimates that 559 license a software solution from a third external costs to modify their software money market funds are required to file party that is used to assist the funds to and might pass those costs down to reports on Form N–MFP on a monthly prepare and file the required money market funds in the form of basis.2340 No commenters provided information. The Commission also higher annual licensing fees.2351 In the specific data or estimates regarding the understands that approximately 65% of Proposing Release, although we did not cost estimates we provided in the the 559 2347 (for a total of 363) money have the information necessary to Proposing Release for the amendments market funds that report information on provide a point estimate of the external to Form N–MFP, although some Form N–MFP retain the services of a costs or the extent to which the software suggested that the costs of some aspects third party to provide data aggregation service providers would pass down any of our proposed amendments to Form and validation services as part of the external costs to funds, we were able to N–MFP could be significant.2341 For preparation and filing of reports on estimate a range of costs, from 5% to example, some commenters expressed Form N–MFP on behalf of the fund. The 10% of current annual licensing 2352 concern that the proposed lot level Commission estimates that, in the first fees. We received no specific portfolio security disclosure would year, each fund (regardless of whether comments on this estimate. While we significantly increase the costs and the fund licenses the software or uses a are making certain changes to the final burdens of preparing Form N–MFP.2342 third-party service provider, given our amendments as described above that After consideration of these comments, assumption that these two options are may reduce costs, we do not believe that we believe that our original cost cost-competitive with one another) will these changes would significantly alter estimates may have understated the our estimated range of additional incur an additional average annual 2353 costs if we had implemented the burden of 85 hours, at a time cost of external licensing costs. amendments as proposed. As noted $22,069 per fund,2348 to prepare and file Accordingly, as proposed, the above, we have revised the final the report on Form N–MFP (as Commission estimates that 35% of funds (196 funds) will pay $336 in amendments from our proposal in a amended) and an average of additional external licensing costs each number of ways in order to reduce costs approximately 60 additional burden year and 65% of funds (363 funds) will to the extent feasible and still achieve hours (five hours per fund, per filing), our goals of enhancing and improving pay $800 in additional external licensing costs each year because of our the monitoring of money market fund 2344 The updated industry data on time costs 2354 risks. In light of these changes, and reflects salary information from SIFMA’s final amendments to Form N–MFP. taking into account other commenters’ Management & Professional Earnings in the 2343 Securities Industry 2013, supra note 2214. 2349 This estimate is based on the following estimates, we believe our original × cost estimates continue to be reasonable. 2345 We are estimating that 559 money market calculations: (16 Hours $232 blended average funds will be affected by our final amendments to hourly rate for a financial reporting manager ($266 Accordingly, the Commission has not Form N–MFP. This estimate is based on a review per hour) and fund senior accountant ($198 per × modified the estimated annual burden of reports on Form N–MFP filed with the hour) = $3,712 per fund) + (9 hours $157 per hour Commission for the month ended February 28, for an intermediate accountant = $1,413 per fund) hours associated with the final × 2014. In the Proposing Release we estimated 586 + (13 hours $312 per hour for a senior database amendments from those we estimated at × funds would be affected by our proposed administrator = $4,056 per fund) + (9 hours $301 the proposal. However, the Commission amendments. See Proposing Release supra note 25 for a senior portfolio manager = $2,709 per fund) × has modified its estimates based on at n.688. + (13 hours $283 per hour for a compliance updated industry data on time costs as 2346 The Commission estimated this 35% in the manager = $3,679 per fund) = 60 hours (16 + 9 + current burden. This estimate is based on the 13 + 9 + 13) at a total cost of $15,569 per fund × ($3,712 + $1,413 + $4,056 + $2,709 + $3,679). 2340 This estimate is based on a review of reports following calculation: 559 Funds 35% = 196 funds. Therefore, the additional average cost per fund per on Form N–MFP filed with the Commission for the burden hour is approximately $259 ($15,569 ÷ 60 2347 The Commission estimated this 65% in the month ended February 28, 2014. burden hours). 2341 current burden. This estimate is based on the See, e.g., Fidelity Comment Letter; State 2350 following calculation: 559 Funds × 65% = 363 In the Proposing Release, we estimated each Street Comment Letter. fund would incur an additional average annual 2342 funds. See supra note 1477 and accompanying text. burden of 85 hours (30 hours for the initial monthly 2348 This estimate is based on the following 2343 See, e.g., State Street Comment Letter, filing and 55 hours for the remaining monthly calculations: [30 Hours for the initial monthly filing (estimating that ‘‘the additional disclosures that filings (5 hours per fund, per filing × 11 months)), at a total cost of $7,824 per fund (8 hours × $232 will be required will at a minimum double the cost at a time cost of $22,045 per fund, to prepare and blended average hourly rate for a financial reporting of preparing and filing the Form N–MFP. If file the report on Form N–MFP (as proposed) and manager ($266 per hour) and fund senior purchases and sales information is also required, it an average of approximately 60 additional burden accountant ($198 per hour) = $1,856 per fund) + (4 may increase even more.’’); Dreyfus Comment Letter hours (five hours per fund, per filing), at a time cost hours × $157 per hour for an intermediate (estimating that it ‘‘incurred several hundreds of of $15,562 per fund each year thereafter. See accountant = $628 per fund) + (6 hours × $312 per thousands of dollars in technology-related costs to Proposing Release, supra note 25, at nn.1092 and hour for a senior database administrator = $1872 build systems required to populate the Form N– 1093 and accompanying text. MFP for (at the time) 51 MMFs,’’ and that the per fund) + (4 hours × $301 for a senior portfolio 2351 See Proposing Release, supra note 25, at reprogramming for each round of changes to Form manager = $1204 per fund) + (8 hours × $283 per n.1094 and accompanying text. N–MFP ‘‘will require several months of time at tens hour for a compliance manager = $2,264 per fund)] 2352 of thousands of dollars in cost for each.’’). As + [55 hours (5 hours per fund × 11 monthly filings) Id. discussed in more detail below, given that we are at a total cost of $14,245 per fund ($259 average cost 2353 Similar to our previous estimates of time not adopting certain costlier disclosures such as lot per fund per burden hour × 55 hours)]. The costs, we believe our original estimates of external level reporting, the Commission estimates that the additional average annual burden per fund for the costs continue to be reasonable in light of certain current approved collection of information for Form first year is 85 hours (30 hours (initial monthly changes in the final amendments and consideration N–MFP of 45,214 aggregate annual hours will filing) + 55 hours (remaining 11 monthly filings)) of commenters’ comments. See supra note 2343 and almost double to 83,412 aggregate annual hours, and the additional average cost burden per fund for accompanying discussion. while external costs will rise from $4,424,480 to the first year is $22,069 ($7,824 (initial monthly 2354 As proposed, the Commission estimates that $4,780,736. See supra section IV.C.2 and infra note filing) + $14,245 (remaining 11 monthly filings = the annual licensing fee for 35% of money market 2363 and accompanying discussion. $22,069). Continued

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00211 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47946 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

The Commission therefore estimates Generally, a money market fund will be 2. Estimated Burden that our final amendments to Form N– required to file Form N–CR if a portfolio a. Overview of Cost and Burden MFP will result in a first-year aggregate security defaults, an affiliate provides Changes additional 47,515 burden hours 2355 at a financial support to the fund, the fund total time cost of $12,336,571 2356 plus experiences a significant decline in its Our cost estimates below generally $356,256 in total external costs 2357 for shadow price, or when liquidity fees or reflect the costs associated with an 2358 2367 all funds, and 33,540 burden hours redemption gates are imposed and when actual filing of Form N–CR. The 2359 at a total time cost of $8,703,071 they are lifted.2365 In most cases, a Proposing Release estimated that a fund 2360 plus $356,256 in total external costs money market fund will be required to would annually spend on average for all funds each year hereafter. approximately five burden hours and submit a brief summary filing on Form Amortizing these additional hourly total time costs of $1,708 to prepare, N–CR within one business day of the burdens over three years results in an review and submit a report under any occurrence of the event, and a follow up average annual aggregate burden of Part of Form N–CR.2368 In the aggregate, approximately 38,198 hours at a total filing within four business days that the Proposing Release estimated that time cost of $9,914,238, and $356,256 in includes a more complete description compliance with new rule 30b1–8 and 2366 total external costs for all funds.2361 and information. This requirement Form N–CR would result in a total Finally, the Commission estimates that is a collection of information under the annual burden of approximately 341 our final amendments to Form N–MFP PRA. The information provided on burden hours and total annual time will result in a total aggregate annual Form N–CR will enable the Commission costs of approximately $116,429.2369 collection of information burden of to enhance its oversight of money The Proposing Release estimated 586 83,412 hours 2362 and $4,780,736 in market funds and its ability to respond money market funds would be required external costs.2363 to market events. The Commission will to comply with new rule 30b1–8 and be able to use the information provided 2370 D. Rule 30b1–8 and Form N–CR Form N–CR, which would have on Form N–CR in its regulatory, resulted in an average annual burden of 1. Discussion of New Reporting disclosure review, inspection, and approximately 0.58 burden hours and Requirements policymaking roles. Requiring funds to average annual time costs of Today we are adopting a new report these events on Form N–CR will approximately $199 on a per-fund basis. requirement that money market funds provide important transparency to fund The Proposing Release further estimated file a current report with us when shareholders, and also will provide that there would be no external costs certain significant events occur.2364 information more uniformly and associated with this collection of efficiently to the Commission. It will information.2371 funds is $3,360: A 5% to 10% increase = $168 ¥ also provide investors and other market As discussed in section III.F above, $336 in increased costs; the Commission estimates we are making various changes from the that the annual licensing fee for 65% of money observers with better and timelier market unds is $8,000: A 5% to 10% increase = disclosure of potentially important proposal to our final amendments, a $400 ¥ $800 in increased costs. See also, Proposing events. This collection of information number of which we expect to impact Release, supra note 25, at n. 1094 and will be mandatory for money market the frequency of filings as well as the accompanying text. costs associated with filing a report on 2355 funds that rely on rule 2a–7 and the This estimate is based on the following Form N–CR.2372 For example, with calculation: 559 Funds × 85 hours = 47,515 burden information will not be kept respect to Parts B, C and D, we are now hours in year one. confidential. 2356 This estimate is based on the following permitting filers to split their response calculation: 559 Funds × $22,069 annual cost per into an initial and follow-up filing,2373 fund in the initial year = $12,336,571. analysis, therefore, the burden associated with the similar to what we proposed for Parts E 2357 requirements of rule 30b1–8 is included in the This estimate is based on the following and F in the Proposing Release. We calculation: (196 Funds × $336 additional external collection of information requirements of Form N– costs = $65,856) + (363 funds × $800 additional CR. believe this change will increase total external costs = $290,400) = $356,256. 2365 See Form N–CR Parts B–H. More specifically, filing costs by increasing the number of 2358 This estimate is based on the following these events include instances of portfolio security filings. In addition, although only one × calculation: 559 Funds 60 hours per fund = default (Form N–CR Part B), financial support commenter provided specific cost 33,540 hours. (Form N–CR Part C), a decline in a stable NAV 2374 2359 estimates, we also took into account This estimate is based on the following fund’s current NAV per share (Form N–CR Part D), × calculation: 559 Funds $15,569 annual cost per a decline in weekly liquid assets below 10% of total fund in subsequent years = $8,703,071. 2367 We also recognize the possibility for some fund assets (Form N–CR Part E), whether a fund has 2360 See supra note 2357. advance industry discussions and preparation in imposed or removed a liquidity fee or gate (Form connection with Form N–CR, as discussed in more 2361 This estimate is based on the following N–CR Parts E, F and G), or any such other event(s) detail in the text following supra note 1363. calculation: (47,515 Hours in year 1 + 33,540 hours a Fund, in its discretion, may wish to disclose 2368 in year 2 + 33,540 hours in year 3) ÷ 3 = 38,198 See Proposing Release supra note 25 at average annual burden hours; ($12,336,571 in year (Form N–CR Part H). In addition, Form N–CR Part n.1203 and accompanying text. 1 + $8,703,071 in year 2 + $8,703,071 in year 3) ÷ A will also require a fund to report the following 2369 See Proposing Release supra note 25 at 3 = $9,914,238 average annual burden costs; general information: (i) The date of the report; (ii) n.1205 and accompanying text. ($356,256 in year 1 + $356,256 in year 2 + $356,256 the registrant’s central index key (‘‘CIK’’) number; 2370 See Proposing Release supra note 25 at in year 3) ÷ 3 = $356,256 average external costs. (iii) the EDGAR series identifier; (iv) the Securities n.1206 and accompanying text. 2362 This estimate is based on the following Act file number; and (v) the name, email address, 2371 See Proposing Release supra note 25 at calculation: Current approved burden of 45,214 and telephone number of the person authorized to discussion following n.1206. hours + 38,198 in additional burden hours as a receive information and respond to questions about 2372 See supra sections III.F.2–5 for a more result of our amendments = 83,412 hours. the filing. See Form N–CR Part A. While the detailed discussion of each of our final 2363 This estimate is based on the following Commission estimates the burden of reporting the amendments. 2373 calculation: Current approved burden of $4,424,480 information in response to Part A to be minimal, See supra section III.F.7 (Timing of Form in external costs + $356,256 in additional external N–CR). they were considered in the estimates of the costs as a result of our amendments = $4,780,736. 2374 See supra note 1295 and accompanying text. burdens incurred generally in connection with the 2364 As we proposed, this requirement will be As discussed in that section, because today we are implemented through our adoption of new rule preparation, formatting and filing of a report under allowing funds to file a response to the Items 30b1–8, which requires funds to file a report on any of the other Parts of Form N–CR. discussed by the commenter within four business new Form N–CR in certain circumstances. See rule 2366 A report on Form N–CR will be made public days instead of just one business day, we expect 30b1–8; Form N–CR. For purposes of the PRA on EDGAR immediately upon filing. that the costs of filing Form N–CR should be

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00212 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47947

commenters’ general concerns and year in response to Part B. Taking into Commission therefore estimates that the suggestions about the timing and account a blend of legal and financial total annual burden for Part B reporting burdens of Form N–CR.2375 For in-house professionals,2382 we estimate would be 270 burden hours, time costs example, commenters cited the that a fund would on average spend a of $96,600, and external costs of particular burdens and the role of the total of 13.5 burden hours 2383 and time $20,000.2387 board in drafting and reviewing the costs of $4,830 2384 for one set of initial c. Part C: Financial Support board disclosures in Parts E and F.2376 and follow-up reports in response to In light of commenters’ input, we Part B. Because some funds may also In a change from the proposal, we therefore revisited (and typically engage outside legal counsel,2385 we have made modifications to the increased) our prior cost estimates. estimate funds will also incur on definition of financial support in Part C Recognizing the substantive differences average external costs of approximately of Form N–CR,2388 which we estimate between each Part of Form N–CR, we $1,000 for one set of reports.2386 The will impact the frequency of filings on are also breaking out our cost estimates Part C of Form N–CR. Accordingly, for each Part individually, rather than 2382 Recognizing that, depending on the particular updating our estimate from the providing just one estimate with respect circumstances, different members of a fund’s proposal,2389 we estimate that the to any Part as in the proposal.2377 We financial team may assist with the preparation of Commission will receive, in the Form N–CR in varying degrees, we have estimated 2390 further expect, in particular with respect the time costs for a financial professional to be $255 aggregate, an average of 30 sets of to the follow-up reports under Parts B per hour, which is the blended average hourly rate initial and follow-up reports 2391 per through F as well as any reports on Part for a senior portfolio manager ($301), financial reporting manager ($266), and senior accountant counsel (1⁄2 of all instances × 1⁄2 legal professional H, that certain funds may engage legal ($198). For similar reasons, we have estimated the counsel to assist with the drafting and time = 1⁄4 aggregate legal professional time). time costs for a legal professional to be $440 per Accordingly, we estimate that funds will incur hour, which is the blended average hourly rate for review of Form N–CR, thereby incurring additional external legal costs of $1,000 (2.5 hours 2378 a deputy general counsel ($546) and compliance additional external costs. × $400 per hour for outside counsel) per set of attorney ($334). In the Proposing Release, we based initial and follow-up reports in response to Part B. Accordingly, we have added an estimate our estimate of time costs on an in-house attorney for new Part H and, in the discussion 2387 This estimate is based on the following and in-house accountant only. See Proposing × below, we are also updating and Release supra note 25 at n.1111 and accompanying calculation: 20 Reports per year 13.5 burden text. As noted in this section, we are making these hours per report = 270 burden hours; 20 reports per providing a more nuanced estimate of year × $4,830 time cost per report = $96,600 in time and other changes to provide a more nuanced × the costs associated with filing a report estimate of the costs associated with filing a report costs; 20 reports per year $1,000 external cost per with respect to each of Parts B though on Part B of Form N–CR. report = $20,000 in external costs. 2388 G of Form N–CR. 2383 When filing a report, the Commission See supra section III.F.3 (Definition of estimates that a fund would spend on average Financial Support). b. Part B: Default Events approximately 3 hours of legal professional time 2389 See Proposing Release supra note 25 at 2379 and 3 hours of financial professional time to n.1108 and accompanying text (estimating an As proposed, we estimate that the prepare, review and submit an initial filing. In average of 40 reports per year filed in response to Commission would receive, in the addition, the Commission estimates that a fund an event specified on Part C). aggregate, an average of 20 sets 2380 of would spend on average approximately 4.5 hours of 2390 This estimate is based on our current estimate initial and follow-up reports 2381 per legal professional time and 3 hours of financial of an average of 25 notifications of certain rule 17a– professional time to prepare, review and submit a 9 security purchases that money market funds follow-up amendment. The estimates of the average currently send via email to the Director of IM significantly reduced from this commenter’s legal professional time above have already been pursuant to rule 2a–7(c)(7)(iii) each year. See estimates. Id. reduced by the corresponding average amount of Submission for OMB Review, Comment Request, 2375 See, e.g., supra sections III.F.7 (Timing of time that we estimate will be shifted in the Extension: Rule 2a–7, OMB Control No. 3235–0268, Form N–CR) and III.F.8 (Operational Costs: aggregate from in-house counsel to outside counsel. Securities and Exchange Commission 77 FR 236 Overview). See infra note 2386. (Dec. 7, 2012). Because money market funds will be 2376 See, e.g., IDC Comment Letter (‘‘Any public 2384 This estimate is based on the following required to file a report in response to Part C of disclosure about a board’s decision-making process calculations: (3 Hours for the initial filing + 4.5 Form N–CR if the fund receives any form of would require careful and thoughtful drafting and hours for the follow-up filing) × $440 per hour for financial support from the fund’s sponsor or other multiple layers of review (by board counsel, fund a legal professional = $3,300) + ((3 hours for the affiliated person (which support includes, but is not counsel, and the directors, among others).’’); initial filing + 3 hours for the follow-up filing) × limited to, a rule 17a–9 security purchase), the Stradley Ronon Comment Letter; SIFMA Comment $255 per hour for a financial professional = $1,530) Commission estimates that the Commission will Letter. = 13.5 burden hours and time costs of $4,830. receive a greater number of reports on Form N–CR 2377 See supra note 2368 and accompanying text. 2385 We estimate the cost for outside legal counsel Part C than the number of notifications of rule 17a– 2378 See supra note 1347 and accompanying to be $400 per hour. This is based on an estimated 9 security purchases that it currently receives. In discussion. $400 per hour cost for outside legal services, and the Proposing Release, we originally estimated 40 2379 See Proposing Release supra note 25 at n. is the same estimate used by the Commission for filings per year under Part C of Form N–CR. See 1107 and accompanying text. these services in the ‘‘Exemptions for Advisers to Proposing Release supra note 25 at n.735 and 2380 This estimate is based on the Commission’s Funds, Private Fund Advisers With accompanying text. As discussed in supra section current estimate of an average of 20 notifications of Less Than $150 Million Under Management, and III.F.3, today we are adopting certain exclusions an event of default or insolvency sent via email to Foreign Private Advisers’’ final rule: SEC Release from the definition of financial support that will the Director of IM pursuant to rule 2a–7(c)(7)(iii) No. IA–3222 (June 22, 2011); [76 FR 39646 (July 6, narrow the definition to a certain degree. each year. See Submission for OMB Review, 2011)]. Correspondingly, in anticipation of a moderate Comment Request, Extension: Rule 2a–7, OMB 2386 Commenters provided us with no specific reduction in instances that meet the definition as Control No. 3235–0268, Securities and Exchange comments that would allow us to estimate with any amended today, we predict an estimated 30 filings Commission 77 FR 236 (Dec. 7, 2012). We believe precision to what extent funds may engage legal per year under Part C of Form N–CR. We believe that this estimate is likely to be high, in particular counsel to assist in the preparation of Form N–CR. that this estimate is likely to be high, in particular when markets are not in crisis as they were during However, for purposes of this PRA, we estimate that when markets are not in crisis as they were during 2008 or 2011. However, we are continuing to use in approximately half of all instances funds will 2008 or 2011. However, we are using this higher this higher estimate to be conservative in our engage legal counsel to assist in the preparation of estimate to be conservative in our analysis. analysis. a set of initial and follow up filings responding to 2391 A fund must file a report on Form N–CR 2381 A fund must file a report on Form N–CR Part B of Form N–CR. In such cases, we estimate responding to Items C.1 through C.7 on the first responding to Items B.1 through B.4 on the first that approximately half of the total legal business day after the initial date on which any business day after the initial date on which a professional time that in-house counsel would have financial support contemplated in Item C is default or event of insolvency contemplated in Item otherwise spent on responding to Part B of Form provided to the fund. A fund must amend its initial B occurs. A fund must amend its initial report on N–CR will be shifted to outside counsel. report on Form N–CR to respond to Items C.8 Form N–CR to respond to Item B.5 by the fourth Accordingly, a quarter of the total legal professional through C.10 by the fourth business day after the business day after the initial date on which a time that would otherwise have been spent on initial date on which any financial support default or event of insolvency contemplated in Item responding to Part B of Form N–CR, or 2.5 hours, contemplated in Item C is provided to the fund. See B occurs. See Form N–CR Item B Instructions. will be shifted from in-house counsel to outside Form N–CR Item C Instructions.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00213 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47948 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

year in response to Part C. Taking into D. Taking into account a blend of legal thresholds permitting or triggering account a blend of legal and financial and financial in-house professionals,2399 board consideration of a liquidity fee in in-house professionals,2392 we estimate we estimate that a fund will on average Part E of Form N–CR.2405 We therefore that a fund will on average spend a total spend a total of 13.5 burden hours 2400 have updated our estimates of the of 18.5 burden hours 2393 and time costs and time costs of approximately frequency of filings under Part E.2406 of approximately $6,660 2394 for one set $4,830 2401 for one set of initial and Moreover, in particular with respect to of initial and follow-up reports in follow-up reports in response to Part D. the board disclosures, we expect that response to Part C. We also estimate We also estimate funds will also incur most if not all funds may engage outside funds will also incur on average on average external costs of legal counsel to assist with the drafting external costs of approximately $1,400 approximately $1,000 for one set of and review of Form N–CR, thereby for one set of reports.2395 The reports.2402 The Commission therefore incurring additional external costs.2407 Commission therefore estimates that the estimates that the total annual burden total annual burden for Part C reporting for Part D reporting will be four burden Accordingly, we estimate that the will be 555 burden hours, time costs of hours, time costs of $1,449, and external Commission will receive, in the 2408 $199,800, and external costs of costs of $300.2403 aggregate, an average of 1.2 sets of $42,000.2396 initial and follow-up reports 2409 per e. Part E: Imposition of Liquidity Fees year in response to an event specified d. Part D: Shadow Price Declines In addition to other changes from the on Part E. Taking into account a blend In a change from the proposal, we proposal,2404 we have made of legal and financial in-house estimate that the Commission will modifications to the weekly liquid asset professionals,2410 as well as time spent receive, in the aggregate, an average of by the board reviewing the 0.3 sets 2397 of initial and follow-up deviates downward from its intended stable price 2398 per share by more than 1⁄4 of 1 percent. A fund must reports per year in response to Part 2405 amend its initial report on Form N–CR to respond See supra section III.F.5 (Conforming to Item D.3 by the fourth business day after the Changes). 2392 See supra note 2382. initial date on which the fund’s current NAV 2406 See infra note 2408 and accompanying text. 2393 When filing a report, the Commission deviates downward from its intended stable price 2407 See supra note 1377 and accompanying estimates that a fund will spend on average per share by more than 1⁄4 of 1 percent. See Form discussion. approximately 4.5 hours of legal professional time N–CR Item D Instructions. 2408 For purposes of this estimate, the and 4 hours of financial professional time to 2399 See supra note 2382. Commission estimates that 0.6 funds per year will prepare, review and submit an initial filing. In 2400 When filing a report, the Commission file a report triggered by the 10% weekly liquid addition, the Commission estimates that a fund will estimates that a fund will spend on average asset threshold. See supra section III.F.5 spend on average approximately 6 hours of legal approximately 3 hours of legal professional time (Operational Costs of Part E, F, and G: Imposition professional time and 4 hours of financial and 3 hours of financial professional time to and Lifting of Fees and Gates). In the Proposing professional time to prepare, review and submit a prepare, review and submit an initial filing. In Release, we had previously estimated a total of 4 follow-up amendment. The estimates of the average addition, the Commission estimates that a fund will reports in response to Parts E and F based on the legal professional time above have already been spend on average approximately 4.5 hours of legal reduced by the corresponding average amount of previously proposed higher 15% weekly liquid professional time and 3 hours of trigger. See Proposing Release supra note 25 time that we estimate will be shifted in the professional time to prepare, review and submit a aggregate from in-house counsel to outside counsel. at n.1202. In addition, the DERA Study analyzed follow-up amendment. The estimates of the average the distribution of weekly liquid assets and found See infra note 2395. legal professional time above have already been 2394 This estimate is based on the following that 83 prime funds per year had their weekly reduced by the corresponding average amount of liquid asset percentages fall below 30%. See supra calculations: ((4.5 Hours for the initial filing + 6 time that we estimate will be shifted in the × section III.F.5 (Operational Costs of Part E, F, and hours for the follow-up filing) $440 per hour for aggregate from in-house counsel to outside counsel. G: Imposition and Lifting of Fees and Gates). We are a legal professional = $4,620) + ((4 hours for the See infra note 2402. unable to estimate with any specificity how many initial filing + 4 hours for the follow-up filing) × 2401 This estimate is based on the following of these 83 prime funds would have decided to $255 per hour for a financial professional = $2,040) calculations: ((3 Hours for the initial filing + 4.5 impose a discretionary liquidity fee upon breaching = 18.5 burden hours and time costs of $6,660. hours for the follow-up filing) × $440 per hour for the 30% weekly liquid asset threshold. However, 2395 Using the same assumptions as with respect a legal professional = $3,300) + ((3 hours for the we generally expect relatively few funds will to Part B in supra note 2386, we estimate that initial filing + 3 hours for the follow-up filing) × approximately a quarter of the total legal $255 per hour for a financial professional = $1,530) impose a discretionary liquidity fee given its professional time that would otherwise have been = 13.5 burden hours and time costs of $4,830. voluntary nature and potential costs on redeeming shareholders. For purposes of this PRA, we estimate spent on responding to Part C of Form N–CR, or 3.5 2402 Using the same assumptions as with respect hours, will be shifted from in-house counsel to to Part B in supra note 2386, we estimate that that funds will voluntarily impose a liquidity fee at outside counsel. Accordingly, we estimate that approximately a quarter of the total legal most as often as they will be required to consider funds will incur additional external legal costs of professional time that would otherwise have been a liquidity fee based on the 10% weekly liquid asset $1,400 (3.5 hours × $400 per hour for outside spent on responding to Part D of Form N–CR, or 2 trigger. Accordingly, the Commission counsel) per set of initial and follow-up reports in hours, will be shifted from in-house counsel to conservatively estimates that 0.6 additional funds response to Part C. outside counsel. Accordingly, we estimate that per year will file a report in response to Part E 2396 This estimate is based on the following funds will incur additional external legal costs of because it breached the 30% weekly liquid asset calculation: 30 Reports per year × 18.5 burden $1,000 (2.5 hours × $400 per hour for outside threshold and their board determined to impose hours per report = 555 burden hours; 30 reports per counsel) per set of initial and follow-up reports in such a discretionary liquidity fee. Together with the year × $6,660 time cost per report = $199,800 in response to Part D. filings triggered by the 10% weekly liquid asset time costs; 30 reports per year × $1,400 external 2403 This estimate is based on the following threshold, this will result in a total of 1.2 sets of cost per report = $42,000 in external costs. calculation: 0.3 Reports per year × 13.5 burden filings in response to Part E per year. Although we 2397 Commission staff analyzed form N–MFP data hours per report = 4 burden hours; 0.3 reports per believe this estimate is likely to be high, we are from November 2010 to February 2014 and found year × $4,830 time cost per report = $1,449 in time using this estimate to be conservative in our that only one non-institutional fund had a 1⁄4 of 1 costs; 0.3 reports per year × $1,000 external cost per analysis. See supra section III.F.5 (Operational percent deviation from the stable $1.00 per share report = $300 in external costs. Costs of Part E, F, and G: Imposition and Lifting of NAV. 1 fund in over 39 months is equivalent to less 2404 See supra section III.F.5 for a discussion of Fees and Gates). than 1 (1 × 12 ÷ 39 = 0.31) funds per year. See also all our final amendments to Part E. For example, we 2409 A fund must file a report on Form N–CR supra note 1394. In the Proposing Release, we had have made modifications to the board disclosure responding to Items E.1 through E.4 on the first estimated 0.167 reports filed per year in respect of requirements. See supra section III.F.5 (Board business day after the initial date on which the Part D. See Proposing Release, supra note 25, at Disclosures). In addition, as noted in supra note reporting requirement under Part E was triggered. n.1205. We revised this estimate to reflect more 2376, commenters cited the particular burdens and A fund must amend its initial report on Form N– accurate accounting and updated data. the role of the board in drafting and reviewing the CR to respond to Items E.5 and E.6 by the fourth 2398 A retail or government money market fund board disclosures in Parts E and F. Accordingly, business day after the initial date on which the must file a report on Form N–CR responding to taking into account these and our other changes to reporting requirement under Part E was triggered. Items D.1 and D.2 on the first business day after the Part E, we have increased our cost estimates for Part See Form N–CR Item E Instructions. initial date on which the fund’s current NAV E. 2410 See supra note 2382.

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00214 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47949

disclosure,2411 we estimate that a fund weekly liquid asset threshold permitting and time costs of approximately will on average spend a total of 20 boards to impose a discretionary $10,910 2425 for one set of initial and burden hours 2412 and time costs of gate.2418 We therefore have updated our follow-up reports in response to Part F. approximately $10,910 2413 for one set of estimates of the frequency of filings Because we expect most if not all funds initial and follow-up reports in response under Part F.2419 In particular with may also engage legal counsel to assist to Part E. Because we expect that most, respect to the board disclosures, we with the drafting and review of Form N– if not all, funds may also engage outside expect that most if not all funds may CR,2426 we estimate funds also further legal counsel to assist with the drafting engage legal counsel to assist with the incur on average external costs of and review of Part E,2414 we also drafting and review of Form N–CR, approximately $3,600 for each set of estimate funds will also incur on thereby incurring additional external reports.2427 The Commission therefore average external costs of approximately costs.2420 Accordingly, we estimate that estimates that the total annual burden $3,600 per set of reports.2415 The the Commission will receive, in the for Part F reporting will be 12 burden Commission therefore estimates that the aggregate, an average of 0.6 sets 2421 of hours, time costs of $6,546, and external total annual burden for Part E reporting initial and follow-up reports 2422 per costs of $2,160.2428 will be 24 burden hours, time costs of year in response to an event specified $13,092, and external costs of on Part F. Taking into account a blend g. Part G: Removal of Liquidity Fees $4,320.2416 of legal and financial in-house and/or Resumption of Fund professionals,2423 as well as time spent Redemptions f. Part F: Suspension of Fund by the board reviewing the disclosure, Redemptions As discussed in the Proposing we estimate that a fund will on average Release, we continue to believe the In addition to other changes from the spend a total of 20 burden hours 2424 frequency of filings under Part G on 2417 proposal, we have increased the Form N–CR to be closely correlated to have made modifications to the board disclosure the frequency of filings under Parts E 2411 For purposes of this PRA, we estimate time requirements. See supra section III.F.5 (Board 2429 costs of $4,400 per hour for a board of 8 directors. Disclosures). In addition, as noted in supra note and F. Given our revised estimates See supra note 2214. 2376, commenters cited the particular burdens and 2412 When filing a report, the Commission the role of the board in drafting and reviewing the and 4 hours of financial professional time to estimates that a fund would spend on average board disclosures in Parts E and F. Accordingly, prepare, review and submit an initial filing. In approximately 3 hours of legal professional time taking into account these and our other changes to addition, the Commission estimates that a fund and 4 hours of financial professional time to Part F, we have increased our cost estimates for would spend on average approximately 6 hours of prepare, review and submit an initial filing. In Part F. legal professional time and 6 hours of financial addition, the Commission estimates that a fund 2418 See supra section III.F.5 (Conforming professional time to prepare, review and submit a would spend on average approximately 6 hours of Changes). follow-up amendment. The Commission also legal professional time and 6 hours of financial 2419 See infra note 2421 and accompanying text. estimates that a fund would spend 1 hour for a professional time to prepare, review and submit a 2420 See supra note 1376 and accompanying board of directors to review the reports. The follow-up amendment. The Commission also discussion. estimates of the average legal professional time estimates that a fund would spend 1 hour for a 2421 above have already been reduced by the board of directors to review the reports. The In the Proposing Release, we had previously estimated a total of 4 reports in response to Parts corresponding average amount of time that we estimates of the average legal professional time estimate will be shifted in the aggregate from in- above have already been reduced by the E and F based on the previously proposed 15% house counsel to outside counsel. See infra note corresponding average amount of time that we weekly liquid asset trigger. See Proposing Release 2427. estimate will be shifted in the aggregate from in- supra note 25 at n.1202. However, we are revising 2425 house counsel to outside counsel. See infra note this estimate in light of the amended higher 30% This estimate is based on the following 2415. weekly liquid asset threshold for discretionary calculations: ((3 Hours for the initial filing + 6 hours for the follow-up filing) × $440 per hour for 2413 This estimate is based on the following gates. In particular, the DERA Study found that 83 prime funds per year had their weekly liquid asset a legal professional = $3,960) + ((4 hours for the calculations: ((3 Hours for the initial filing + 6 × hours for the follow-up filing) × $440 per hour for percentages fall below 30%. See supra section initial filing + 6 hours for the follow-up filing) III.F.8 (Operational Costs of Part E, F, and G: $255 per hour for a financial professional = $2,550) a legal professional = $3,960) + ((4 hours for the × initial filing + 6 hours for the follow-up filing) × Imposition and Lifting of Fees and Gates). Similar + (1 hour $4,400 per hour for a board of 8 $255 per hour for a financial professional = $2,550) to discretionary liquidity fees, we are unable to directors = $4,400) = 20 burden hours and time + (1 hour × $4,400 per hour for a board of 8 estimate with any specificity how many of these 83 costs of $10,910. directors = $4,400) = 20 burden hours and time prime funds would have decided to impose a 2426 Because, for the reason discussed in supra costs of $10,910. discretionary gate upon breaching the 30% weekly note 1301 and accompanying text, the potential 2414 Because, for the reason discussed in supra liquid asset threshold. Cf. supra note 2408. imposition of a gate is one of the most significant note 1301 and accompanying text, the potential However, we conservatively estimate the number of events that can occur to money market funds, to be imposition of a liquidity fee is one of the most instances in which a fund breached the 30% weekly conservative we estimate that all funds would seek significant events that can occur to money market liquid asset threshold and its board determined to outside counsel for purposes of this estimate. funds, to be conservative we estimate that all funds impose a voluntary gate to be equal to the number 2427 On average, we estimate that approximately would seek outside counsel for purposes of this of instances in which a fund breached the 30% half of the total legal professional time that in-house estimate. weekly liquid asset threshold and its board counsel would have otherwise spent on reviewing 2415 On average, we estimate that approximately determined to impose a voluntary fee. This results and responding to Part F of Form N–CR will be half of the total legal professional time that in-house in an estimate of approximately 0.6 sets of initial shifted to outside counsel. Accordingly, for counsel would have otherwise spent on reviewing and follow-up reports filed per year in response to purposes of this PRA, we estimate that a total of 8 and responding to Part E of Form N–CR will be Part F. Although we believe this estimate is likely hours will be shifted from in-house counsel to shifted to outside counsel. Accordingly, for to be high, we are using this estimate to be outside counsel. Accordingly, we estimate that purposes of this PRA, we estimate that a total of 9 conservative in our analysis. See supra section funds will incur external legal costs of $3,600 (9 hours will be shifted from in-house counsel to III.F.8 (Operational Costs of Part E, F, and G: hours × $400 per hour for outside counsel) per set outside counsel. Accordingly, we estimate that Imposition and Lifting of Fees and Gates). of initial and follow-up reports in response to funds would incur external legal costs of $3,600 (9 2422 A fund must file a report on Form N–CR Part F. hours × $400 per hour for outside counsel) per set responding to Items F.1 and F.2 on the first 2428 This estimate is based on the following of initial and follow-up reports in response to business day after the initial date on which a fund calculation: 0.6 Reports per year × 20 burden hours Part E. suspends redemptions. A fund must amend its per report = 12 burden hours; 0.6 reports per year 2416 This estimate is based on the following initial report on Form N–CR to respond to Items F.3 × $10,910 time cost per report = $6,546 in time calculation: 1.2 Reports per year × 20 burden hours and F.4 by the fourth business day after the initial costs; 0.6 reports per year × $3,600 external cost per per report = 24 burden hours; 1.2 reports per year date on which a fund suspends redemptions. See report = $2,160 in external costs. × $10,910 time cost per report = $13,092 in time Form N–CR Item F Instructions. 2429 See, e.g., Proposing Release supra note 25 at costs; 1.2 reports per year × $3,600 external cost per 2423 See supra note 2382. n.1202 and accompanying discussion. We expect report = $4,320 in external costs. 2424 When filing a report, the Commission there to be a close correlation because Part G 2417 See supra section III.F.5 for a discussion of estimates that a fund would spend on average requires disclosure of the lifting of any liquidity fee all our final amendments to Part F. For example, we approximately 3 hours of legal professional time or gate imposed in connection with Part E or F.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00215 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47950 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

of the number of filings under Parts E reporting will be 3.6 burden hours, and of approximately $1,390 2442 for one set and F,2430 we are correspondingly time costs of $1,251.2437 of initial and follow-up reports in response to Part H. We also estimate updating our estimate of the number of h. Part H: Other Events filings under Part G. We are further funds will also incur on average updating our estimates for Part G, Given the broad scope and voluntary external legal costs of approximately because the Commission expects the nature of the optional disclosure under $800 per report.2443 The Commission Part H of Form N–CR, which is new cost per filing associated with therefore estimates that the total annual from the proposal, we believe that, in an responding to Part G to be lower than burden for Part H reporting will be 60 event of filing, a fund’s particular for Parts E or F.2431 Unlike Parts B burden hours, time costs of $20,850, and circumstances that led it to decide to external costs of $12,000.2444 through F and H, for which we have make such a voluntary disclosure will included estimated external costs to be the predominant factor in i. Aggregate Burden of Form N–CR account for the possibility that funds determining the time and costs In the aggregate, we estimate that may engage legal counsel to assist in the associated with filing a report on Part H. compliance with Form N–CR will result preparation and review of Form N– To be conservative, we also expect that in a total annual burden of CR,2432 we have not done so here some funds may engage outside legal approximately 929 burden hours,2445 because of the relative simplicity of Part counsel to assist with the drafting and total annual time costs of approximately G. Accordingly, we estimate that the review of Part H, thereby incurring $339,588,2446 and total external costs of Commission will receive, in the additional external costs.2438 We $80,780.2447 Given an estimated 559 aggregate, an average of 1.8 reports 2433 estimate that the Commission will money market funds that will be per year in response to Part G. Taking receive, in the aggregate, approximately required to comply with Form N– into account a blend of legal and 15 reports 2439 per year in response to CR,2448 this will result in an average financial in-house professionals,2434 we Part H of Form N–CR. Taking into annual burden of approximately 1.7 estimate that a fund will on average account a blend of legal and financial burden hours, average annual time costs spend a total of two burden hours 2435 in-house professionals,2440 we estimate of approximately $607 on a per-fund and time costs of approximately that a fund will on average spend a total basis, and average annual external costs 2441 2449 $695 2436 for a filing in response to Part of four burden hours and time costs of $145. G. The Commission therefore estimates E. Rule 34b–1(a) 2437 This estimate is based on the following that the total annual burden for Part G calculation: 1.8 Reports per year × 2 burden hours Rule 34b–1 under the Investment per report = 3.6 burden hours; 1.8 reports per year Company Act is an antifraud provision × 2430 See supra notes 2408 and 2421. $695 time cost per report = $1,251 in time costs. 2431 2438 See supra note 2386 and accompanying The Proposing Release estimated that a fund 2442 This estimate is based on the following discussion. would spend on average approximately 5 burden calculations: (2 Hours × $440 per hour for a legal 2439 hours and total time costs of $1,708 to prepare, For purposes of this estimate, the professional = $880) + (2 hours × $255 per hour for review, and submit a report under any Part of Form Commission conservatively estimates that funds a financial professional = $510) = 4 burden hours N–CR. See Proposing Release supra note 25 at will include a disclosure under Part H in about a and time costs of $1,390. n.1203 and accompanying text. However, we expect quarter of the instances they submit a follow-up 2443 In particular, we expect that funds are more a response to Part G to be shorter than under Parts filing under Parts B through F, as well as with likely to file a report on Part H when there are more E or F, given that Part G only requires disclosure respect to a quarter of all filings under Part G. complex events that need to be addressed, which of the date on which a fund removed a liquidity fee Because of the timing constraints, we generally correspondingly we believe will make it and/or resumed Fund redemptions. See Form N–CR would not expect that funds will make a Part H significantly more likely that funds will engage Item G.1. In addition, unlike Part E or F, Part G disclosure in an initial filing. However, given the legal counsel. To be conservative, we estimate that would not require any follow-up report. possibility that funds might make a Part H funds would engage outside legal counsel in all 2432 See supra IV.D.2.g for our discussion of the disclosure in the initial filing or on a stand-alone cases they file a response to Part H. Accordingly, external costs of Parts B through F; see also infra basis, we conservatively estimate one additional we estimate that funds would incur additional × this section for our discussion of the external costs Part H filing per year under each scenario. We external legal costs of $800 (2 hours $400 per hour of Part H. therefore estimate an annual total of approximately for outside counsel) per set of initial and follow-up 15 filings in response to Part H based on the reports in response to Part H (with the estimated 2 2433 As discussed in section III.F, we expect the following calculation: (20 sets of Part B filings per hours of outside counsel time corresponding to the frequency of Part G filings will be closely correlated year) + (30 sets of Part C filings per year) + (0.3 sets 2 hours of legal professional time we estimate in to any filings under Part E of F, given that Part G of Part D filings per year) + (1.2 sets of Part E filings supra note 2441). will disclose the lifting of any liquidity fee or gate per year) + (0.6 sets of Part F filings per year) + (1.8 2444 This estimate is based on the following imposed in connection with Part E or F. See supra Part G filings per year) = approximately 54 Parts B– calculation: 15 Reports per year × 4 burden hours section III.F.8 (Operational Costs of Part E, F, and G filings per year. (54 Parts B–G filings per year ÷ per report = 60 burden hours; 15 reports per year G: Imposition and Lifting of Fees and Gates). In 4) + (2 additional Part H filings per year in an initial × $1,390 time cost per report = $20,850 in time particular, for purposes of this estimate the filing or on a stand-alone basis) = approximately 15 costs; 15 reports per year × $800 external cost per Commission estimates that 1.8 funds per year will Part H filings per year. report = $12,000 in external costs. file a report in response to Part G, based on the 2440 See supra note 2382. 2445 This estimate is based on the following assumption that each time a fund files a report 2441 This estimate is derived in part from our calculation: 270 Hours (Part B) + 555 hours (Part C) under Parts E or F it will also eventually file a current PRA estimate for Form 8–K under the + 4 hours (Part D) + 24 hours (Part E) + 12 hours report under Part G. We believe this to be a high Exchange Act. See ‘‘Form 8–K, Current Report (Part F) + 3.6 hours (Part G) + 60 hours (Part H) = estimate given that, among other things, at least Pursuant to Section 13 or 15(d) of the Securities 929 aggregate burden hours. some funds that impose a liquidity fee or gate will Exchange Act of 1934’’ (OMB Control No. 3235– 2446 This estimate is based on the following likely to go out of business (and thus would never 0060), available at http://www.reginfo.gov. In calculation: $96,600 (Part B) + $199,800 (Part C) + reopen), although we are unable to predict with particular, we estimate that Form 8–K takes $1,449 (Part D) + $13,092 (Part E) + $6,546 (Part F) certainty how many would do so. approximately 5 hours per response if rounded up + $1,251 (Part G) + $20,850 (Part H) = $339,588 2434 See supra note 2382. to the next whole hour. As an initial step, we aggregate time costs. 2435 When filing a report, the Commission conservatively added an additional hour, for a total 2447 This estimate is based on the following estimates that a fund will spend on average of 6 hours. Of this total, we estimate that an average calculation: $20,000 (Part B) + $42,000 (Part C) + approximately 1 hour of legal professional time and of 2 hours will be shifted to outside legal counsel $300 (Part D) + $4,320 (Part E) + $2,160 (Part F) + 1 hour of financial professional time to prepare, (corresponding to the 2 hours of legal professional $12,000 (Part H) = $80,780 total external costs. review, and submit a filing in response to Part G. time discussed immediately below). Accordingly, 2448 See supra note 2340. 2436 This estimate is based on the following when filing a report, the Commission estimates that 2449 This estimate is based on the following calculations: (1 Hour × $440 per hour for a legal a fund would spend on average approximately 2 calculation: 929 Burden hours ÷ 559 funds = 1.7 professional = $440) + (1 hour × $255 per hour for hours of legal professional time and 2 hours of annual burden hours per fund; $339,588 ÷ 559 a financial professional = $255) = 2 burden hours financial professional time to prepare, review and funds = $607 annual time costs per fund; $80,780 and time costs of $695. submit a response to Part H. ÷ 559 funds = $145 annual external costs per fund.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00216 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47951

governing sales material that with the amended requirements of rule associated with the rule 482 accompanies or follows the delivery of 482. This collection of information will amendments, the Commission has not a statutory prospectus. Among other be mandatory for money market funds modified its previous hour burden things, rule 34b–1 deems to be that rely on rule 2a–7, and the estimates.2455 materially misleading any advertising information will not be kept Based on an estimate of 559 money material by a money market fund confidential. market funds that will be required to required to be filed with the Certain commenters generally noted update the risk disclosure included in Commission by section 24(b) of the Act that complying with all of the new fund advertisements pursuant to rule that includes performance data, unless disclosure requirements, including the 482, as amended, we estimate that, in such advertising also includes the rule amended requirements of rule 482, the aggregate, the amendments will 482(b)(4) risk disclosures already would involve additional costs.2450 result in 2,935 total one-time burden discussed in section IV.F below. In the Several commenters provided dollar hours,2456 at a total one-time time cost Proposing Release, the Commission estimates of the initial costs to of $818,376.2457 Amortized over a three- noted that the proposal to amend the implement a fees and gates or floating year period, this will result in an wording of the rule 482(b)(4) risk NAV framework and noted that these average additional annual burden of disclosures would indirectly affect rule estimates would include the costs of approximately 978 burden hours 2458 at 34b–1(a), although the Commission related disclosure, but these a total annual time cost of proposed no changes to rule 34b–1(a) commenters did not specifically break approximately $272,792 for all itself. We also noted that our discussion out the disclosure-related costs in their funds.2459 Given that the amendments 2451 of the amendments to rule 482(b)(4) estimates. One commenter stated are one-time updates to the wording of accounted for the burdens associated that the costs to update Web site the risk disclosures already required with the wording changes to the risk disclosures to reflect the new floating under current rule 482(b)(4), we believe disclosures in money market fund NAV and fees and gates requirements that, once funds have made these one- advertising, and by complying with our would be ‘‘minimal when compared to 2452 time changes, the amendments to rule amendments to rule 482(b)(4), money other costs,’’ and another 482(b)(4) will only require money market funds would also automatically commenter stated that the proposed market funds to incur the same costs remain in compliance with rule 34b– disclosure requirements should not 2453 and hour burdens on an ongoing basis 1(a) as affected by these amendments. produce any meaningful costs. As as under current rule 482(b)(4). Therefore, any burdens associated with described above, we are adopting rule 34b–1(a) as a result of our proposed amendments to rule 482 that have been 2455 The compliance period for updating rule amendments to rule 482(b)(4) were modified from the proposed 482(b)(4) risk disclosures to reflect the floating NAV already accounted for in the Proposing amendments to respond to certain or liquidity fees and gates amendments is 2 years. Release’s Paperwork Reduction Act commenters’ concerns and other We understand that money market funds commonly analysis of rule 482. No commenters suggestions. The rule 482 disclosure update and issue new advertising materials on a periodic and frequent basis. Accordingly, given the addressed rule 34b–1, and we continue requirements that we are adopting extended compliance period proposed, we expect to believe that any burdens associated therefore differ from the proposed rule that funds should be able to amend the wording of with rule 34b–1(a) as a result of the 482 disclosure requirements in content their rule 482(b)(4) risk disclosures as part of one amendments we are adopting to rule and format.2454 We believe that these of their general updates of their advertising materials. Similarly, we believe that funds could 482(b)(4) are accounted for in section revisions to the proposed requirements update the corresponding disclosure statement on IV.F below. do not produce additional burdens for their Web sites when performing other periodic F. Rule 482 funds because the revisions only Web site maintenance. We therefore account only involve changes in the wording and for the incremental change in burden that amending We are adopting amendments the rule 482(b)(4) risk disclosures will cause in the formatting of the required disclosure context of a larger update to a fund’s advertising affecting current requirements under statement and do not impact the materials or Web site. rule 482 of the Securities Act relating to measures funds must take to effect the 2456 This estimate is based on the following the information that is required to be disclosure requirements. Taking this calculation: 5.25 Hours per year (4 hours to update included in money market funds’ into consideration, as well as the fact and review the wording of the rule 482(b)(4) risk advertisements or other sales materials. disclosure for each fund’s printed advertising and that we received no comments sales material, plus 1.25 hours to post and review Specifically, the amendments revise the providing specific suggestions or the wording of the rule 482(b)(4) risk disclosures on particular wording of the current rule critiques about our methods for a fund’s Web site) × 559 money market funds = 482(b)(4) risk disclosures required to estimating the burdens and costs approximately 2,935 hours. appear in advertisements for money 2457 This estimate is based on the following calculation: $1,464 (Total one-time costs per fund) market funds (including on the fund 2450 See, e.g., Fin. Svcs. Roundtable Comment × 559 funds = $818,376. The $1,464 per fund figure Web site). The fees and gates Letter (noting that the proposed disclosure is, in turn, based on the following calculations: (3 amendments, as well as the floating requirements generally would produce ‘‘significant hours (spent by a marketing manager to update the NAV amendments, will change the cost to the fund and ultimately to the fund’s wording of the risk disclosures for each fund’s investment expectations and experience investors’’); SSGA Comment Letter (urging the marketing materials) × $254/hour for a marketing Commission to consider the ‘‘substantial manager = $762) + (1 hour (spent by a webmaster of money market fund investors. administrative, operational, and expense burdens’’ to update a fund’s Web site risk disclosures) × $227/ Accordingly, the amended wording of of the proposed disclosure-related amendments); hour for a webmaster = $227) + (1.25 hours (spent the rule 482(b)(4) risk disclosures Chapin Davis Comment Letter (noting that the by an attorney to review the amended rule 482(b)(4) disclosure- and reporting-related amendments will risk disclosures) × $380/hour for an attorney = reflects the particular risks associated result in increased costs in the form of fund staff with the imposition of liquidity fees or $475) = $1,464. salaries, or consultant, accountant, and lawyer 2458 This estimate is based on the following gates and/or a floating NAV. In the hourly rates, that will ultimately be borne in large calculation: 2,935 Hours ÷ 3 = approximately 978 Proposing Release, using an estimate of part by investors and portfolio issuers). hours. The current approved collection of 586 money market funds, the 2451 See, e.g., Chamber I Comment Letter; Fidelity information for Rule 482 is 305,705 hours annually Comment Letter. Commission estimated that money for all investment companies. Adding 978 hours to 2452 See State Street Comment Letter, at Appendix this approved collection of information will result market funds would incur, in aggregate, A. in a burden of 306,683 hours each year. a total one-time burden of 3,077 hours, 2453 See HSBC Comment Letter. 2459 This estimate is based on the following at a time cost of $857,904, to comply 2454 See supra section III.E.1. calculation: $818,376 ÷ 3 = $272,792.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00217 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47952 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

G. Form N–1A The floating NAV amendments we are Certain commenters generally noted We are adopting amendments to Form adopting will also require certain that complying with all of the new N–1A relating to money market funds’ additional prospectus and SAI disclosure requirements, including the disclosure of: (i) Certain of the risks disclosures, which will not necessitate Form N–1A disclosure requirements, associated with liquidity fees and gates rule and form amendments. Pursuant to would involve some additional costs.2467 and/or a floating NAV; (ii) historical current disclosure requirements, we Several commenters provided dollar estimates of the initial costs to occasions on which the fund has expect that floating NAV money market implement a fees and gates or floating considered or imposed liquidity fees or funds will include disclosure in their NAV regime and noted that these gates; and (iii) historical instances in prospectuses about the tax estimates would include the costs of which the fund has received financial consequences to shareholders of buying, related disclosure, but these support from a sponsor or fund affiliate. holding, exchanging, and selling the 2464 commenters did not specifically break Specifically, we are adopting shares of the floating NAV fund. In out the disclosure-related costs in their amendments to Form N–1A that will addition, we expect that a floating NAV estimates.2468 One commenter stated require funds to include certain risk money market fund will update its that the costs to update a fund’s disclosure statements in their prospectus and SAI disclosure regarding registration statement to reflect the new prospectuses. We are also adopting the purchase, redemption, and pricing of fund shares, to reflect any procedural fees and gates and floating NAV amendments to Form N–1A that will requirements would be ‘‘minimal when require money market funds (other than changes resulting from the fund’s use of a floating NAV.2465 We also expect that, compared to other costs,’’ 2469 and government money market funds that another commenter stated that the have not chosen to retain the ability to at the time a stable NAV money market fund transitions to a floating NAV, it proposed disclosure requirements impose liquidity fees and suspend should not produce any meaningful redemptions) to provide disclosure in will update its registration statement to include relevant related disclosure by costs.2470 As described above, we are their SAIs regarding any occasion adopting amendments to the Form N– during the last 10 years in which: (i) means of a post-effective amendment or prospectus supplement.2466 This 1A disclosure requirements that have The fund’s weekly liquid assets have been modified from the proposed fallen below 10%, and with respect to collection of information will be mandatory for money market funds that amendments to respond to commenters each occasion, whether the fund’s board concerns. The amendments we are has determined to impose a liquidity fee rely on rule 2a–7, and the information will not be kept confidential. adopting to the Form N–1A risk and/or suspend redemptions; and (ii) disclosure requirements therefore differ the fund’s weekly liquid assets have In the Proposing Release, the from the proposed requirements in fallen below 30%, and the fund’s board Commission estimated that the content and format.2471 In addition, the has determined to impose a liquidity fee proposed amendments to Form N–1A amendments we are adopting to require and/or suspend redemptions.2460 relating to the fees and gates proposal, funds to provide disclosure in their Finally, we are also adopting the Form N–1A requirements relating to SAIs about historical occasions on amendments to Form N–1A that will the fees and gates proposal that would which the fund has considered or require each money market fund to not necessitate form amendments, and imposed liquidity fees or gates, as well disclose in its SAI historical instances the proposed sponsor support as historical occasions on which the in which the fund has received financial disclosure requirements together would fund has received financial support support from a sponsor or fund result in all money market funds from a sponsor or fund affiliate, have affiliate.2461 incurring an annual increased burden of been modified in certain respects from In addition, the fee and gate 1,007 hours, at a time cost of $298,072. the proposed amendments. We believe requirements we are adopting will entail We also estimated that, under the fees that these revisions do not produce certain additional prospectus and SAI and gates alternative, there would be additional burdens for funds 2472 and disclosure requirements that will not one-time aggregate external costs (in the necessitate rule and form amendments. form of printing costs) of $6,269,175 2467 See supra note 2450. Specifically, pursuant to current associated with the new Form N–1A 2468 See, e.g., Chamber I Comment Letter; Fidelity disclosure requirements, we will expect disclosure requirements. The Comment Letter. that money market funds (besides Commission estimated that the 2469 See State Street Comment Letter, at Appendix proposed amendments to Form N–1A A. government money market funds that 2470 See HSBC Comment Letter. have not chosen to retain the ability to relating to the floating NAV proposal, 2471 See supra section III.E.1. impose liquidity fees and suspend the Form N–1A requirements relating to 2472 The revisions to the proposed Form N–1A redemptions) will disclose in the the floating NAV proposal that would risk disclosure requirements do not produce statutory prospectus, as well as in the not necessitate form amendments, and additional burdens for funds because the revisions the proposed sponsor support only involve changes in the wording and formatting SAI, as applicable, the effects that the of the required disclosure statement and do not potential imposition of fees and/or gates disclosure requirements together would impact the measures funds must take to effect the may have on a shareholder’s ability to result in all money market funds disclosure requirements. The revisions to the redeem shares of the fund.2462 We also incurring an annual increased burden of proposed SAI historical disclosure requirements do not produce additional burdens for funds because expect that, promptly after a money 907 hours, at a time cost of $268,472. the adopted amendments to Form N–1A require a market fund imposes a redemption fee Additionally, we estimated that, under fund to disclose less detailed information than that or gate, it will inform investors of any the floating NAV alternative, there which would have been required under the fees or gates currently in place by means would be one-time aggregate external proposed amendments to Form N–1A. See supra text following note 975 and text accompanying and of a post-effective amendment or costs (in the form of printing costs) of following note 1019. Furthermore, because the SAI prospectus supplement.2463 $3,134,588 associated with the new historical disclosure overlaps with the information Form N–1A disclosure requirements. that a fund must disclose on Parts C, E, F, and G of Form N–CR (see supra section III.E.8), we believe 2460 See supra section III.E.5. that the burden for a fund to draft and finalize this 2461 See supra section III.E.7. 2464 See supra section III.E.2. historical disclosure will largely be incurred when 2462 See supra section III.E.4. 2465 See supra section III.E.3. the fund files Form N–CR, and thus the differences 2463 See supra section III.E.9.f. 2466 See id. in the Form N–1A historical disclosure

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00218 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47953

therefore do not affect the assumptions draft and finalize the required The Commission estimates that each we used in estimating hour burdens and disclosure and amend its registration money market fund (except government related costs. The comments we statement. We also estimate that each funds that have not chosen to retain the received on the new disclosure floating NAV money market fund will ability to impose liquidity fees and requirements also do not affect the incur a one-time burden of eight suspend redemptions) will incur an assumptions we used in our estimates, hours,2477 at a time cost of $2,552,2478 ongoing burden of one hour, at a time as these comments provided no specific to draft and finalize the required cost of $319,2482 each year to: 1) review suggestions or critiques regarding our disclosure and amend its registration and update the SAI disclosure regarding methods for estimating hour and cost statement. In aggregate, the Commission historical occasions on which the fund burdens associated with the Form N–1A estimates that all money market funds has considered or imposed liquidity fees requirements. As described below, will incur a one-time burden of 2,933 or gates; 2) review and update the SAI however, our current estimates reflect hours,2479 at a time cost of $935,627,2480 disclosure regarding historical occasions the fact that the amendments we are to comply with the Form N–1A in which the fund has received financial adopting today combine the floating disclosure requirements. Amortizing the support from a sponsor or fund affiliate; NAV and fees and gates proposal one-time burden over a three-year and 3) inform investors of any fees or alternatives into one unified approach. period results in an average annual gates currently in place (as appropriate), The burdens associated with the burden of 978 hours at a time cost of or the transition to a floating NAV (as proposed amendments to Form N–1A $311,876.2481 appropriate), by means of a prospectus include one-time burdens as well as supplement. The Commission also ongoing burdens. The Commission statement to include required disclosure statement) estimates that each government money estimates that each money market fund × $319 (blended hourly rate for a compliance market fund that has not chosen to (except government funds that have not attorney ($334) and a senior programmer ($303)) = $319) + (1 hour (to update registration statement to retain the ability to impose liquidity chosen to retain the ability to impose include disclosure about financial support received fees and suspend redemptions will liquidity fees and suspend redemptions, by the fund) × $319 (blended hourly rate for a incur an ongoing burden of 0.5 hours, at and floating NAV money market funds) compliance attorney ($334) and a senior a time cost of $160,2483 each year to programmer ($303)) = $319) = $638. will incur a one-time burden of five 2477 review and update the SAI disclosure 2473 2474 This estimate is based on the following hours, at a time cost of $1,595, calculation: 1 Hour to update registration statement regarding historical instances in which to draft and finalize the required to include required disclosure statement + 3 hours the fund has received financial support disclosure and amend its registration to update registration statement to include from a sponsor or fund affiliate. In statement. In addition, we estimate that disclosure about effects that fees/gates may have on aggregate, we estimate that all money shareholder redemptions, and disclosure about each government fund that has not historical occasions on which the fund has market funds will incur an annual chosen to retain the ability to impose considered or imposed liquidity fees or gates + 3 burden of 480 hours,2484 at a time cost liquidity fees and suspend redemptions hours to update registration statement to include of $153,120,2485 to comply with the will incur a one-time burden of two tax- and operations-related disclosure about floating Form N–1A disclosure requirements. hours,2475 at a time cost of $638,2476 to NAV + 1 hour to update registration statement to Amortizing these one-time and include disclosure about financial support received by the fund = 8 hours. ongoing hour and cost burdens over requirements that we are adopting, compared to 2478 This estimate is based on the following three years results in an average annual those that we proposed, should not substantially calculation: (1 Hour (to update registration increased burden of 2.3 hours per fund affect our previous hour burden estimates. statement to include required disclosure statement) (other than government funds that have 2473 This estimate is based on the following × $319 (blended hourly rate for a compliance calculation: 1 Hour to update the registration attorney ($334) and a senior programmer ($303)) = not chosen to retain the ability to statement to include the required disclosure $319) + (3 hours (to update registration statement impose liquidity fees and suspend statement + 3 hours to update the registration to include disclosure about effects that fees/gates statement to include the disclosure about effects may have on shareholder redemptions, and annual burden hours; $935,627 burden costs ÷ 3 = that fees/gates may have on shareholder disclosure about historical occasions on which the $311,876 average annual burden cost. redemptions, and the disclosure about historical fund has considered or imposed liquidity fees or 2482 This estimate is based on the following occasions on which the fund has considered or gates) × $319 (blended hourly rate for a compliance imposed liquidity fees or gates + 1 hour to update calculation: (0.5 Hours (to review and update the attorney ($334) and a senior programmer ($303)) = SAI disclosure regarding historical occasions on the registration statement to include the disclosure $957) + (3 hours (to update registration statement about historical occasions of financial support which the fund has considered or imposed liquidity to include tax- and operations-related disclosure fees or gates, and to inform investors of any fees or received by the fund = 5 hours. about floating NAV) × $319 (blended hourly rate for 2474 gates currently in place (as appropriate), or the This estimate is based on the following a compliance attorney ($334) and a senior calculation: (1 Hour (to update registration transition to a floating NAV (as appropriate), by programmer ($303)) = $957) + (1 hour (to update means of a prospectus supplement) × $319 (blended statement to include required disclosure statement) registration statement to include disclosure about × $319 (blended hourly rate for a compliance hourly rate for a compliance attorney ($334) and a financial support received by the fund) × $319 senior programmer ($303)) = $159.5) + (0.5 hours attorney ($334) and a senior programmer ($303)) = (blended hourly rate for a compliance attorney $319) + (3 hours (to update registration statement (to review and update the SAI disclosure regarding ($334) and a senior programmer ($303)) = $319) = to include disclosure about effects that fees/gates historical instances in which the fund has received $2,552. may have on shareholder redemptions, and financial support from a sponsor or fund affiliate) 2479 This estimate is based on the following × $319 (blended hourly rate for a compliance disclosure about historical occasions on which the × fund has considered or imposed liquidity fees or calculations: (5 Hours 195 funds (559 money attorney ($334) and a senior programmer ($303)) = ¥ gates) × $319 (blended hourly rate for a compliance market funds 205 institutional prime funds $159.5) = $319. ¥ attorney ($334) and a senior programmer ($303)) = 159 funds that will rely on the government fund 2483 This estimate is based on the following × $957) + (1 hour (to update registration statement to exemption) = 975 hours) + (2 hours 159 funds that calculation: (0.5 Hours × $319 (blended hourly rate include disclosure about historical occasions of will rely on the government fund exemption = 318 for a compliance attorney ($334) and a senior financial support received by the fund) × $319 hours) + (8 hours × 205 institutional prime funds programmer ($303)) = approximately $160. (blended hourly rate for a compliance attorney = 1,640 hours) = 2,933 hours. For purposes of this 2484 This estimate is based on the following ($334) and a senior programmer ($303)) = $319) = PRA analysis, our calculations of the number of calculations: (1 Hour × 400 funds (559 money $1,595. institutional prime funds and funds that will rely market funds ¥159 funds that will rely on the 2475 This estimate is based on the following on the government fund exemption are based on government fund exemption) = 400 hours) + (0.5 calculation: 1 Hour to update registration statement Form N–MFP data as of February 28, 2014. hours × 159 funds that will rely on the government to include required disclosure statement + 1 hour 2480 This estimate is based on the following fund exemption = approximately 80 hours) = 480 to update registration statement to include calculation: 2,933 Hours × $319 (blended hourly hours. disclosure about financial support received by the rate for a compliance attorney ($334) and a senior 2485 This estimate is based on the following fund = 2 hours. programmer ($303)) = $935,627. calculation: 480 Hours × $319 (blended hourly rate 2476 This estimate is based on the following 2481 This estimate is based on the following for a compliance attorney ($334) and a senior calculation: (1 Hour (to update registration calculation: 2,933 Burden hours ÷ 3 = 977 average programmer ($303)) = $153,120.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00219 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47954 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

redemptions, and floating NAV money H. Advisers Act Rule 204(b)–1 and Form liquidity fund adviser will be required market funds),2486 at a time cost of PF to provide, quarterly and with respect to 2487 $744. Government funds that have Advisers Act rule 204(b)–1 requires each portfolio security, certain not chosen to retain the ability to SEC-registered private fund advisers additional information for each month impose liquidity fees and suspend that have at least $150 million in private of the reporting period.2496 We discuss redemptions will incur an average fund assets under management to report the additional information we are 2488 annual increased burden of 1 hour, certain information regarding the requiring large liquidity fund advisers to 2489 at a time cost of $319, to comply private funds they advise on Form PF. provide in more detail in section III.H.1 with the Form N–1A disclosure The rule implements sections 204 and above. Generally, however, this requirements. Floating NAV money 211 of the Advisers Act, as amended by additional information is largely the market funds will incur an average the Dodd-Frank Act, which direct the same as the reporting requirements for annual increased burden of 3.3 Commission (and the CFTC) to supply 2490 2491 registered money market funds under hours, at a time cost of $1,063, FSOC with information for use in to comply with the Form N–1A amended Form N–MFP, with some monitoring potential systemic risk by modifications to better tailor the disclosure requirements. establishing reporting requirements for In total, the Commission estimates reporting to private liquidity funds.2497 private fund advisers. Form PF divides As proposed, the final amendments will that all money market funds will incur respondents into groups based on their also remove current Questions 56 and an average annual increased burden of size and the types of private funds they 1,285 hours,2492 at a time cost of 57 on Form PF, which generally require 2493 manage, with some groups of advisers $413,716, to comply with the Form required to file more information than large liquidity fund advisers to provide N–1A disclosure requirements. others or more frequently than others. information about their liquidity funds’ Additionally, we estimate that there will Large liquidity fund advisers—the only portfolio holdings broken out by asset be annual aggregate external costs (in group of advisers affected by today’s class (rather than security by the form of printing costs) of $6,269,175 amendments to Form PF—must provide security).2498 The amendments will also associated with the Form N–1A require, as proposed, large liquidity 2494 information concerning their liquidity disclosure requirements. funds on Form PF each quarter. Form fund advisers to identify any money PF contains a collection of information market fund advised by the adviser or 2486 This estimate is based on the following 2495 calculation: 5 Burden hours (year 1) + 1 burden under the PRA. This new collection its related persons that pursues hour (year 2) + 1 burden hour (year 3) ÷ 3 = of information will be mandatory for substantially the same investment approximately 2.3 burden hours. large liquidity fund advisers, and will objective and strategy and invests side 2487 This estimate is based on the following be kept confidential to the extent by side in substantially the same calculation: $1,595 (Year 1 monetized burden discussed above in section III.H. Based hours) + $319 (year 2 monetized burden hours) + positions as a liquidity fund the adviser $319 (year 3 monetized burden hours) ÷ 3 = on data filed on Form PF and Form reports about on Form PF.2499 In approximately $744. ADV, the Commission estimates that, as addition, the final amendments have 2488 This estimate is based on the following of April 30, 2014, there were 28 large calculation: 2 Burden hours (year 1) + 0.5 burden been reorganized to minimize system ÷ liquidity fund advisers subject to this changes and costs as much as hours (year 2) + 0.5 burden hours (year 3) 3 = 1 quarterly filing requirement that burden hour. possible.2500 Finally, our changes from 2489 collectively advised 56 liquidity funds. This estimate is based on the following the proposal to the final amendments to calculation: $638 (Year 1 monetized burden hours) + $160 (year 2 monetized burden hours) + $160 1. Discussion of Amendments Form PF generally reflect any changes (year 3 monetized burden hours) ÷ 3 = Under our final amendments, for each from the proposal to the final approximately $319. liquidity fund it manages, a large amendments to Form N–MFP, such as 2490 This estimate is based on the following the elimination of the proposed lot level calculation: 8 Burden hours (year 1) + 1 burden 2501 hour (year 2) + 1 burden hour (year 3) ÷ 3 = fund has considered or imposed liquidity fees or reporting. approximately 3.3 burden hours. gates, or historical instances in which the fund has 2491 received financial support from a sponsor or fund This estimate is based on the following 2496 affiliate, will need to add 2–8 pages of new See Question 63 of Form PF. Advisers will be calculation: $2,552 (Year 1 monetized burden required to file this information with their quarterly hours) + $319 (year 2 monetized burden hours) + disclosure to its registration statement. Adding this ÷ new disclosure will therefore increase the number liquidity fund filings with data for the quarter $319 (year 3 monetized burden hours) 3 = broken down by month. Advisers will not be approximately $1,063. of pages in, and change the printing costs of, the fund’s registration statement. The Commission required to file information on Form PF more 2492 This estimate is based on the following calculates the external costs associated with the frequently as a result of today’s proposal because calculation: (2.3 Hours × 195 funds (559 money proposed Form N–1A disclosure requirements as large liquidity fund advisers already are required to market funds ¥ 205 institutional prime funds ¥ follows: 5 pages (mid-point of 2 pages and 8 pages) file information each quarter on Form PF. See Form 159 funds that will rely on the government fund × $0.045 per page × 27,863,000 money market fund PF: Instruction 9. exemption) = approximately 449 hours) + (1 hour registration statements printed annually = 2497 × 159 funds that will rely on the government fund See supra section IV.H.1 for a more detailed $6,269,175 annual aggregate external costs. Our exemption = 159 hours) + (3.3 hours × 205 discussion of these additional reporting estimate of potential printing ($0.045 per page: institutional prime funds = approximately 677 requirements. $0.035 for ink + $0.010 for paper) is based on data 2498 See supra section IV.H.1. hours) = 1,285 hours. provided by Lexecon Inc. in response to Investment 2499 See Question 64 to Form PF. See also supra The current approved collection of information Company Act Release No. 27182 (Dec. 8, 2005) [70 section IV.H.1. for Form N–1A is 1,578,689 hours annually for all FR 74598 (Dec. 15, 2005)]. See Comment Letter of 2500 investment companies. Adding 1,285 hours to this Lexecon Inc. (Feb. 13, 2006) (‘‘Lexecon Comment By eliminating lot level sale data reporting approved collection of information will result in a Letter’’). For purposes of this analysis, our best (proposed question 64 of Form PF) and accordingly burden of 1,579,974 hours each year. estimate of the number of money market fund renumbering proposed question 65 (parallel funds) 2493 This estimate is based on the following registration statements printed annually is based on as question 64, we have restructured the calculation: ($744 × 195 Funds (559 money market 27,863,000 money market fund shareholder amendments to Form PF so that the amendments funds ¥ 205 institutional prime funds ¥ 159 funds accounts in 2012. See Investment Company keep the same numbering range as the current form. that will rely on the government fund exemption) Institute, 2013 Investment Company Fact Book, at See question 64 of Form PF; Axiom Comment Letter = $145,080) + ($319 × 159 funds that will rely on 178, available at http://www.ici.org/pdf/2013_ (suggesting to reorganize and consolidate the the government fund exemption = $50,721) + factbook.pdf. questions in the proposed form amendments to ($1,063 × 205 institutional prime funds = $217,915) 2495 For purposes of the PRA analysis, the current minimize the system changes necessary to file the = $413,716. burden associated with the requirements of rule form). 2494 We expect that a fund that must include 204(b)–1 is included in the collection of 2501 See supra section IV.H.1. See also, e.g., supra disclosure about historical occasions on which the information requirements of Form PF. section IV.C.1 (New Reporting Requirements).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00220 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47955

2. Current Burden outweigh the benefits,2504 most therefore estimates increased annual commenters who discussed the Form PF burdens per large liquidity fund adviser The current approved collection of amendments generally supported with two large liquidity funds each of information for Form PF is 258,000 them.2505 For the reasons discussed in 298 burden hours, at a total time cost of annual aggregate hours and $25,684,000 section IV.C, we believe our original $79,566, and external costs of in aggregate external costs. In estimating cost estimates continue for Form N– 2510 these total approved burdens, we $17,104. This will result in MFP to be reasonable. Likewise, for the increased aggregate burden hours across estimated that the amortized average same reasons, the Commission generally annual burden of Form PF for large all large liquidity fund advisers of 8,344 has not modified from our proposal the burden hours,2511 at a time cost of liquidity fund advisers in particular cost estimates associated with the final $2,227,848,2512 and $478,912 in external would be 290 hours per large liquidity amendments to Form PF.2506 However, costs.2513 Finally, the aggregate annual, fund adviser for each of the first three as with Form N–MFP, the Commission years, resulting in an aggregate has modified its estimates for Form PF amortized paperwork burden for Form amortized annual burden of 23,200 based on updated industry data on time PF as amended therefore will be 251,264 hours for large liquidity fund advisers costs as well as the updated total for each of the first three years.2502 We number of large liquidity funds that estimated that the external cost burden would be affected. would range from $0 to $50,000 per Accordingly, the Commission large private fund adviser, which estimates that our final amendments to resulted in aggregate estimated external Form PF will result in paperwork costs attributable to large liquidity fund burden hours and external costs as advisers of $4,000,000. The external cost follows. First, as discussed in the PRA estimates also included estimates for analysis for our amendments to Form filing fees, which are $150 per annual N–MFP, the Commission estimates that filing and $150 per quarterly filing, the average annual amortized burdens external service providers to provide portfolio resulting in annual filings costs for large per money market fund imposed by holdings information on Form N–MFP and Form liquidity fund advisers of $48,000.2503 Form N–MFP as amended are 149 PF. Accordingly, the Commission estimates that 2507 large liquidity fund advisers will use the same 3. Change in Burden hours and $8,552 in external professionals, and in comparable proportions 2508 costs. As discussed above, the (conservatively based on the proportion of The Commission continues to Commission estimates that large professionals used with respect to our final estimate that, as proposed, the liquidity fund advisers generally will amendments to Form N–MFP as amortized over the paperwork burdens associated with incur similar burdens for each of their first three years), for purposes of the Commission’s Form N–MFP (as adopted with our final liquidity funds. Accordingly, we estimate of time costs associated with our amendments) are representative of the estimate that large liquidity fund amendments to Form PF. As discussed in supra burdens that large liquidity fund advisers will incur a time cost of note 2362 and the accompanying text, amortizing these additional hourly and cost burdens of our advisers could incur as a result of our $38,740 associated with these 149 final amendments to Form N–MFP over three years final amendments to Form PF because estimated burden hours for each large results in an average annual aggregate burden of advisers will be required to file on Form liquidity fund.2509 The Commission approximately 38,198 hours at a total time cost of PF virtually the same information $9,914,238, or average time costs of approximately money market funds will file on Form 2504 See SSGA Comment Letter. See also, e.g., $260 per hour. This results in the following N–MFP as amended and because, as Wells Fargo Comment Letter (noting that the ‘‘[t]he estimated time cost for the Commission’s estimated discussed in section IV.H, virtually all burdens associated with complying with the 149 hour burdens per liquidity fund: 149 burden proposed amendments to Form PF are substantial’’ hours (per liquidity fund for Form PF) × $260 of the 28 large liquidity funds advisers as a reason for why the proposed amendments to (average per hour time costs) = $38,740 additional affected already manage a money market Form PF should not apply to unregistered liquidity time costs per fund. vehicles owned exclusively by registered funds and fund or have a related person that 2510 complying with rule 12d1–1 under the Investment This estimate assumes for purposes of the manages a money market fund. Company Act.). PRA that each large liquidity fund adviser advises Therefore, we continue to believe that 2505 See, e.g., Goldman Sachs Comment Letter; ICI two large liquidity funds (56 total liquidity funds large liquidity fund advisers—when Comment Letter; Oppenheimer Comment Letter. ÷ 28 large liquidity fund advisers). Each large required to compile and report for their 2506 Similarly, we estimate that our various other liquidity fund adviser therefore will incur the final changes to Form PF, such as those referenced following burdens: 149 Estimated burden hours per liquidity funds generally the same × information virtually all of them already in supra note 2497–2500 and the accompanying fund 2 large liquidity funds = 298 burden hours discussion, will not significantly alter the estimated per large liquidity fund adviser; $38,740 estimated report for their money market funds— paperwork burdens. time cost per fund × 2 large liquidity funds = likely will use the same (or comparable) 2507 As discussed in the PRA analysis for Form $77,480 time cost per large liquidity fund adviser; staff and/or external service providers to N–MFP, the Commission estimates that Form and $8,552 estimated external costs per fund (based provide portfolio holdings information N–MFP, as amended, will result in an aggregate on $4,780,736 in total external costs for 559 funds annual, amortized collection of information burden with respect to Form N–MFP) × 2 large liquidity on Form N–MFP and Form PF. of 83,412 hours. See supra note 2343 and funds = $17,104 external costs per large liquidity Commenters provided no concrete accompanying text. Based on the Commission’s estimated 559 money market fund respondents, this fund adviser. cost estimates with respect to our results in a per fund annual burden of 2511 This estimate is based on the following amendments to Form PF. As noted in approximately 149 hours. calculation: 298 Estimated additional burden hours section IV.H above, although one 2508 As discussed in the PRA analysis for Form per large liquidity fund adviser × 28 large liquidity commenter asserted that the costs of N–MFP, the Commission estimates that Form fund advisers = 8,344. compliance for Form PF would N–MFP, as amended, will result in an aggregate 2512 This estimate is based on the following external cost burden of $4,780,736. See supra note calculation: $77,480 Estimated time cost per large 2363 and accompanying text. Based on the liquidity fund adviser × 28 large liquidity fund 2502 See Form PF Adopting Release supra note Commission’s estimated 559 money market fund 1536 (‘‘290 burden hours on average per year × 80 respondents, this results in a per fund annual advisers = $2,169,440. large liquidity fund advisers = 23,200 hours.’’). external cost burden of approximately $8,552. 2513 This estimate is based on the following 2503 This estimate is based on the following 2509 The Commission estimates, as discussed calculation: $17,104 Estimated external costs per calculation: ($150 Quarterly filing fee × 4 quarters) above, that large liquidity fund advisers are likely large liquidity fund adviser × 28 large liquidity fund × 80 large liquidity fund advisers) = $48,000. to use the same (or comparable) staff and/or advisers = $478,912.

VerDate Mar<15>2010 18:14 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00221 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47956 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

burden hours 2514 and $23,531,712 in 30b1–8 and Form N–CR under the Securities Act.2527 We recognize, external costs.2515 Investment Company Act of 1940 and however, that entities other than those the proposed amendments to rules 2a– subject to the requirements of the V. Regulatory Flexibility Act 7, 12d3–1, 18f–3, 22e–3, 30b1–7, and amended rule may be affected by the Certification 31a–1 and Forms N–MFP and N–1A amendments we adopt today. As such, Section 3(a) of the Regulatory under the Investment Company Act, we have discussed in the appropriate Flexibility Act of 1980 2516 (‘‘RFA’’) Form PF under the Investment Advisers sections of this Release the effects of requires the Commission to undertake Act of 1940, and rules 482 and 419 today’s amendments on entities other an initial regulatory flexibility analysis under the Securities Act of 1933, if than those subject to the requirements of (‘‘IRFA’’) of the proposed rule adopted would not have a significant the amended rule.2528 amendments on small entities unless economic impact on a substantial The commenter also noted that our the Commission certifies that the rule, if number of small entities.2519 We RFA analysis fails to consider money adopted, would not have a significant included this certification in section VI market funds that have yet to enter the economic impact on a substantial of the Proposing Release.2520 industry and may need to begin their number of small entities.2517 As stated We encouraged written comments operations as ‘‘small entities.’’ 2529 We in the Proposing Release, based on regarding this certification.2521 One believe that the commenter information in filings submitted to the commenter responded.2522 Among other misconstrues the RFA, which Commission, we believe that there are things, this commenter argued that, contemplates that an agency shall no money market funds that are small while our certification evaluated the calculate the number of small entities.2518 Accordingly, the impact of our amendments on money businesses that currently would be Commission certified, pursuant to market funds to which the amendments affected by its proposed regulation.2530 section 605(b) of the RFA, that new rule directly apply, we did not account for For the reasons described above, the the ‘‘impact on numerous smaller Commission again certifies that the 2514 Form PF’s current approved burden includes entities that are investors in money amendments to new rule 30b1–8 and 23,200 aggregate burden hours associated with large market funds or that do business with Form N–CR under the Investment liquidity fund advisers, based on 80 large liquidity 2523 fund advisers and an estimated 290 burden hours money market funds....’’ This Company Act of 1940 and the per large liquidity fund adviser. As calculated RFA certification is properly based on amendments to rules 2a–7, 12d3–1, 18f– below, because we are reducing our estimate of the the economic impact of the amended 3, 22e–3, 30b1–7, and 31a–1 and Forms number of large liquidity funds from 80 to 28, our rule on the entities that are subject to N–MFP and N–1A under the Investment estimates of costs will actually decrease on an aggregate basis. However, on a per fund basis, our the requirements of the amended Company Act, Form PF under the amendments to Form PF will increase the burden rule.2524 The numerous other entities Investment Advisers Act of 1940, and hours per large liquidity fund adviser by 298 hours, suggested by the commenter are not rules 482 and 419 under the Securities as discussed above, resulting in a total of 588 subject to the requirements of the Act of 1933, would not, if adopted have burden hours per large liquidity fund adviser. Multiplying 588 by the current estimated number amended rule and also are not included a significant economic impact on a of 28 large liquidity fund advisers results in 16,464 in the definition of ‘‘small business’’ or substantial number of small entities. burden hours attributable to large liquidity fund ‘‘small organization’’ for purposes of the VI. Update To Codification of Financial advisers, a 6,736 reduction from the approved RFA under the Investment Company burden hours attributable to large liquidity fund Reporting Policies 2525 2526 advisers. This therefore results in 249,300 total Act, Investment Advisers Act or burden hours for all of Form PF (current approved The Commission amends the 258,000 burden hours ¥ 6,736 reduction = 2519 5 U.S.C. 605(b). ‘‘Codification of Financial Reporting 251,264). 2520 See Proposing Release supra note 25, section Policies’’ announced in Financial 2515 Form PF’s current approved burden includes VI. Reporting Release No. 1 (April 15, 1982) $25,684,000 in external costs, which includes 2521 See Id. $4,000,000 attributable to large liquidity fund [47 FR 21028] as follows: 2522 See Federated X Comment Letter. advisers for certain costs ($50,000 per adviser), and 1. By adding new Section 220 ‘‘Cash 2523 $48,000 (or $600 per adviser) for filing fees, in both Id. Equivalents’’ and including the text of 2524 cases assuming 80 large liquidity fund adviser In advancing the argument, the commenter the second and third paragraphs of respondents. Form PF’s approved burden therefore relies on Aeronautical Repair Station Association v. includes a total of $4,048,000 in external costs Federal Aviation Administration, 494 F.3d 161 attributable to large liquidity fund advisers. As (D.C. Cir. 2007). This case is inapposite, however, liquidity fund and money market fund assets, well calculated below, because we are reducing our because there the agency’s own rulemaking release above the $25 million threshold in rule 0–7 under estimate of the number of large liquidity funds from expressly stated that the rule imposed the Investment Advisers Act. 80 to 28, our estimates of external costs will responsibilities directly on certain small business 2527 See rule 157 of the Securities Act, which, actually decrease on an aggregate basis. However, contractors. The court reaffirmed its prior holdings with respect to investment companies, adopts the we estimate external costs to increase on a per fund that the RFA limits its application to small entities definition of rule 0–10 of the Investment Company basis. Reducing these estimates to reflect the ‘‘which will be subject to the proposed regulation— Act. We also note that our changes to rule 482 Commission’s current estimate of 28 large liquidity that is, those small entities to which the proposed under the Securities Act will only apply to fund adviser respondents results in costs of rule will apply.’’ Id. at 176 (emphasis and internal advertisements by money market funds and not by $1,400,000 (28 large liquidity fund advisers × quotations omitted). See also Cement Kiln Recycling any other issuers, whereas we are making only $50,000 per adviser) and $16,800 (28 large liquidity Coal v. EPA, 255F. 3d 855, 869 (D.C. Cir. 2001). technical, conforming amendments to rule 419 fund advisers × $600), respectively, for an aggregate 2525 See rule 0–10 of the Investment Company under the Securities Act. cost of $1,416,800. These costs, plus the additional Act, which defines the term ‘‘small business’’ or 2528 See, e.g., supra sections III.A.5, III.B.8, III.C external costs associated with our amendments to ‘‘small organization’’ for purposes of rules under and III.K. Form PF ($478,912 as estimated above), result in the Act to mean an investment company that, 2529 See Federated X Comment Letter. total external costs attributable to large liquidity together with other investment companies in the 2530 For example, the Office of Advocacy for the fund advisers of $1,895,712, a reduction of same group of related investment companies, has United States Small Business Administration $2,152,288 from the currently approved external net assets of $50 million or less as of the end of (‘‘SBA’’) publishes a guide for government agencies costs attributable to large liquidity fund advisers. its most recent fiscal year. regarding how to comply with the RFA, which This therefore results in total external cost for all 2526 See rule 0–07 of the Investment Advisers Act, contains an example of an appropriate RFA of Form PF of $23,531,712 (current approved which defines the term ‘‘small business’’ or ‘‘small certification. This example has an agency calculate ¥ external cost burden of $25,684,000 $2,152,288 organization’’ for purposes of rules under the Act the number of small businesses that currently reduction = $23,531,712). to mean an investment adviser that, among other would be affected by a proposed regulation. See ‘‘A 2516 5 U.S.C. 603(a). things, has assets under management of less than Guide for Government Agencies: How to Comply 2517 5 U.S.C. 605(b). $25 million. Our changes to rule 204(b)–1 and Form with the Regulatory Flexibility Act,’’ available at 2518 See Proposing Release, supra note 25, at PF would only apply to certain large liquidity fund http://www.sba.gov/sites/default/files/rfaguide_ n.1249 and accompanying text. advisers with at least $1 billion in combined 0512_0.pdf.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00222 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47957

Section III.A.7 and the third paragraph the authority set forth in sections 6(c) ‘‘paragraphs (c)(2), (c)(3), and (c)(4)’’ of Section III.B.6.b of this Release. and 38(a) of the Investment Company and adding in its place ‘‘paragraph (d)’’. 2. By adding a new Section 404.05.c Act [15 U.S.C. 80a–6(c) and 80a–37(a)]. ■ 3. Section 230.482 is amended: ‘‘Guidance on the Amortized Cost The Commission is adopting ■ a. In paragraph (b)(3)(i) by adding after Method of Valuation and Other amendments to rule 22e–3 pursuant to ‘‘An advertisement for a money market Valuation Concerns’’ and including the the authority set forth in sections 6(c), fund’’ the phrase ‘‘that is a government first two introductory paragraphs before 22(e) and 38(a) of the Investment money market fund, as defined in Section III.D.1., except for the phrase Company Act [15 U.S.C. 80a–6(c), 80a– § 270.2a–7(a)(16) of this chapter, or a ‘‘After further consideration, and as 22(e), and 80a–37(a)]. The Commission retail money market fund, as defined in suggested by a number of commenters,’’ is adopting amendments to rule 30b1– § 270.2a–7(a)(25) of this chapter’’. and except for footnote 870. 7 and Form N–MFP pursuant to ■ b. By revising paragraph (b)(4) to read a. By adding the subject heading ‘‘1. authority set forth in Sections 8(b), as follows: Use of Amortized Cost Valuation’’, and 30(b), 31(a), and 38(a) of the Investment § 230.482 Advertising by an investment including the first, third and fourth Company Act [15 U.S.C. 80a–8(b), 80a– paragraphs, except for footnote 874, of company as satisfying requirements of 29(b), 80a–30(a), and 80a–37(a)]. The section 10. Section III.D.1. Commission is adopting new rule 30b1– * * * * * b. By adding the subject heading ‘‘2. 8 and Form N–CR pursuant to authority Other Valuation Matters’’ and including (b) * * * set forth in Sections 8(b), 30(b), 31(a), (4) Money market funds. (i) An the first sentence of the first paragraph and 38(a) of the Investment Company of Section III.D.2. advertisement for an investment Act [15 U.S.C. 80a–8(b), 80a–29(b), 80a– company that holds itself out to be a c. By adding the subject heading ‘‘Fair 30(a), and 80a–37(a)]. The Commission Value for Thinly Traded Securities’’ and money market fund, that is not a is adopting amendments to rule 31a–1 government money market fund, as including below the subject heading, the pursuant to authority set forth in fourth and fifth paragraphs of Section defined in § 270.2a–7(a)(16) of this sections 6(c) and 38(a)] of the chapter, or a retail money market fund, III.D.2. Investment Company Act [15 U.S.C. d. By adding the subject heading ‘‘Use as defined in § 270.2a–7(a)(25) of this 80a–6(c) and 80a–37(a)]. The of Pricing Services’’ and including chapter, must include the following Commission is adopting amendments to below the subject heading, the first statement: Form N–1A pursuant to authority set sentence of the sixth paragraph except forth in Sections 5, 6, 7, 10, and 19(a) You could lose money by investing in the for the phrase ‘‘As noted above,’’ and of the Securities Act [15 U.S.C. 77e, 77f, Fund. Because the share price of the Fund the seventh, eighth and ninth will fluctuate, when you sell your shares they 77g, 77j and 77s(a)] and Sections 8, paragraphs of Section III.D.2. may be worth more or less than what you The Codification is a separate 24(a), 24(g), 30, and 38 of the originally paid for them. The Fund may publication of the Commission. It will Investment Company Act [15 U.S.C. impose a fee upon sale of your shares or may not be published in the Federal Register 80a–8, 80a–24(a), 80a–24(g), 80a–29, temporarily suspend your ability to sell or Code of Federal Regulations. For and 80a–37]. The Commission is shares if the Fund’s liquidity falls below required minimums because of market more information on the Codification of adopting amendments to Form PF pursuant to authority set forth in conditions or other factors. An investment in Financial Reporting Policies, contact the the Fund is not insured or guaranteed by the Commission’s Public Reference Room at Sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b–4(b) and Federal Deposit Insurance Corporation or any 202–551–5850. other government agency. The Fund’s 80b–11(e)]. sponsor has no legal obligation to provide VII. Statutory Authority List of Subjects in 17 CFR Parts 230, financial support to the Fund, and you The Commission is adopting 239, 270, 274, and 279 should not expect that the sponsor will amendments to rule 419 under the provide financial support to the Fund at any rulemaking authority set forth in Investment companies, Reporting and time. sections 3, 4, 5, 7, and 19 of the recordkeeping requirements, Securities. (ii) An advertisement for an Securities Act [15 U.S.C. 77c, 77d, 77e, Text of Rules and Forms investment company that holds itself 77g, and 77s]. The Commission is out to be a money market fund, that is adopting amendments to rule 482 For reasons set out in the preamble, a government money market fund, as pursuant to authority set forth in Title 17, Chapter II of the Code of defined in § 270.2a–7(a)(16) of this sections 5, 10(b), 19(a), and 28 of the Federal Regulations is amended as chapter or a retail money market fund, Securities Act [15 U.S.C. 77e, 77j(b), follows: as defined in § 270.2a–7(a)(25) of this 77s(a), and 77z–3] and sections 24(g) chapter, and that is subject to the and 38(a) of the Investment Company PART 230—GENERAL RULES AND requirements of § 270.2a–7(c)(2)(i) and/ Act [15 U.S.C. 80a–24(g) and 80a–37(a)]. REGULATIONS, SECURITIES ACT OF or (ii) of this chapter (or is not subject The Commission is adopting 1933 to the requirements of § 270.2a–7(c)(2)(i) amendments to rule 2a–7 under the and/or (ii) of this chapter pursuant to ■ exemptive and rulemaking authority set 1. The authority citation for part 230 § 270.2a–7(c)(2)(iii) of this chapter, but forth in sections 6(c), 8(b), 22(c), 35(d), continues to read, in part, as follows: has chosen to rely on the ability to and 38(a) of the Investment Company Authority: 15 U.S.C. 77b, 77b note, 77c, impose liquidity fees and suspend Act of 1940 [15 U.S.C. 80a–6(c), 80a– 77d, 77d note, 77f, 77g, 77h, 77j, 77r, 77s, redemptions consistent with the 8(b), 80a–22(c), 80a–34(d), and 80a– 77z–3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, requirements of § 270.2a–7(c)(2)(i) and/ 37(a)]. The Commission is adopting 78o, 78o–7 note, 78t, 78w, 78ll(d), 78mm, or (ii)), must include the following amendments to rule 12d3–1 pursuant to 80a–8, 80a–24, 80a–28, 80a–29, 80a–30, and statement: the authority set forth in sections 6(c) 80a–37, and Pub. L. 112–106, sec. 201(a), 126 Stat. 313 (2012), unless otherwise noted. You could lose money by investing in the and 38(a) of the Investment Company * * * * * Fund. Although the Fund seeks to preserve Act [15 U.S.C. 80a–6(c) and 80a–37(a)]. the value of your investment at $1.00 per The Commission is adopting ■ 2. Section 230.419(b)(2)(iv)(B) is share, it cannot guarantee it will do so. The amendments to rule 18f–3 pursuant to amended by removing the phrase Fund may impose a fee upon sale of your

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00223 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47958 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

shares or may temporarily suspend your PART 270—RULES AND arrangement or agreement provides for ability to sell shares if the Fund’s liquidity REGULATIONS, INVESTMENT or secures repayment of the security. falls below required minimums because of COMPANY ACT OF 1940 Municipal issuer means a state or market conditions or other factors. An territory of the United States (including investment in the Fund is not insured or ■ 4. The authority citation for Part 270 guaranteed by the Federal Deposit Insurance the District of Columbia), or any Corporation or any other government agency. continues to read, in part, as follows: political subdivision or public The Fund’s sponsor has no legal obligation Authority: 15 U.S.C. 80a–1 et seq., 80a– instrumentality of a state or territory of to provide financial support to the Fund, and 34(d), 80a–37, and 80a–39, and Pub. L. 111– the United States. A conduit security you should not expect that the sponsor will 203, sec. 939A, 124 Stat. 1376 (2010), unless does not include a security that is: provide financial support to the Fund at any otherwise noted. (i) Fully and unconditionally time. * * * * * guaranteed by a municipal issuer; (iii) An advertisement for an ■ 5. Section 270.2a–7 is revised to read (ii) Payable from the general revenues investment company that holds itself as follows: of the municipal issuer or other out to be a money market fund, that is municipal issuers (other than those § 270.2a–7 Money market funds. a government money market fund, as revenues derived from an agreement or defined in § 270.2a–7(a)(16) of this (a) Definitions—(1) Acquisition (or arrangement with a person who is not chapter, that is not subject to the acquire) means any purchase or a municipal issuer that provides for or requirements of § 270.2a–7(c)(2)(i) and/ subsequent rollover (but does not secures repayment of the security issued or (ii) of this chapter pursuant to include the failure to exercise a demand by the municipal issuer); § 270.2a–7(c)(2)(iii) of this chapter, and feature). (iii) Related to a project owned and (2) Amortized cost method of that has not chosen to rely on the ability operated by a municipal issuer; or valuation means the method of to impose liquidity fees and suspend (iv) Related to a facility leased to and calculating an investment company’s redemptions consistent with the under the control of an industrial or net asset value whereby portfolio requirements of § 270.2a–7(c)(2)(i) and/ commercial enterprise that is part of a securities are valued at the fund’s or (ii)), must include the following public project which, as a whole, is acquisition cost as adjusted for statement: owned and under the control of a amortization of premium or accretion of You could lose money by investing in the municipal issuer. discount rather than at their value based Fund. Although the Fund seeks to preserve (8) Daily liquid assets means: the value of your investment at $1.00 per on current market factors. (3) Asset-backed security means a (i) Cash; share, it cannot guarantee it will do so. An (ii) Direct obligations of the U.S. investment in the Fund is not insured or fixed income security (other than a guaranteed by the Federal Deposit Insurance government security) issued by a special Government; Corporation or any other government agency. purpose entity (as defined in this (iii) Securities that will mature, as The Fund’s sponsor has no legal obligation paragraph (a)(3)), substantially all of the determined without reference to the to provide financial support to the Fund, and assets of which consist of qualifying exceptions in paragraph (i) of this you should not expect that the sponsor will assets (as defined in this paragraph section regarding interest rate provide financial support to the Fund at any readjustments, or are subject to a time. (a)(3)). Special purpose entity means a trust, corporation, partnership or other demand feature that is exercisable and Note to paragraph (b)(4). If an affiliated entity organized for the sole purpose of payable, within one business day; or person, promoter, or principal underwriter of issuing securities that entitle their (iv) Amounts receivable and due the Fund, or an affiliated person of such a holders to receive payments that depend unconditionally within one business person, has contractually committed to primarily on the cash flow from day on pending sales of portfolio provide financial support to the Fund, the securities. statement may omit the last sentence (‘‘The qualifying assets, but does not include a registered investment company. (9) Demand feature means a feature Fund’s sponsor has no legal obligation to permitting the holder of a security to provide financial support to the Fund, and Qualifying assets means financial assets, you should not expect that the sponsor will either fixed or revolving, that by their sell the security at an exercise price provide financial support to the Fund at any terms convert into cash within a finite equal to the approximate amortized cost time.’’) for the term of the agreement. For time period, plus any rights or other of the security plus accrued interest, if purposes of this Note, the term ‘‘financial assets designed to assure the servicing any, at the later of the time of exercise support’’ includes any capital contribution, or the settlement of the transaction, paid purchase of a security from the Fund in or timely distribution of proceeds to security holders. within 397 calendar days of exercise. reliance on § 270.17a–9 of this chapter, (10) Demand feature issued by a non- purchase of any defaulted or devalued (4) Business day means any day, other security at par, execution of letter of credit than Saturday, Sunday, or any controlled person means a demand or letter of indemnity, capital support customary business holiday. feature issued by: agreement (whether or not the Fund (5) Collateralized fully has the same (i) A person that, directly or ultimately received support), performance meaning as defined in § 270.5b–3(c)(1) indirectly, does not control, and is not guarantee, or any other similar action except that § 270.5b–3(c)(1)(iv)(C) and controlled by or under common control reasonably intended to increase or stabilize (D) shall not apply. with the issuer of the security subject to the value or liquidity of the fund’s portfolio; the demand feature (control means however, the term ‘‘financial support’’ (6) Conditional demand feature excludes any routine waiver of fees or means a demand feature that is not an ‘‘control’’ as defined in section 2(a)(9) of reimbursement of fund expenses, routine unconditional demand feature. A the Act) (15 U.S.C. 80a–2(a)(9)); or inter-fund lending, routine inter-fund conditional demand feature is not a (ii) A sponsor of a special purpose purchases of fund shares, or any action that guarantee. entity with respect to an asset-backed would qualify as financial support as defined (7) Conduit security means a security security. above, that the board of directors has issued by a municipal issuer (as defined (11) Designated NRSRO means any otherwise determined not to be reasonably in this paragraph (a)(7)) involving an one of at least four nationally intended to increase or stabilize the value or arrangement or agreement entered into, recognized statistical rating liquidity of the fund’s portfolio. directly or indirectly, with a person organizations, as that term is defined in * * * * * other than a municipal issuer, which section 3(a)(62) of the Securities

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00224 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47959

Exchange Act of 1934 (15 U.S.C. common control with the issuer of the unconditional demand feature, an 78c(a)(62)), that: security subject to the guarantee (other obligation that entitles the holder to (i) The money market fund’s board of than a sponsor of a special purpose receive upon the later of exercise or the directors: entity with respect to an asset-backed settlement of the transaction the (A) Has designated as an NRSRO security); approximate amortized cost of the whose credit ratings with respect to any (2) The security subject to the underlying security or securities, plus obligor or security or particular obligors guarantee is a repurchase agreement that accrued interest, if any. A guarantee or securities will be used by the fund to is collateralized fully; or includes a letter of credit, financial determine whether a security is an (3) The guarantee is itself a guaranty (bond) insurance, and an eligible security; and government security; and unconditional demand feature (other (B) Determines at least once each (B) The issuer of the demand feature than an unconditional demand feature calendar year issues credit ratings that or guarantee, or another institution, has provided by the issuer of the security). are sufficiently reliable for such use; undertaken promptly to notify the (ii) The sponsor of a special purpose (ii) Is not an ‘‘affiliated person,’’ as holder of the security in the event the entity with respect to an asset-backed defined in section 2(a)(3)(C) of the Act demand feature or guarantee is security shall be deemed to have (15 U.S.C. 80a–2(a)(3)(C)), of the issuer substituted with another demand provided a guarantee with respect to the of, or any insurer or provider of credit feature or guarantee (if such substitution entire principal amount of the asset- support for, the security; and is permissible under the terms of the backed security for purposes of this (iii) The fund discloses in its demand feature or guarantee). section, except paragraphs (a)(12)(iii) statement of additional information is a (13) Event of insolvency has the same (definition of eligible security), designated NRSRO, including any meaning as defined in § 270.5b–3(c)(2). (d)(2)(iii) (credit substitution), limitations with respect to the fund’s (14) First tier security means any (d)(3)(iv)(A) (fractional guarantees) and use of such designation. eligible security that: (e) (guarantees not relied on) of this (12) Eligible security means: (i) Is a rated security that has received section, unless the money market fund’s (i) A rated security with a remaining a short-term rating from the requisite board of directors has determined that maturity of 397 calendar days or less NRSROs in the highest short-term rating the fund is not relying on the sponsor’s that has received a rating from the category for debt obligations (within financial strength or its ability or requisite NRSROs in one of the two which there may be sub-categories or willingness to provide liquidity, credit highest short-term rating categories gradations indicating relative standing); or other support to determine the (within which there may be sub- (ii) Is an unrated security that is of quality (pursuant to paragraph (d)(2) of categories or gradations indicating comparable quality to a security meeting this section) or liquidity (pursuant to relative standing); or the requirements for a rated security in paragraph (d)(4) of this section) of the (ii) An unrated security that is of paragraph (a)(14)(i) of this section, as asset-backed security, and maintains a comparable quality to a security meeting determined by the fund’s board of record of this determination (pursuant the requirements for a rated security in directors; to paragraphs (g)(7) and (h)(6) of this paragraph (a)(12)(i) of this section, as (iii) Is a security issued by a registered section). determined by the money market fund’s investment company that is a money (19) Guarantee issued by a non- board of directors; provided, however, market fund; or controlled person means a guarantee that: A security that at the time of (iv) Is a government security. issued by: issuance had a remaining maturity of (15) Floating rate security means a (i) A person that, directly or more than 397 calendar days but that security the terms of which provide for indirectly, does not control, and is not has a remaining maturity of 397 the adjustment of its interest rate controlled by or under common control calendar days or less and that is an whenever a specified interest rate with the issuer of the security subject to unrated security is not an eligible changes and that, at any time until the the guarantee (control means ‘‘control’’ security if the security has received a final maturity of the instrument or the as defined in section 2(a)(9) of the Act) long-term rating from any designated period remaining until the principal (15 U.S.C. 80a–2(a)(9))); or NRSRO that is not within the designated amount can be recovered through (ii) A sponsor of a special purpose NRSRO’s three highest long-term ratings demand, can reasonably be expected to entity with respect to an asset-backed categories (within which there may be have a market value that approximates security. sub-categories or gradations indicating its amortized cost. (20) Illiquid security means a security relative standing), unless the security (16) Government money market fund that cannot be sold or disposed of in the has received a long-term rating from the means a money market fund that invests ordinary course of business within requisite NRSROs in one of the three 99.5 percent or more of its total assets seven calendar days at approximately highest rating categories. in cash, government securities, and/or the value ascribed to it by the fund. (iii) In addition, in the case of a repurchase agreements that are (21) Penny-rounding method of security that is subject to a demand collateralized fully. pricing means the method of computing feature or guarantee: (17) Government security has the an investment company’s price per (A) The guarantee has received a same meaning as defined in section share for purposes of distribution, rating from a designated NRSRO or the 2(a)(16) of the Act (15 U.S.C. 80a– redemption and repurchase whereby the guarantee is issued by a guarantor that 2(a)(16)). current net asset value per share is has received a rating from a designated (18) Guarantee: rounded to the nearest one percent. NRSRO with respect to a class of debt (i) Means an unconditional obligation (22) Rated security means a security obligations (or any debt obligation of a person other than the issuer of the that meets the requirements of within that class) that is comparable in security to undertake to pay, upon paragraphs (a)(22)(i) or (ii) of this priority and security to the guarantee, presentment by the holder of the section, in each case subject to unless: guarantee (if required), the principal paragraph (a)(22)(iii) of this section: (1) The guarantee is issued by a amount of the underlying security plus (i) The security has received a short- person that, directly or indirectly, accrued interest when due or upon term rating from a designated NRSRO, controls, is controlled by or is under default, or, in the case of an or has been issued by an issuer that has

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00225 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47960 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

received a short-term rating from a section 2(a)(41) of the Act (15 U.S.C. (15 U.S.C. 80a–33(b)) for a registered designated NRSRO with respect to a 80a–2(a)(41)) and the rules thereunder. investment company, in any registration class of debt obligations (or any debt (30) Unconditional demand feature statement, application, report, account, obligation within that class) that is means a demand feature that by its record, or other document filed or comparable in priority and security with terms would be readily exercisable in transmitted pursuant to the Act, the security; or the event of a default in payment of including any advertisement, pamphlet, (ii) The security is subject to a principal or interest on the underlying circular, form letter, or other sales guarantee that has received a short-term security or securities. literature addressed to or intended for rating from a designated NRSRO, or a (31) United States dollar- distribution to prospective investors guarantee issued by a guarantor that has denominated means, with reference to a that is required to be filed with the received a short-term rating from a security, that all principal and interest Commission by section 24(b) of the Act designated NRSRO with respect to a payments on such security are payable (15 U.S.C. 80a–24(b)), to hold itself out class of debt obligations (or any debt to security holders in United States to investors as a money market fund or obligation within that class) that is dollars under all circumstances and that the equivalent of a money market fund, comparable in priority and security with the interest rate of, the principal amount unless such registered investment the guarantee; but to be repaid, and the timing of payments company complies with this section. (iii) A security is not a rated security related to such security do not vary or (2) Names. It shall constitute the use if it is subject to an external credit float with the value of a foreign of a materially deceptive or misleading support agreement (including an currency, the rate of interest payable on name or title within the meaning of arrangement by which the security has foreign currency borrowings, or with section 35(d) of the Act (15 U.S.C. 80a– become a refunded security) that was any other interest rate or index 34(d)) for a registered investment not in effect when the security was expressed in a currency other than company to adopt the term ‘‘money assigned its rating, unless the security United States dollars. market’’ as part of its name or title or the has received a short-term rating (32) Unrated security means a security name or title of any redeemable reflecting the existence of the credit that is not a rated security. securities of which it is the issuer, or to support agreement as provided in (33) Variable rate security means a adopt a name that suggests that it is a paragraph (a)(22)(i) of this section, or security the terms of which provide for money market fund or the equivalent of the credit support agreement with the adjustment of its interest rate on set a money market fund, unless such respect to the security has received a dates (such as the last day of a month registered investment company short-term rating as provided in or calendar quarter) and that, upon each complies with this section. paragraph (a)(22)(ii) of this section. adjustment until the final maturity of (3) Titles. For purposes of paragraph (23) Refunded security has the same the instrument or the period remaining (b)(2) of this section, a name that meaning as defined in § 270.5b–3(c)(4). until the principal amount can be suggests that a registered investment (24) Requisite NRSROs means: recovered through demand, can company is a money market fund or the (i) Any two designated NRSROs that reasonably be expected to have a market equivalent thereof includes one that have issued a rating with respect to a value that approximates its amortized uses such terms as ‘‘cash,’’ ‘‘liquid,’’ security or class of debt obligations of cost. ‘‘money,’’ ‘‘ready assets’’ or similar an issuer; or (34) Weekly liquid assets means: terms. (ii) If only one designated NRSRO has (i) Cash; (c) Pricing and Redeeming Shares— issued a rating with respect to such (ii) Direct obligations of the U.S. (1) Share price calculation. security or class of debt obligations of Government; (i) The current price per share, for an issuer at the time the fund acquires (iii) Government securities that are purposes of distribution, redemption the security, that designated NRSRO. issued by a person controlled or and repurchase, of any redeemable (25) Retail money market fund means supervised by and acting as an security issued by a government money a money market fund that has policies instrumentality of the government of the market fund or retail money market and procedures reasonably designed to United States pursuant to authority fund, notwithstanding the requirements limit all beneficial owners of the fund granted by the Congress of the United of section 2(a)(41) of the Act (15 U.S.C. to natural persons. States that: 80a–2(a)(41)) and of §§ 270.2a–4 and (26) Second tier security means any (A) Are issued at a discount to the 270.22c–1 thereunder, may be eligible security that is not a first tier principal amount to be repaid at computed by use of the amortized cost security. maturity without provision for the method and/or the penny-rounding (27) Single state fund means a tax payment of interest; and method. To use these methods, the exempt fund that holds itself out as (B) Have a remaining maturity date of board of directors of the government or seeking to maximize the amount of its 60 days or less. retail money market fund must distributed income that is exempt from (iv) Securities that will mature, as determine, in good faith, that it is in the the income taxes or other taxes on determined without reference to the best interests of the fund and its investments of a particular state and, exceptions in paragraph (i) of this shareholders to maintain a stable net where applicable, subdivisions thereof. section regarding interest rate asset value per share or stable price per (28) Tax exempt fund means any readjustments, or are subject to a share, by virtue of either the amortized money market fund that holds itself out demand feature that is exercisable and cost method and/or the penny-rounding as distributing income exempt from payable, within five business days; or method. The government or retail regular federal income tax. (v) Amounts receivable and due money market fund may continue to use (29) Total assets means, with respect unconditionally within five business such methods only so long as the board to a money market fund using the days on pending sales of portfolio of directors believes that they fairly Amortized Cost Method, the total securities. reflect the market-based net asset value amortized cost of its assets and, with (b) Holding out and use of names and per share and the fund complies with respect to any other money market fund, titles—(1) Holding out. It shall be an the other requirements of this section. means the total value of the money untrue statement of material fact within (ii) Any money market fund that is market fund’s assets, as defined in the meaning of section 34(b) of the Act not a government money market fund or

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00226 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47961

a retail money market fund must invested thirty percent or more of its separate account funding variable compute its price per share for purposes total assets in weekly liquid assets; or insurance contracts or the sponsoring of distribution, redemption and (2) The beginning of the next business insurance company of such separate repurchase by rounding the fund’s day following ten business days after account may apply a liquidity fee or current net asset value per share to a suspending redemptions. The money temporary suspension of redemptions minimum of the fourth decimal place in market fund may not suspend the right pursuant to paragraph (c)(2) of this the case of a fund with a $1.0000 share of redemption pursuant to this section section to contract owners who allocate price or an equivalent or more precise for more than ten business days in any all or a portion of their contract value level of accuracy for money market rolling ninety calendar day period. to a subaccount of the separate account funds with a different share price (e.g. (ii) Default liquidity fees. If, at the end that is either a money market fund or $10.000 per share, or $100.00 per share). of a business day, the money market that invests all of its assets in shares of (2) Liquidity fees and temporary fund has invested less than ten percent a money market fund. suspensions of redemptions. Except as of its total assets in weekly liquid assets, (v) Master feeder funds. Any money provided in paragraphs (c)(2)(iii) and (v) the fund must institute a liquidity fee, market fund (a ‘‘feeder fund’’) that of this section, and notwithstanding effective as of the beginning of the next owns, pursuant to section 12(d)(1)(E) of sections 22(e) and 27(i) of the Act (15 business day, as described in paragraphs the Act (15 U.S.C. 80a–12(d)(1)(E)), U.S.C. 80a–22(e) and 80a–27(i)) and (c)(2)(ii)(A) and (B) of this section, shares of another money market fund (a § 270.22c–1: unless the fund’s board of directors, ‘‘master fund’’) may not impose (i) Discretionary liquidity fees and including a majority of the directors liquidity fees or temporary suspensions temporary suspensions of redemptions. who are not interested persons of the of redemptions under paragraphs If, at any time, the money market fund fund, determines that imposing the fee (c)(2)(i) and (ii) of this section, provided has invested less than thirty percent of is not in the best interests of the fund. however, that if a master fund, in which (A) Amount of default liquidity fee. its total assets in weekly liquid assets, the feeder fund invests, imposes a The default liquidity fee shall be one the fund may institute a liquidity fee liquidity fee or temporary suspension of percent of the value of shares redeemed (not to exceed two percent of the value redemptions pursuant to paragraphs unless the money market fund’s board (c)(2)(i) and (ii) of this section, then the of the shares redeemed) or suspend the of directors, including a majority of the right of redemption temporarily, subject feeder fund shall pass through to its directors who are not interested persons investors the fee or redemption to paragraphs (c)(i)(A) and (B) of this of the fund, determines, at the time of section, if the fund’s board of directors, suspension on the same terms and initial imposition or later, that a higher conditions as imposed by the master including a majority of the directors or lower fee level is in the best interests who are not interested persons of the fund. of the fund. A liquidity fee may not (d) Risk-limiting conditions—(1) fund, determines that the fee or exceed two percent of the value of the Portfolio maturity. The money market suspension of redemptions is in the best shares redeemed. fund must maintain a dollar-weighted interests of the fund. (B) Duration and application of average portfolio maturity appropriate (A) Duration and application of default liquidity fee. Once imposed, the to its investment objective; provided, discretionary liquidity fee. Once default liquidity fee must be applied to however, that the money market fund imposed, a discretionary liquidity fee all shares redeemed and shall remain in must not: must be applied to all shares redeemed effect until the money market fund’s (i) Acquire any instrument with a and must remain in effect until the board of directors, including a majority remaining maturity of greater than 397 money market fund’s board of directors, of the directors who are not interested calendar days; including a majority of the directors persons of the fund, determines that (ii) Maintain a dollar-weighted who are not interested persons of the imposing such liquidity fee is not in the average portfolio maturity (‘‘WAM’’) fund, determines that imposing such best interests of the fund. Provided that exceeds 60 calendar days; or liquidity fee is no longer in the best however, that if, at the end of a business (iii) Maintain a dollar-weighted interests of the fund. Provided however, day, the money market fund has average portfolio maturity that exceeds that if, at the end of a business day, the invested thirty percent or more of its 120 calendar days, determined without money market fund has invested thirty total assets in weekly liquid assets, the reference to the exceptions in paragraph percent or more of its total assets in fund must cease charging the liquidity (i) of this section regarding interest rate weekly liquid assets, the fund must fee, effective as of the beginning of the readjustments (‘‘WAL’’). cease charging the liquidity fee, next business day. (2) Portfolio quality—(i) General. The effective as of the beginning of the next (iii) Government money market funds. money market fund must limit its business day. The requirements of paragraphs (c)(2)(i) portfolio investments to those United (B) Duration of temporary suspension and (ii) of this section shall not apply States dollar-denominated securities of redemptions. The temporary to a government money market fund. A that the fund’s board of directors suspension of redemptions must apply government money market fund may, determines present minimal credit risks to all shares and must remain in effect however, choose to rely on the ability to (which determination must be based on until the fund’s board of directors, impose liquidity fees and suspend factors pertaining to credit quality in including a majority of the directors redemptions consistent with the addition to any rating assigned to such who are not interested persons of the requirements of paragraph (c)(2)(i) and/ securities by a designated NRSRO) and fund, determines that the temporary or (ii) of this section and any other that are at the time of acquisition suspension of redemptions is no longer requirements that apply to liquidity fees eligible securities. in the best interests of the fund. and temporary suspensions of (ii) Second tier securities. No money Provided, however, that the fund must redemptions (e.g., Item 4(b)(1)(ii) of market fund may acquire a second tier restore the right of redemption on the Form N–1A (§ 274.11A of this chapter)). security with a remaining maturity of earlier of: (iv) Variable contracts. greater than 45 calendar days, (1) The beginning of the next business Notwithstanding section 27(i) of the Act determined without reference to the day following a business day that ended (15 U.S.C. 80a–27(i)), a variable exceptions in paragraph (i) of this with the money market fund having insurance contract issued by a registered section regarding interest rate

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00227 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47962 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

readjustments. Immediately after the (A) Taxable and national funds. payments of interest and principal on acquisition of any second tier security, Immediately after the acquisition of any the security. a money market fund must not have security, a money market fund other (D) Asset-backed securities—(1) invested more than three percent of its than a single state fund must not have General. An asset-backed security total assets in second tier securities. invested more than: acquired by a fund (‘‘primary ABS’’) (iii) Securities subject to guarantees. (1) Five percent of its total assets in shall be deemed to be issued by the A security that is subject to a guarantee securities issued by the issuer of the special purpose entity that issued the may be determined to be an eligible security, provided, however, that such a asset-backed security, provided, security or a first tier security based fund may invest up to twenty-five however: solely on whether the guarantee is an percent of its total assets in the first tier (i) Holdings of primary ABS. Any eligible security or first tier security, as securities of a single issuer for a period person whose obligations constitute ten the case may be. of up to three business days after the percent or more of the principal amount (iv) Securities subject to conditional acquisition thereof; provided, further, of the qualifying assets of the primary demand features. A security that is that the fund may not invest in the ABS (‘‘ten percent obligor’’) shall be subject to a conditional demand feature securities of more than one issuer in deemed to be an issuer of the portion of (‘‘underlying security’’) may be accordance with the foregoing proviso the primary ABS such obligations determined to be an eligible security or in this paragraph at any time; and represent; and a first tier security only if: (2) Ten percent of its total assets in (ii) Holdings of secondary ABS. If a (A) The conditional demand feature is securities issued by or subject to ten percent obligor of a primary ABS is an eligible security or first tier security, demand features or guarantees from the itself a special purpose entity issuing asset-backed securities (‘‘secondary as the case may be; institution that issued the demand (B) At the time of the acquisition of ABS’’), any ten percent obligor of such feature or guarantee. the underlying security, the money secondary ABS also shall be deemed to (B) Single state funds. Immediately market fund’s board of directors has be an issuer of the portion of the after the acquisition of any security, a determined that there is minimal risk primary ABS that such ten percent single state fund must not have that the circumstances that would result obligor represents. invested: in the conditional demand feature not (2) Restricted special purpose entities. being exercisable will occur; and (1) With respect to seventy-five A ten percent obligor with respect to a (1) The conditions limiting exercise percent of its total assets, more than five primary or secondary ABS shall not be either can be monitored readily by the percent of its total assets in securities deemed to have issued any portion of fund or relate to the taxability, under issued by the issuer of the security; and the assets of a primary ABS as provided federal, state or local law, of the interest (2) With respect to all of its total in paragraph (d)(3)(ii)(D)(1) of this payments on the security; or assets, more than ten percent of its total section if that ten percent obligor is (2) The terms of the conditional assets in securities issued by or subject itself a special purpose entity issuing demand feature require that the fund to demand features or guarantees from asset-backed securities (‘‘restricted will receive notice of the occurrence of the institution that issued the demand special purpose entity’’), and the the condition and the opportunity to feature or guarantee. securities that it issues (other than exercise the demand feature in (C) Second tier securities. securities issued to a company that accordance with its terms; and Immediately after the acquisition of any controls, or is controlled by or under (C) The underlying security or any second tier security, a money market common control with, the restricted guarantee of such security (or the debt fund must not have invested more than special purpose entity and which is not securities of the issuer of the underlying one half of one percent of its total assets itself a special purpose entity issuing security or guarantee that are in the second tier securities of any asset-backed securities) are held by only comparable in priority and security with single issuer, and must not have one other special purpose entity. the underlying security or guarantee) invested more than 2.5 percent of its (3) Demand features and guarantees. has received either a short-term rating or total assets in second tier securities In the case of a ten percent obligor a long-term rating, as the case may be, issued by or subject to demand features deemed to be an issuer, the fund must from the requisite NRSROs within the or guarantees from the institution that satisfy the diversification requirements NRSROs’ two highest short-term or issued the demand feature or guarantee. of paragraph (d)(3)(iii) of this section long-term rating categories (within (ii) Issuer diversification calculations. with respect to any demand feature or which there may be sub-categories or For purposes of making calculations guarantee to which the ten percent gradations indicating relative standing) under paragraph (d)(3)(i) of this section: obligor’s obligations are subject. or, if unrated, is determined to be of (A) Repurchase agreements. The (E) Shares of other money market comparable quality by the money acquisition of a repurchase agreement funds. A money market fund that market fund’s board of directors to a may be deemed to be an acquisition of acquires shares issued by another security that has received a rating from the underlying securities, provided the money market fund in an amount that the requisite NRSROs within the obligation of the seller to repurchase the would otherwise be prohibited by NRSROs’ two highest short-term or securities from the money market fund paragraph (d)(3)(i) of this section shall long-term rating categories, as the case is collateralized fully and the fund’s nonetheless be deemed in compliance may be. board of directors has evaluated the with this section if the board of (3) Portfolio diversification—(i) Issuer seller’s creditworthiness. directors of the acquiring money market diversification. The money market fund (B) Refunded securities. The fund reasonably believes that the fund must be diversified with respect to acquisition of a refunded security shall in which it has invested is in issuers of securities acquired by the be deemed to be an acquisition of the compliance with this section. fund as provided in paragraphs (d)(3)(i) escrowed government securities. (F) Treatment of certain affiliated and (d)(3)(ii) of this section, other than (C) Conduit securities. A conduit entities—(1) General. The money market with respect to government securities security shall be deemed to be issued by fund, when calculating the amount of its and securities subject to a guarantee the person (other than the municipal total assets invested in securities issued issued by a non-controlled person. issuer) ultimately responsible for by any particular issuer for purposes of

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00228 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47963

paragraph (d)(3)(i) of this section, must (B) Tax exempt funds. Immediately are sufficiently liquid to meet treat as a single issuer two or more after the acquisition of any demand reasonably foreseeable shareholder issuers of securities owned by the feature or guarantee, any security redemptions in light of the fund’s money market fund if one issuer subject to a demand feature or obligations under section 22(e) of the controls the other, is controlled by the guarantee, or a security directly issued Act (15 U.S.C. 80a–22(e)) and any other issuer, or is under common by the issuer of a demand feature or commitments the fund has made to control with the other issuer, provided guarantee (any such acquisition, a shareholders; provided, however, that: that ‘‘control’’ for this purpose means ‘‘demand feature or guarantee (i) Illiquid securities. The money ownership of more than 50 percent of acquisition’’), a tax exempt fund, with market fund may not acquire any the issuer’s voting securities. respect to eighty-five percent of its total illiquid security if, immediately after (2) Equity owners of asset-backed assets, must not have invested more the acquisition, the money market fund commercial paper special purpose than ten percent of its total assets in would have invested more than five entities. The money market fund is not securities issued by or subject to percent of its total assets in illiquid required to aggregate an asset-backed demand features or guarantees from the securities. commercial paper special purpose institution that issued the demand (ii) Minimum daily liquidity entity and its equity owners under feature or guarantee; provided that any requirement. The money market fund paragraph (d)(3)(ii)(F)(1) of this section demand feature or guarantee acquisition may not acquire any security other than provided that a primary line of business in excess of ten percent of the fund’s a daily liquid asset if, immediately after of its equity owners is owning equity total assets in accordance with this the acquisition, the fund would have interests in special purpose entities and paragraph must be a demand feature or invested less than ten percent of its total providing services to special purpose guarantee issued by a non-controlled assets in daily liquid assets. This entities, the independent equity owners’ person. provision does not apply to tax exempt activities with respect to the SPEs are (C) Second tier demand features or funds. limited to providing management or guarantees. Immediately after the (iii) Minimum weekly liquidity administrative services, and no acquisition of any demand feature or requirement. The money market fund qualifying assets of the special purpose guarantee, any security subject to a may not acquire any security other than entity were originated by the equity demand feature or guarantee, a security a weekly liquid asset if, immediately owners. directly issued by the issuer of a after the acquisition, the fund would (3) Ten percent obligors. For purposes demand feature or guarantee, or a have invested less than thirty percent of of determining ten percent obligors security after giving effect to the its total assets in weekly liquid assets. pursuant to paragraph (d)(3)(ii)(D)(1)(i) demand feature or guarantee, in all (e) Demand features and guarantees of this section, the money market fund cases that is a second tier security, a not relied upon. If the fund’s board of must treat as a single person two or money market fund must not have directors has determined that the fund more persons whose obligations in the invested more than 2.5 percent of its is not relying on a demand feature or aggregate constitute ten percent or more total assets in securities issued by or guarantee to determine the quality of the principal amount of the subject to demand features or guarantees (pursuant to paragraph (d)(2) of this qualifying assets of the primary ABS if from the institution that issued the section), or maturity (pursuant to one person controls the other, is demand feature or guarantee. paragraph (i) of this section), or controlled by the other person, or is (iv) Demand feature and guarantee liquidity of a portfolio security under common control with the person, diversification calculations—(A) (pursuant to paragraph (d)(4) of this provided that ‘‘control’’ for this purpose Fractional demand features or section), and maintains a record of this means ownership of more than 50 guarantees. In the case of a security determination (pursuant to paragraphs percent of the person’s voting securities. subject to a demand feature or guarantee (g)(3) and (h)(7) of this section), then the (iii) Diversification rules for demand from an institution by which the fund may disregard such demand features and guarantees. The money institution guarantees a specified feature or guarantee for all purposes of market fund must be diversified with portion of the value of the security, the this section. respect to demand features and institution shall be deemed to guarantee (f) Downgrades, defaults and other guarantees acquired by the fund as the specified portion thereof. events—(1) Downgrades. provided in paragraphs (d)(3)(iii) and (B) Layered demand features or (i) General. Upon the occurrence of (d)(3)(iv) of this section, other than with guarantees. In the case of a security either of the events specified in respect to a demand feature issued by subject to demand features or guarantees paragraphs (f)(1)(i)(A) and (B) of this the same institution that issued the from multiple institutions that have not section with respect to a portfolio underlying security, or with respect to limited the extent of their obligations as security, the board of directors of the a guarantee or demand feature that is described in paragraph (d)(3)(iv)(A) of money market fund shall reassess itself a government security. this section, each institution shall be promptly whether such security (A) General. Immediately after the deemed to have provided the demand continues to present minimal credit acquisition of any demand feature or feature or guarantee with respect to the risks and shall cause the fund to take guarantee, any security subject to a entire principal amount of the security. such action as the board of directors demand feature or guarantee, or a (v) Diversification safe harbor. A determines is in the best interests of the security directly issued by the issuer of money market fund that satisfies the money market fund: a demand feature or guarantee, a money applicable diversification requirements (A) A portfolio security of a money market fund must not have invested of paragraphs (d)(3) and (e) of this market fund ceases to be a first tier more than ten percent of its total assets section shall be deemed to have security (either because it no longer has in securities issued by or subject to satisfied the diversification the highest rating from the requisite demand features or guarantees from the requirements of section 5(b)(1) of the NRSROs or, in the case of an unrated institution that issued the demand Act (15 U.S.C. 80a–5(b)(1)) and the rules security, the board of directors of the feature or guarantee, subject to adopted thereunder. money market fund determines that it is paragraphs (d)(3)(iii)(B) and (d)(3)(iii)(C) (4) Portfolio liquidity. The money no longer of comparable quality to a first of this section. market fund must hold securities that tier security); and

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00229 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47964 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

(B) The money market fund’s security or the provider of any demand calculated at least daily, and at such investment adviser (or any person to feature or guarantee. other intervals that the board of whom the fund’s board of directors has (3) Notice to the Commission. The directors determines appropriate and delegated portfolio management money market fund must notify the reasonable in light of current market responsibilities) becomes aware that any Commission of the occurrence of certain conditions; unrated security or second tier security material events, as specified in Form N– (2) For the periodic review by the held by the money market fund has, CR (§ 274.222 of this chapter). board of directors of the amount of the since the security was acquired by the (4) Defaults for purposes of deviation as well as the methods used fund, been given a rating by a paragraphs (f)(2) and (3) of this section. to calculate the deviation; and designated NRSRO below the For purposes of paragraphs (f)(2) and (3) (3) For the maintenance of records of designated NRSRO’s second highest of this section, an instrument subject to the determination of deviation and the short-term rating category. a demand feature or guarantee shall not board’s review thereof. (ii) Securities to be disposed of. The be deemed to be in default (and an event (B) Prompt consideration of deviation. reassessments required by paragraph of insolvency with respect to the In the event such deviation from the (f)(1)(i) of this section shall not be security shall not be deemed to have money market fund’s amortized cost required if the fund disposes of the occurred) if: price per share exceeds 1⁄2 of 1 percent, security (or it matures) within five (i) In the case of an instrument subject the board of directors shall promptly business days of the specified event to a demand feature, the demand feature consider what action, if any, should be and, in the case of events specified in has been exercised and the fund has initiated by the board of directors. paragraph (f)(1)(i)(B) of this section, the recovered either the principal amount or (C) Material dilution or unfair results. board is subsequently notified of the the amortized cost of the instrument, Where the board of directors believes adviser’s actions. plus accrued interest; the extent of any deviation from the (iii) Special rule for certain securities (ii) The provider of the guarantee is money market fund’s amortized cost subject to demand features. In the event continuing, without protest, to make price per share may result in material that after giving effect to a rating payments as due on the instrument; or dilution or other unfair results to downgrade, more than 2.5 percent of the (iii) The provider of a guarantee with investors or existing shareholders, it fund’s total assets are invested in respect to an asset-backed security shall cause the fund to take such action securities issued by or subject to pursuant to paragraph (a)(18)(ii) of this as it deems appropriate to eliminate or demand features from a single section is continuing, without protest, to reduce to the extent reasonably institution that are second tier provide credit, liquidity or other practicable such dilution or unfair securities, the fund shall reduce its support as necessary to permit the asset- results. investment in securities issued by or backed security to make payments as (ii) [Reserved] subject to demand features from that due. (2) Funds using penny rounding. In institution to no more than 2.5 percent (g) Required procedures. The money the case of a government or retail money of its total assets by exercising the market fund’s board of directors must market fund that uses the penny demand features at the next succeeding adopt written procedures including the rounding method of pricing, in exercise date(s), absent a finding by the following: supervising the money market fund’s board of directors that disposal of the (1) Funds using amortized cost. In the operations and delegating special portfolio security would not be in the case of a government or retail money responsibilities involving portfolio best interests of the money market fund. market fund that uses the amortized cost management to the money market (2) Defaults and other events. Upon method of valuation, in supervising the fund’s investment adviser, the money the occurrence of any of the events money market fund’s operations and market fund’s board of directors, as a specified in paragraphs (f)(2)(i) through delegating special responsibilities particular responsibility within the (iv) of this section with respect to a involving portfolio management to the overall duty of care owed to its portfolio security, the money market money market fund’s investment shareholders, must establish written fund shall dispose of such security as adviser, the money market fund’s board procedures reasonably designed, taking soon as practicable consistent with of directors, as a particular into account current market conditions achieving an orderly disposition of the responsibility within the overall duty of and the money market fund’s security, by sale, exercise of any care owed to its shareholders, shall investment objectives, to assure to the demand feature or otherwise, absent a establish written procedures reasonably extent reasonably practicable that the finding by the board of directors that designed, taking into account current money market fund’s price per share as disposal of the portfolio security would market conditions and the money computed for the purpose of not be in the best interests of the money market fund’s investment objectives, to distribution, redemption and market fund (which determination may stabilize the money market fund’s net repurchase, rounded to the nearest one take into account, among other factors, asset value per share, as computed for percent, will not deviate from the single market conditions that could affect the the purpose of distribution, redemption price established by the board of orderly disposition of the portfolio and repurchase, at a single value. directors. security): (i) Specific procedures. Included (3) Securities for which maturity is (i) The default with respect to a within the procedures adopted by the determined by reference to demand portfolio security (other than an board of directors shall be the following: features. In the case of a security for immaterial default unrelated to the (A) Shadow pricing. Written which maturity is determined by financial condition of the issuer); procedures shall provide: reference to a demand feature, written (ii) A portfolio security ceases to be an (1) That the extent of deviation, if any, procedures shall require ongoing review eligible security; of the current net asset value per share of the security’s continued minimal (iii) A portfolio security has been calculated using available market credit risks, and that review must be determined to no longer present quotations (or an appropriate substitute based on, among other things, financial minimal credit risks; or that reflects current market conditions) data for the most recent fiscal year of the (iv) An event of insolvency occurs from the money market fund’s issuer of the demand feature and, in the with respect to the issuer of a portfolio amortized cost price per share, shall be case of a security subject to a

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00230 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47965

conditional demand feature, the issuer procedures must require periodic (B) An assessment by the fund’s of the security whose financial evaluation of such determination. adviser of the fund’s ability to withstand condition must be monitored under (8) Stress Testing. Written procedures the events (and concurrent occurrences paragraph (d)(2)(iv) of this section, must provide for: of those events) that are reasonably whether such data is publicly available (i) General. The periodic stress likely to occur within the following or provided under the terms of the testing, at such intervals as the board of year, including such information as may security’s governing documentation. directors determines appropriate and reasonably be necessary for the board of (4) Securities subject to demand reasonable in light of current market directors to evaluate the stress testing features or guarantees. In the case of a conditions, of the money market fund’s conducted by the adviser and the results security subject to one or more demand ability to have invested at least ten of the testing. The fund adviser must features or guarantees that the fund’s percent of its total assets in weekly include a summary of the significant board of directors has determined that liquid assets, and the fund’s ability to assumptions made when performing the the fund is not relying on to determine minimize principal volatility (and, in stress tests. the quality (pursuant to paragraph (d)(2) the case of a money market fund using (h) Recordkeeping and reporting—(1) of this section), maturity (pursuant to the amortized cost method of valuation Written procedures. For a period of not paragraph (i) of this section) or liquidity or penny rounding method of pricing as less than six years following the (pursuant to paragraph (d)(4) of this provided in paragraph (c)(1) of this replacement of existing procedures with section) of the security subject to the section, the fund’s ability to maintain new procedures (the first two years in demand feature or guarantee, written the stable price per share established by an easily accessible place), a written procedures must require periodic the board of directors for the purpose of copy of the procedures (and any evaluation of such determination. distribution, redemption and modifications thereto) described in this (5) Adjustable rate securities without repurchase), based upon specified section must be maintained and demand features. In the case of a hypothetical events that include, but are preserved. variable rate or floating rate security that not limited to: (2) Board considerations and actions. is not subject to a demand feature and For a period of not less than six years (A) Increases in the general level of for which maturity is determined (the first two years in an easily short-term interest rates, in combination pursuant to paragraph (i)(1), (i)(2) or accessible place) a written record must with various levels of an increase in (i)(4) of this section, written procedures be maintained and preserved of the shareholder redemptions; shall require periodic review of whether board of directors’ considerations and (B) A downgrade or default of the interest rate formula, upon actions taken in connection with the readjustment of its interest rate, can particular portfolio security positions, discharge of its responsibilities, as set reasonably be expected to cause the each representing various portions of forth in this section, to be included in security to have a market value that the fund’s portfolio (with varying the minutes of the board of directors’ approximates its amortized cost value. assumptions about the resulting loss in meetings. (6) Ten percent obligors of asset- the value of the security), in (3) Credit risk analysis. For a period backed securities. In the case of an combination with various levels of an of not less than three years from the date asset-backed security, written increase in shareholder redemptions; that the credit risks of a portfolio procedures must require the fund to (C) A widening of spreads compared security were most recently reviewed, a periodically determine the number of to the indexes to which portfolio written record of the determination that ten percent obligors (as that term is used securities are tied in various sectors in a portfolio security presents minimal in paragraph (d)(3)(ii)(D) of this section) the fund’s portfolio (in which a sector credit risks and the designated NRSRO deemed to be the issuers of all or a is a logically related subset of portfolio ratings (if any) used to determine the portion of the asset-backed security for securities, such as securities of issuers status of the security as an eligible purposes of paragraph (d)(3)(ii)(D) of in similar or related industries or security, first tier security or second tier this section; provided, however, written geographic region or securities of a security shall be maintained and procedures need not require periodic similar security type), in combination preserved in an easily accessible place. determinations with respect to any with various levels of an increase in (4) Determinations with respect to asset-backed security that a fund’s board shareholder redemptions; and adjustable rate securities. For a period of directors has determined, at the time (D) Any additional combinations of of not less than three years from the date of acquisition, will not have, or is events that the adviser deems relevant. when the assessment was most recently unlikely to have, ten percent obligors (ii) A report on the results of such made, a written record must be that are deemed to be issuers of all or testing to be provided to the board of preserved and maintained, in an easily a portion of that asset-backed security directors at its next regularly scheduled accessible place, of the determination for purposes of paragraph (d)(3)(ii)(D) of meeting (or sooner, if appropriate in required by paragraph (g)(5) of this this section, and maintains a record of light of the results), which report must section (that a variable rate or floating this determination. include: rate security that is not subject to a (7) Asset-backed securities not subject (A) The date(s) on which the testing demand feature and for which maturity to guarantees. In the case of an asset- was performed and an assessment of the is determined pursuant to paragraph backed security for which the fund’s money market fund’s ability to have (i)(1), (i)(2) or (i)(4) of this section can board of directors has determined that invested at least ten percent of its total reasonably be expected, upon the fund is not relying on the sponsor’s assets in weekly liquid assets and to readjustment of its interest rate at all financial strength or its ability or minimize principal volatility (and, in times during the life of the instrument, willingness to provide liquidity, credit the case of a money market fund using to have a market value that or other support in connection with the the amortized cost method of valuation approximates its amortized cost). asset-backed security to determine the or penny rounding method of pricing as (5) Determinations with respect to quality (pursuant to paragraph (d)(2) of provided in paragraph (c)(1) of this asset-backed securities. For a period of this section) or liquidity (pursuant to section to maintain the stable price per not less than three years from the date paragraph (d)(4) of this section) of the share established by the board of when the determination was most asset-backed security, written directors); and recently made, a written record must be

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00231 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47966 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

preserved and maintained, in an easily prominently on its Web site the (B) The percentage of the money accessible place, of the determinations following information: market fund’s total assets invested in required by paragraph (g)(6) of this (i) For a period of not less than six weekly liquid assets; and section (the number of ten percent months, beginning no later than the fifth (C) The money market fund’s net obligors (as that term is used in business day of the month, a schedule inflows or outflows. paragraph (d)(3)(ii)(D) of this section) of its investments, as of the last business (iii) A schedule, chart, graph, or other deemed to be the issuers of all or a day or subsequent calendar day of the depiction showing the money market portion of the asset-backed security for preceding month, that includes the fund’s net asset value per share (which purposes of paragraph (d)(3)(ii)(D) of following information: the fund must calculate based on this section). The written record must (A) With respect to the money market current market factors before applying include: fund and each class of redeemable the amortized cost or penny-rounding (i) The identities of the ten percent shares thereof: method, if used), rounded to the fourth obligors (as that term is used in (1) The WAM; and decimal place in the case of funds with paragraph (d)(3)(ii)(D) of this section), (2) The WAL. a $1.000 share price or an equivalent the percentage of the qualifying assets (B) With respect to each security held level of accuracy for funds with a constituted by the securities of each ten by the money market fund: different share price (e.g., $10.00 per percent obligor and the percentage of (1) Name of the issuer; share), as of the end of each business the fund’s total assets that are invested (2) Category of investment (indicate day during the preceding six months, in securities of each ten percent obligor; the category that identifies the which must be updated each business day as of the end of the preceding and instrument from among the following: (ii) Any determination that an asset- business day. U.S. Treasury Debt; U.S. Government backed security will not have, or is (iv) A link to a Web site of the Agency Debt; Non-U.S. Sovereign, Sub- unlikely to have, ten percent obligors Securities and Exchange Commission Sovereign and Supra-National debt; deemed to be issuers of all or a portion where a user may obtain the most recent Certificate of Deposit; Non-Negotiable of that asset-backed security for 12 months of publicly available Time Deposit; Variable Rate Demand purposes of paragraph (d)(3)(ii)(D) of information filed by the money market Note; Other Municipal Security; Asset this section. fund pursuant to § 270.30b1–7. (6) Evaluations with respect to asset- Backed Commercial Paper; Other Asset (v) For a period of not less than one backed securities not subject to Backed Securities; U.S. Treasury year, beginning no later than the same guarantees. For a period of not less than Repurchase Agreement, if collateralized business day on which the money three years from the date when the only by U.S. Treasuries (including market fund files an initial report on evaluation was most recently made, a Strips) and cash; U.S. Government Form N–CR (§ 274.222 of this chapter) written record must be preserved and Agency Repurchase Agreement, in response to the occurrence of any maintained, in an easily accessible collateralized only by U.S. Government event specified in Parts C, E, F, or G of place, of the evaluation required by Agency securities, U.S. Treasuries, and Form N–CR, the same information that paragraph (g)(7) of this section cash; Other Repurchase Agreement, if the money market fund is required to (regarding asset-backed securities not any collateral falls outside Treasury, report to the Commission on Part C subject to guarantees). Government Agency and cash; (Items C.1, C.2, C.3, C.4, C.5, C.6, and (7) Evaluations with respect to Insurance Company Funding C.7), Part E (Items E.1, E.2, E.3, and E.4), securities subject to demand features or Agreement; Investment Company; Part F (Items F.1 and F.2), or Part G of guarantees. For a period of not less than Financial Company Commercial Paper; Form N–CR concerning such event, three years from the date when the and Non-Financial Company along with the following statement: evaluation was most recently made, a Commercial Paper. If Other Instrument, ‘‘The Fund was required to disclose written record must be preserved and include a brief description); additional information about this event maintained, in an easily accessible (3) CUSIP number (if any); [or ‘‘these events,’’ as appropriate] on place, of the evaluation required by (4) Principal amount; Form N–CR and to file this form with paragraph (g)(4) of this section (5) The maturity date determined by the Securities and Exchange (regarding securities subject to one or taking into account the maturity Commission. Any Form N–CR filing more demand features or guarantees). shortening provisions in paragraph (i) of submitted by the Fund is available on (8) Reports with respect to stress this section (i.e., the maturity date used the EDGAR Database on the Securities testing. For a period of not less than six to calculate WAM under paragraph and Exchange Commission’s Internet years (the first two years in an easily (d)(1)(ii) of this section); site at http://www.sec.gov.’’ accessible place), a written copy of the (6) The maturity date determined (11) Processing of transactions. A report required under paragraph without reference to the exceptions in government money market fund and a (g)(8)(ii) of this section must be paragraph (i) of this section regarding retail money market fund (or its transfer maintained and preserved. interest rate readjustments (i.e., the agent) must have the capacity to redeem (9) Inspection of records. The maturity used to calculate WAL under and sell securities issued by the fund at documents preserved pursuant to paragraph (d)(1)(iii) of this section); a price based on the current net asset paragraph (h) of this section are subject (7) Coupon or yield; and value per share pursuant to § 270.22c– to inspection by the Commission in (8) Value. 1. Such capacity must include the accordance with section 31(b) of the Act (ii) A schedule, chart, graph, or other ability to redeem and sell securities at (15 U.S.C. 80a–30(b)) as if such depiction, which must be updated each prices that do not correspond to a stable documents were records required to be business day as of the end of the price per share. maintained pursuant to rules adopted preceding business day, showing, as of (i) Maturity of portfolio securities. For under section 31(a) of the Act (15 U.S.C. the end of each business day during the purposes of this section, the maturity of 80a–30(a)). preceding six months: a portfolio security shall be deemed to (10) Web site disclosure of portfolio (A) The percentage of the money be the period remaining (calculated holdings and other fund information. market fund’s total assets invested in from the trade date or such other date The money market fund must post daily liquid assets; on which the fund’s interest in the

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00232 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47967

security is subject to market action) repurchase of the underlying securities ■ 6. Section 270.12d3–1(d)(7)(v) is until the date on which, in accordance is scheduled to occur, or, where the amended by removing ‘‘§§ 270.2a– with the terms of the security, the agreement is subject to demand, the 7(a)(8) and 270.2a–7(a)(15)’’ and adding principal amount must unconditionally notice period applicable to a demand for in its place ‘‘§§ 270.2a–7(a)(9) and be paid, or in the case of a security the repurchase of the securities. 270.2a–7(a)(18)’’. called for redemption, the date on (7) Portfolio lending agreements. A ■ 7. Section 270.18f–3(c)(2)(i) is which the redemption payment must be portfolio lending agreement shall be amended by removing the phrase ‘‘that made, except as provided in paragraphs treated as having a maturity equal to the determines net asset value using the (i)(1) through (i)(8) of this section: period remaining until the date on amortized cost method permitted by (1) Adjustable rate government which the loaned securities are § 270.2a–7’’ and adding in its place securities. A government security that is scheduled to be returned, or where the ‘‘that operates in compliance with a variable rate security where the agreement is subject to demand, the § 270.2a–7’’. variable rate of interest is readjusted no notice period applicable to a demand for ■ 8. Section § 270.22e–3 is amended by less frequently than every 397 calendar the return of the loaned securities. revising paragraph (a)(1) and adding (8) Money market fund securities. An days shall be deemed to have a maturity paragraph (d). equal to the period remaining until the investment in a money market fund The revisions and additions read as next readjustment of the interest rate. A shall be treated as having a maturity follows. government security that is a floating equal to the period of time within which rate security shall be deemed to have a the acquired money market fund is § 270.22e–3 Exemption for liquidation of remaining maturity of one day. required to make payment upon money market funds. (2) Short-term variable rate securities. redemption, unless the acquired money (a) * * * A variable rate security, the principal market fund has agreed in writing to (1) The fund, at the end of a business amount of which, in accordance with provide redemption proceeds to the day, has invested less than ten percent the terms of the security, must investing money market fund within a of its total assets in weekly liquid assets unconditionally be paid in 397 calendar shorter time period, in which case the or, in the case of a fund that is a days or less shall be deemed to have a maturity of such investment shall be government money market fund, as maturity equal to the earlier of the deemed to be the shorter period. defined in § 270.2a–7(a)(16) or a retail period remaining until the next (j) Delegation. The money market money market fund, as defined in readjustment of the interest rate or the fund’s board of directors may delegate § 270.2a–7(a)(25), the fund’s price per period remaining until the principal to the fund’s investment adviser or share as computed for the purpose of amount can be recovered through officers the responsibility to make any distribution, redemption and demand. determination required to be made by repurchase, rounded to the nearest one (3) Long-term variable rate securities. the board of directors under this section percent, has deviated from the stable A variable rate security, the principal other than the determinations required price established by the board of amount of which is scheduled to be by paragraphs (a)(11)(i) (designation of directors or the fund’s board of paid in more than 397 calendar days, NRSROs), (c)(1) (board findings), directors, including a majority of that is subject to a demand feature, shall (c)(2)(i) and (ii) (determinations related directors who are not interested persons be deemed to have a maturity equal to to liquidity fees and temporary of the fund, determines that such a the longer of the period remaining until suspensions of redemptions), (f)(2) deviation is likely to occur; the next readjustment of the interest rate (defaults and other events), (g)(1) and * * * * * or the period remaining until the (g)(2) (amortized cost and penny (d) Definitions. Each of the terms principal amount can be recovered rounding procedures), and (g)(8) (stress business day, total assets, and weekly through demand. testing procedures) of this section. liquid assets has the same meaning as (1) Written guidelines. The board of (4) Short-term floating rate securities. defined in § 270.2a–7. A floating rate security, the principal directors must establish and ■ 9. Section 270.30b1–7 is revised to amount of which, in accordance with periodically review written guidelines read as follows: the terms of the security, must (including guidelines for determining unconditionally be paid in 397 calendar whether securities present minimal § 270.30b1–7 Monthly report for money days or less shall be deemed to have a credit risks as required in paragraph market funds. maturity of one day, except for purposes (d)(2) of this section) and procedures Every registered open-end of determining WAL under paragraph under which the delegate makes such management investment company, or (d)(1)(iii) of this section, in which case determinations. series thereof, that is regulated as a it shall be deemed to have a maturity (2) Oversight. The board of directors money market fund under § 270.2a-7 equal to the period remaining until the must take any measures reasonably must file with the Commission a principal amount can be recovered necessary (through periodic reviews of monthly report of portfolio holdings on through demand. fund investments and the delegate’s Form N–MFP (§ 274.201 of this chapter), (5) Long-term floating rate securities. procedures in connection with current as of the last business day or any A floating rate security, the principal investment decisions and prompt subsequent calendar day of the amount of which is scheduled to be review of the adviser’s actions in the preceding month, no later than the fifth paid in more than 397 calendar days, event of the default of a security or business day of each month. that is subject to a demand feature, shall event of insolvency with respect to the ■ 10. Section 270.30b1–8 is added to be deemed to have a maturity equal to issuer of the security or any guarantee read as follows: the period remaining until the principal or demand feature to which it is subject amount can be recovered through that requires notification of the § 270.30b1–8 Current report for money demand. Commission under paragraph (f)(3) of market funds. (6) Repurchase agreements. A this section by reference to Form N–CR Every registered open-end repurchase agreement shall be deemed (§ 274.222 of this chapter)) to assure that management investment company, or to have a maturity equal to the period the guidelines and procedures are being series thereof, that is regulated as a remaining until the date on which the followed. money market fund under § 270.2a–7,

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00233 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47968 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

that experiences any of the events a liquidity fee imposed upon the sale of requirements of §§ 270.2a–7(c)(2)(i) and/ specified on Form N–CR (274.222 of this Fund shares in accordance with rule 2a– or (ii) of this chapter pursuant to chapter), must file with the Commission 7(c)(2). § 270.2a–7(c)(2)(iii) of this chapter, and a current report on Form N–CR within * * * * * that has not chosen to rely on the ability the period specified in that form. to impose liquidity fees and suspend Item 4. Risk/Return Summary: ■ 11. Section 270.31a–1(b)(1) is redemptions consistent with the Investments, Risks, and Performance amended by removing ‘‘§ 270.2a–7(a)(8) requirements of §§ 270.2a–7(c)(2)(i) and/ or § 270.2a–7(a)(15)’’ and adding in its * * * * * or (ii)), include the following statement: place ‘‘§ 270.2a–7(a)(9) or § 270.2a– (b) * * * You could lose money by investing in the 7(a)(18)’’. (1) *** Fund. Although the Fund seeks to preserve (ii) (A) If the Fund is a Money Market the value of your investment at $1.00 per PART 239—FORMS PRESCRIBED Fund that is not a government Money share, it cannot guarantee it will do so. An UNDER THE SECURITIES ACT OF 1933 Market Fund, as defined in § 270.2a– investment in the Fund is not insured or 7(a)(16) or a retail Money Market Fund, guaranteed by the Federal Deposit Insurance ■ 12. The authority citation for Part 239 as defined in § 270.2a–7(a)(25), include Corporation or any other government agency. continues to read in part as follows: the following statement: The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, You could lose money by investing in the you should not expect that the sponsor will 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, Fund. Because the share price of the Fund provide financial support to the Fund at any 78o(d), 78o–7, 78o–7 note, 78u–5, 78w(a), will fluctuate, when you sell your shares they time. 78ll, 78mm, 80a-2(a), 80a–3, 80a–8, 80a–9, may be worth more or less than what you Instruction. If an affiliated person, 80a–10, 80a–13, 80a–24, 80a–26, 80a–29, originally paid for them. The Fund may promoter, or principal underwriter of 80a–30, 80a–37, and Pub. L. 111–203, sec. impose a fee upon sale of your shares or may 939A, 124 Stat. 1376 (2010), unless otherwise temporarily suspend your ability to sell the Fund, or an affiliated person of such noted. shares if the Fund’s liquidity falls below a person, has contractually committed to provide financial support to the * * * * * required minimums because of market conditions or other factors. An investment in Fund, and the term of the agreement PART 274—FORMS PRESCRIBED the Fund is not insured or guaranteed by the will extend for at least one year UNDER THE INVESTMENT COMPANY Federal Deposit Insurance Corporation or any following the effective date of the other government agency. The Fund’s ACT OF 1940 Fund’s registration statement, the sponsor has no legal obligation to provide statement specified in Item financial support to the Fund, and you ■ 13. The authority citation for Part 274 should not expect that the sponsor will 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item continues to read in part as follows: provide financial support to the Fund at any 4(b)(1)(ii)(C) may omit the last sentence Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, time. (‘‘The Fund’s sponsor has no legal 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, (B) If the Fund is a Money Market obligation to provide financial support 80a–26, 80a–29, and Pub. L. 111–203, sec. Fund that is a government Money to the Fund, and you should not expect 939A, 124 Stat. 1376 (2010), unless otherwise Market Fund, as defined in § 270.2a– that the sponsor will provide financial noted. 7(a)(16), or a retail Money Market Fund, support to the Fund at any time.’’). For * * * * * as defined in § 270.2a–7(a)(25), and that purposes of this Instruction, the term ■ 14. Form N–1A (referenced in is subject to the requirements of ‘‘financial support’’ includes any capital §§ 239.15A and 274.11A) is amended §§ 270.2a–7(c)(2)(i) and/or (ii) of this contribution, purchase of a security by: chapter (or is not subject to the from the Fund in reliance on § 270.17a– ■ a. Revising paragraph 2(b) of the requirements of §§ 270.2a–7(c)(2)(i) and/ 9, purchase of any defaulted or instructions to Item 3; or (ii) of this chapter pursuant to devalued security at par, execution of ■ b. Revising paragraph (b)(1)(ii) of Item § 270.2a–7(c)(2)(iii) of this chapter, but letter of credit or letter of indemnity, 4; and has chosen to rely on the ability to capital support agreement (whether or ■ c. Adding a paragraph (g) to Item 16. impose liquidity fees and suspend not the Fund ultimately received The additions and revisions read as redemptions consistent with the support), performance guarantee, or any follows: requirements of §§ 270.2a–7(c)(2)(i) and/ other similar action reasonably intended or (ii)), include the following statement: to increase or stabilize the value or Note: The text of Form N–1A does not, and liquidity of the fund’s portfolio; this amendment will not, appear in the Code You could lose money by investing in the however, the term ‘‘financial support’’ of Federal Regulations. Fund. Although the Fund seeks to preserve excludes any routine waiver of fees or the value of your investment at $1.00 per reimbursement of fund expenses, Form N–1A share, it cannot guarantee it will do so. The routine inter-fund lending, routine * * * * * Fund may impose a fee upon sale of your shares or may temporarily suspend your inter-fund purchases of fund shares, or Item 3. Risk/Return Summary: Fee ability to sell shares if the Fund’s liquidity any action that would qualify as Table falls below required minimums because of financial support as defined above, that market conditions or other factors. An the board of directors has otherwise * * * * * investment in the Fund is not insured or determined not to be reasonably Instructions. guaranteed by the Federal Deposit Insurance intended to increase or stabilize the * * * * * Corporation or any other government agency. value or liquidity of the fund’s portfolio. 2. Shareholder Fees. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and * * * * * * * * * * you should not expect that the sponsor will (b) ‘‘Redemption Fee’’ includes a fee Item 16. Description of the Fund and Its provide financial support to the Fund at any Investments and Risks charged for any redemption of the time. Fund’s shares, but does not include a (C) If the Fund is a Money Market * * * * * deferred sales charge (load) imposed Fund that is a government Money (g) Money Market Fund Material upon redemption, and, if the Fund is a Market Fund, as defined in § 270.2a– Events. If the Fund is a Money Market Money Market Fund, does not include 7(a)(16), that is not subject to the Fund (except any Money Market Fund

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00234 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47969

that is not subject to the requirements of Securities and Exchange Commission’s Commission on Items C.1, C.2, C.3, C.4, §§ 270.2a–7(c)(2)(i) and/or (ii) of this Internet site at http://www.sec.gov.’’ C.5, C.6, and C.7 of Form N–CR [17 CFR chapter pursuant to § 270.2a–7(c)(2)(iii) (2) Financial Support Provided to 274.222]. of this chapter, and has not chosen to Money Market Funds. During the last 10 4. The disclosure required by Item rely on the ability to impose liquidity years, any occasion on which an 16(g)(2) should conclude with the fees and suspend redemptions affiliated person, promoter, or principal following statement: ‘‘The Fund was consistent with the requirements of underwriter of the Fund, or an affiliated required to disclose additional §§ 270.2a–7(c)(2)(i) and/or (ii)) disclose, person of such a person, provided any information about this event [or ‘‘these as applicable, the following events: form of financial support to the Fund, events,’’ as appropriate] on Form N–CR (1) Imposition of Liquidity Fees and including a description of the nature of and to file this form with the Securities Temporary Suspensions of Fund support, person providing support, brief and Exchange Commission. Any Form Redemptions. description of the relationship between N–CR filing submitted by the Fund is (i) During the last 10 years, any the person providing support and the available on the EDGAR Database on the occasion on which the Fund has Fund, date support provided, amount of Securities and Exchange Commission’s invested less than ten percent of its total support, security supported (if Internet site at http://www.sec.gov.’’ assets in weekly liquid assets (as applicable), and the value of security ■ 15. Form N–MFP (referenced in provided in § 270.2a–7(c)(2)(ii)), and supported on date support was initiated § 274.201) is revised to read as follows: with respect to each such occasion, (if applicable). whether the Fund’s board of directors Note: The text of Form N–MFP does not, determined to impose a liquidity fee Instructions and this amendment will not, appear in the pursuant to § 270.2a–7(c)(2)(ii) and/or 1. The term ‘‘financial support’’ Code of Federal Regulations. temporarily suspend the Fund’s includes any capital contribution, Form N–MFP redemptions pursuant to § 270.2a– purchase of a security from the Fund in 7(c)(2)(i). reliance on § 270.17a–9, purchase of any Monthly Schedule of Portfolio Holdings (ii) During the last 10 years, any defaulted or devalued security at par, of Money Market Funds occasion on which the Fund has execution of letter of credit or letter of Form N–MFP is to be used by invested less than thirty percent, but indemnity, capital support agreement registered open-end management more than ten percent, of its total assets (whether or not the Fund ultimately investment companies, or series thereof, in weekly liquid assets (as provided in received support), performance that are regulated as money market § 270.2a–7(c)(2)(i)) and the Fund’s board guarantee, or any other similar action funds pursuant to rule 2a–7 under the of directors has determined to impose a reasonably intended to increase or Investment Company Act of 1940 liquidity fee pursuant to § 270.2a– stabilize the value or liquidity of the (‘‘Act’’) (17 CFR 270.2a–7) (‘‘money 7(c)(2)(i) and/or temporarily suspend Fund’s portfolio; excluding, however, market funds’’), to file reports with the any routine waiver of fees or the Fund’s redemptions pursuant to Commission pursuant to rule 30b1–7 reimbursement of Fund expenses, § 270.2a–7(c)(2)(i). under the Act (17 CFR 270.30b1–7). The routine inter-fund lending, routine Commission may use the information Instructions inter-fund purchases of Fund shares, or provided on Form N–MFP in its 1. With respect to each such occasion, any action that would qualify as regulatory, disclosure review, disclose: the dates and length of time for financial support as defined above, that inspection, and policymaking roles. which the Fund invested less than ten the board of directors has otherwise percent (or thirty percent, as applicable) determined not to be reasonably General Instructions of its total assets in weekly liquid assets; intended to increase or stabilize the A. Rule as to Use of Form N–MFP the dates and length of time for which value or liquidity of the Fund’s the Fund’s board of directors portfolio. Form N–MFP is the public reporting determined to impose a liquidity fee 2. If during the last 10 years, the Fund form that is to be used for monthly pursuant to § 270.2a–7(c)(2)(i) or has participated in one or more mergers reports of money market funds required § 270.2a–7(c)(2)(ii), and/or temporarily with another investment company (a by section 30(b) of the Act and rule suspend the Fund’s redemptions ‘‘merging investment company’’), 30b1–7 under the Act (17 CFR pursuant to § 270.2a–7(c)(2)(i); and the provide the information required by 270.30b1–7). A money market fund size of any liquidity fee imposed Item 16(g)(2) with respect to any must report information about the fund pursuant to § 270.2a–7(c)(2)(i) or merging investment company as well as and its portfolio holdings as of the last § 270.2a–7(c)(2)(ii). with respect to the Fund; for purposes business day or any subsequent 2. The disclosure required by Item of this instruction, the term ‘‘merger’’ calendar day of the preceding month. 16(g)(1) should incorporate, as means a merger, consolidation, or The Form N–MFP must be filed with the appropriate, any information that the purchase or sale of substantially all of Commission no later than the fifth Fund is required to report to the the assets between the Fund and a business day of each month, but may be Commission on Items E.1, E.2, E.3, E.4, merging investment company. If the filed any time beginning on the first F.1, F.2, and G.1 of Form N–CR [17 CFR person or entity that previously business day of the month. Each money 274.222]. provided financial support to a merging market fund, or series of a money 3. The disclosure required by Item investment company is not currently an market fund, is required to file a 16(g)(1) should conclude with the affiliated person, promoter, or principal separate form. If the money market fund following statement: ‘‘The Fund was underwriter of the Fund, the Fund need does not have any classes, the fund required to disclose additional not provide the information required by must provide the information required information about this event [or ‘‘these Item 16(g)(2) with respect to that by Part B for the series. events,’’ as appropriate] on Form N–CR merging investment company. A money market fund may file an and to file this form with the Securities 3. The disclosure required by Item amendment to a previously filed Form and Exchange Commission. Any Form 16(g)(2) should incorporate, as N–MFP at any time, including an N–CR filing submitted by the Fund is appropriate, any information that the amendment to correct a mistake or error available on the EDGAR Database on the Fund is required to report to the in a previously filed form. A fund that

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00235 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47970 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

files an amendment to a previously filed ‘‘Fund’’ means the Registrant or a identifier. form must provide information in separate Series of the Registrant. When Item 7. Has the fund acquired or merged response to all items of Form N–MFP, an item of Form N–MFP specifically with another fund since the last regardless of why the amendment is applies to a Registrant or a Series, those filing? [Y/N] If Yes, answer Item 7.a. filed. terms will be used. a. Identify the acquired or merged ‘‘LEI’’ means, with respect to any fund by CIK, Securities Act file B. Application of General Rules and company, the ‘‘legal entity identifier’’ number, and EDGAR series Regulations assigned by or on behalf of an identifier. The General Rules and Regulations internationally recognized standards Item 8. Provide the name, email address, under the Act contain certain general setting body and required for reporting and telephone number of the person requirements that are applicable to purposes by the U.S. Department of the authorized to receive information reporting on any form under the Act. Treasury’s Office of Financial Research and respond to questions about this These general requirements should be or a financial regulator. In the case of a Form N–MFP. carefully read and observed in the financial institution, if a ‘‘legal entity preparation and filing of reports on this identifier’’ has not been assigned, then Part A: Series-Level Information about form, except that any provision in the LEI means the RSSD ID assigned by the the Fund form or in these instructions shall be National Information Center of the Item A.1 Securities Act File Number. controlling. Board of Governors of the Federal Item A.2 Investment Adviser. Reserve System, if any. a. SEC file number of investment C. Filing of Form N–MFP ‘‘Master-Feeder Fund’’ means a two- adviser. A money market fund must file Form tiered arrangement in which one or Item A.3 Sub-Adviser. If a fund has N–MFP in accordance with rule 232.13 more Funds (or registered or one or more sub-advisers, disclose of Regulation S–T. Form N–MFP must unregistered pooled investment the name of each sub-adviser. be filed electronically using the vehicles) (each a ‘‘Feeder Fund’’), holds a. SEC file number of each sub- Commission’s EDGAR system. shares of a single Fund (the ‘‘Master adviser. Fund’’) in accordance with section Item A.4 Independent Public D. Paperwork Reduction Act 12(d)(1)(E) [15 U.S.C. 80a–12(d)(1)(E)]. Accountant. Information ‘‘Money Market Fund’’ means a Fund a. City and state of independent A registrant is not required to respond that holds itself out as a money market public accountant. to the collection of information fund and meets the requirements of rule Item A.5 Administrator. If a fund has contained in Form N–MFP unless the 2a–7 [17 CFR 270.2a–7]. one or more administrators, Form displays a currently valid Office of ‘‘Securities Act’’ means the Securities disclose the name of each Management and Budget (‘‘OMB’’) Act of 1933 [15 U.S.C. 77a–aa]. administrator. control number. Please direct comments ‘‘Series’’ means shares offered by a Item A.6 Transfer Agent. concerning the accuracy of the Registrant that represent undivided a. CIK Number. information collection burden estimate interests in a portfolio of investments b. SEC file number of transfer agent. and any suggestions for reducing the and that are preferred over all other Item A.7 Master-Feeder Funds. Is this burden to the Secretary, Securities and series of shares for assets specifically a Feeder Fund? [Y/N] If Yes, answer Exchange Commission, 100 F Street NE., allocated to that series in accordance Items A.7.a–7.c. Washington, DC 20549–1090. The OMB with rule 18f–2(a) [17 CFR 270.18f– a. Identify the Master Fund by CIK or, has reviewed this collection of 2(a)]. if the fund does not have a CIK, by ‘‘Value’’ has the meaning defined in information under the clearance name. section 2(a)(41) of the Act (15 U.S.C. requirements of 44 U.S.C. 3507. b. Securities Act file number of the 80a–2(a)(41)). E. Definitions Master Fund. United States Securities and Exchange c. EDGAR series identifier of the References to sections and rules in Commission Washington, DC 20549 Master Fund. this Form N–MFP are to the Investment Form N–MFP Item A.8 Master-Feeder Funds. Is this Company Act of 1940 [15 U.S.C. 80a] a Master Fund? [Y/N] If Yes, answer (the ‘‘Investment Company Act’’), unless Monthly Schedule of Portfolio Holdings Items A.8.a–8.c. otherwise indicated. Terms used in this of Money Market Funds a. Identify all Feeder Funds by CIK or, Form N–MFP have the same meaning as General Information if the fund does not have a CIK, by in the Investment Company Act or name. Item 1. Report for [mm/dd/yyyy]. related rules, unless otherwise b. Securities Act file number of each indicated. Item 2. CIK Number of Registrant. Item 3. LEI of Registrant (if available) Feeder Fund. As used in this Form N–MFP, the (See General Instructions E.) c. EDGAR series identifier of each terms set out below have the following Item 4. EDGAR Series Identifier. Feeder Fund. meanings: Item 5. Total number of share classes in Item A.9 Is this series primarily used ‘‘Cash’’ means demand deposits in the series. to fund insurance company separate depository institutions and cash Item 6. Do you anticipate that this will accounts? [Y/N] holdings in custodial accounts. be the fund’s final filing on Form Item A.10 Category. Indicate the ‘‘Class’’ means a class of shares issued N–MFP? [Y/N] If Yes, answer Items category that identifies the money by a Multiple Class Fund that represents 6.a–6.c. market fund from among the interests in the same portfolio of a. Is the fund liquidating? [Y/N] following: Treasury, Government/ securities under rule 18f–3 [17 CFR b. Is the fund merging with, or being Agency, Exempt Government, 270.18f–3] or under an order exempting acquired by, another fund? [Y/N] Prime, Single State, or Other Tax the Multiple Class Fund from sections c. If applicable, identify the successor Exempt. 18(f), 18(g), and 18(i) [15 U.S.C. 80a– fund by CIK, Securities Act file a. Is this fund an exempt retail fund 18(f), 18(g), and 18(i)]. number, and EDGAR series as defined in 270.2a–7(a)(25)[Y/N]?

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00236 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47971

Item A.11 Dollar-weighted average Item A.19 7-day gross yield. Based on in the case of a fund with a $1.0000 portfolio maturity (‘‘WAM’’ as the 7 days ended on the last day of share price (or an equivalent level defined in rule 2a–7(d)(1)(ii)). the prior month, calculate the of accuracy for funds with a Item A.12 Dollar-weighted average life fund’s yield by determining the net different share price), as of the close maturity (‘‘WAL’’ as defined in rule change, exclusive of capital changes of business on each Friday during 2a–7(d)(1)(iii)). Calculate WAL and income other than investment the month reported (if the reporting without reference to the exceptions income, in the value of a date falls on a holiday or other day in rule 2a–7(d) regarding interest hypothetical pre-existing account on which the fund does not rate readjustments. having a balance of one share at the calculate the net asset value per Item A.13 Liquidity. Provide the beginning of the period and share, provide the value as of the following, as of the close of dividing the difference by the value close of business on the date in that business on each Friday during the of the account at the beginning of week last calculated): month reported (if the reporting the base period to obtain the base a. Friday, week 1: date falls on a holiday or other day period return, and then multiplying b. Friday, week 2: on which the fund does not the base period return by (365/7) c. Friday, week 3: calculate the daily or weekly with the resulting yield figure d. Friday, week 4: liquidity, provide the value as of carried to the nearest hundredth of Friday, week 5 (if applicable): the close of business on the date in one percent. The 7-day gross yield Item B.6 Net shareholder flow. Provide that week last calculated): should not reflect a deduction of the aggregate weekly gross a. Total Value of Daily Liquid Assets shareholders fees and fund subscriptions (including dividend to the nearest cent: operating expenses. For master i. Friday, week 1: reinvestments) and gross funds and feeder funds, report the redemptions, rounded to the nearest ii. Friday, week 2: 7-day gross yield at the master-fund iii. Friday, week 3: cent, as of the close of business on level. iv. Friday, week 4: each Friday during the month Item A.20 Net asset value per share. v. Friday, week 5 (if applicable): reported (if the reporting date falls b. Total Value of Weekly Liquid Provide the net asset value per on a holiday or other day on which Assets (including Daily Liquid share, calculated using available the fund does not calculate the Assets) to the nearest cent: market quotations (or an gross subscriptions or gross i. Friday, week 1: appropriate substitute that reflects redemptions, provide the value as ii. Friday, week 2: current market conditions) rounded of the close of business on the date iii. Friday, week 3: to the fourth decimal place in the in that week last calculated): iv. Friday, week 4: case of a fund with a $1.0000 share a. Friday, week 1: v. Friday, week 5 (if applicable): price (or an equivalent level of i. Weekly gross subscriptions c. Percentage of Total Assets invested accuracy for funds with a different (including dividend reinvestments): in Daily Liquid Assets: share price), as of the close of ii. Weekly gross redemptions: i. Friday, week 1: business on each Friday during the ii. Friday, week 2: month reported (if the reporting b. Friday, week 2: iii. Friday, week 3: date falls on a holiday or other day i. Weekly gross subscriptions iv. Friday, week 4: on which the fund does not (including dividend reinvestments): v. Friday, week 5 (if applicable): calculate the net asset value per ii. Weekly gross redemptions: d. Percentage of Total Assets invested c. Friday, week 3: in Weekly Liquid Assets (including share, provide the value as of the close of business on the date in that i. Weekly gross subscriptions Daily Liquid Assets): (including dividend reinvestments): i. Friday, week 1: week last calculated): ii. Friday, week 2: a. Friday, week 1: ii. Weekly gross redemptions: iii. Friday, week 3: b. Friday, week 2: d. Friday, week 4: iv. Friday, week 4: c. Friday, week 3: i. Weekly gross subscriptions v. Friday, week 5 (if applicable): d. Friday, week 4: (including dividend reinvestments): Item A.14 Provide the following, to the e. Friday, week 5 (if applicable): ii. Weekly gross redemptions: nearest cent: Part B: Class-Level Information About e. Friday, week 5 (if applicable): a. Cash. (See General Instructions E.) the Fund i. Weekly gross subscriptions b. Total Value of portfolio securities. (including dividend reinvestments): (See General Instructions E.) For each Class of the Series (regardless of the number of shares ii. Weekly gross redemptions: i. If any portfolio securities are valued f. Total for the month reported: using amortized cost, the total value outstanding in the Class), disclose the following: i. Monthly gross subscriptions of the portfolio securities valued at (including dividend reinvestments): amortized cost. Item B.1 EDGAR Class identifier. c. Total Value of other assets Item B.2 Minimum initial investment. ii. Monthly gross redemptions: (excluding amounts provided in Item B.3 Net assets of the Class, to the Item B.7 7-day net yield, as calculated A.14.a–c.) nearest cent. under Item 26(a)(1) of Form N–1A Item A.15 Total value of liabilities, to Item B.4 Number of shares (§ 274.11A of this chapter). the nearest cent. outstanding, to the nearest Item B.8 During the reporting period, Item A.16 Net assets of the series, to hundredth. did any Person pay for, or waive all the nearest cent. Item B.5 Net asset value per share. or part of the fund’s operating Item A.17 Number of shares Provide the net asset value per expenses or management fees? [Y/ outstanding, to the nearest share, calculated using available N] If Yes, answer Item B.8.a. hundredth. market quotations (or an a. Provide the name of the Person and Item A.18 If the fund seeks to maintain appropriate substitute that reflects describe the nature and amount of a stable price per share, state the current market conditions), the expense payment or fee waiver, price the fund seeks to maintain. rounded to the fourth decimal place or both (reported in dollars).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00237 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47972 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Part C: Schedule of Portfolio Securities ‘‘open’’? [Y/N] amount must unconditionally be For each security held by the money b. The name of the collateral issuer. paid). market fund, disclose the following: c. LEI (if available). Item C.14 Does the security have a d. Maturity date. Demand Feature on which the fund Item C.1 The name of the issuer. is relying to determine the quality, Item C.2 The title of the issue e. Coupon or yield. f. The principal amount, to the nearest maturity or liquidity of the (including coupon, if applicable). security? [Y/N] If Yes, answer Items Item C.3 The CUSIP. cent. C.14.a—14.f. Where applicable, Item C.4 The LEI (if available). (See g. Value of collateral, to the nearest provide the information required in General Instruction E.). cent. Items C.14b—14.f in the order that Item C.5 Other identifier. In addition h. The category of investments that each Demand Feature issuer was to CUSIP and LEI, provide at least most closely represents the reported in Item C.14.a. one of the following other collateral, selected from among the a. The identity of the Demand Feature identifiers, if available: following: Asset-Backed Securities; Agency issuer(s). a. The ISIN; b. Designated NRSRO(s) for the b. The CIK; or Collateralized Mortgage Obligations; Demand Feature(s) or provider(s) of c. Other unique identifier. Agency and Agency the Demand Feature(s). Item C.6 The category of investment. Strips; Agency Mortgage-Backed c. For each Designated NRSRO, Indicate the category that most Securities; Private Label disclose the credit rating given by closely identifies the instrument Collateralized Mortgage Obligations; the Designated NRSRO. If there is from among the following: U.S. Corporate Debt Securities; Equities; no rating given by the Designated Treasury Debt; U.S. Government Money Market; U.S. Treasuries NRSRO, indicate ‘‘NR.’’ Agency Debt; Non-U.S. Sovereign, (including strips); Other Instrument. If Other Instrument, include a brief d. The amount (i.e., percentage) of Sub-Sovereign and Supra-National fractional support provided by each debt; Certificate of Deposit; Non- description, including, if applicable, whether it is a collateralized debt Demand Feature issuer. Negotiable Time Deposit; Variable e. The period remaining until the obligation, municipal debt, whole Rate Demand Note; Other principal amount of the security loan, or international debt. Municipal Security; Asset Backed may be recovered through the If multiple securities of an issuer are Commercial Paper; Other Asset Demand Feature. Backed Securities; U.S. Treasury subject to the repurchase agreement, f. Is the demand feature conditional? Repurchase Agreement, if the securities may be aggregated, in [Y/N] collateralized only by U.S. which case disclose: (a) The total Item C.15 Does the security have a Treasuries (including Strips) and principal amount and value and (b) Guarantee (other than an cash; U.S. Government Agency the range of maturity dates and unconditional letter of credit Repurchase Agreement, interest rates. disclosed in item C.14 above) on collateralized only by U.S. Item C.9 Rating. Indicate whether the which the fund is relying to Government Agency securities, U.S. security is a rated First Tier determine the quality, maturity or Treasuries, and cash; Other Security, rated Second Tier liquidity of the security? [Y/N] If Repurchase Agreement, if any Security, an Unrated Security, or no Yes, answer Items C.15.a–15.d. collateral falls outside Treasury, longer an Eligible Security. Where applicable, provide the Government Agency and cash; Item C.10 Name of each Designated information required in Item Insurance Company Funding NRSRO. C.15.b–15.d in the order that each Agreement; Investment Company; a. For each Designated NRSRO, Guarantor was reported in Item Financial Company Commercial disclose the credit rating given by C.15.a. Paper; Non-Financial Company the Designated NRSRO. If the a. The identity of the Guarantor(s). Commercial Paper; or Tender instrument and its issuer are not b. Designated NRSRO(s) for the Option Bond. If Other Instrument, rated by the Designated NRSRO, Guarantee(s) or Guarantor(s). include a brief description. indicate ‘‘NR.’’ c. For each Designated NRSRO, Item C.7 If the security is a repurchase Item C.11 The maturity date disclose the credit rating given by agreement, is the fund treating the determined by taking into account the Designated NRSRO. If there is acquisition of the repurchase the maturity shortening provisions no rating given by the Designated agreement as the acquisition of the of rule 2a–7(i) (i.e., the maturity NRSRO, indicate ‘‘NR.’’ underlying securities (i.e., date used to calculate WAM under d. The amount (i.e., percentage) of collateral) for purposes of portfolio rule 2a–7(d)(1)(ii)). fractional support provided by each diversification under rule 2a–7? [Y/ Item C.12 The maturity date Guarantor. N] determined without reference to the Item C.16 Does the security have any Item C.8 For all repurchase exceptions in rule 2a–7(i) regarding enhancements, other than those agreements, specify whether the interest rate readjustments (i.e., the identified in Items C.14 and C.15 repurchase agreement is ‘‘open’’ maturity date used to calculate above, on which the fund is relying (i.e., the repurchase agreement has WAL under rule 2a–7(d)(1)(iii)). to determine the quality, maturity no specified end date and, by its Item C.13 The maturity date or liquidity of the security? [Y/N] If terms, will be extended or ‘‘rolled’’ determined without reference to the Yes, answer Items C.16.a–16.e. each business day (or at another maturity shortening provisions of Where applicable, provide the specified period) unless the rule 2a–7(i) (i.e., the ultimate legal information required in Items investor chooses to terminate it), maturity date on which, in C.16.b–16.e in the order that each and describe the securities subject accordance with the terms of the enhancement provider was reported to the repurchase agreement (i.e., security without regard to any in Item C.16.a. collateral). interest rate readjustment or a. The identity of the enhancement a. Is the repurchase agreement demand feature, the principal provider(s).

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00238 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47973

b. The type of enhancement(s). Note: The text of Form N–CR will not D. Filing of Form N–CR appear in the Code of Federal Regulations. c. Designated NRSRO(s) for the A money market fund must file Form enhancement(s) or enhancement Form N–CR N–CR in accordance with rule 232.13 of provider(s). Regulation S–T. Form N–CR must be d. For each Designated NRSRO, Current Report filed electronically using the disclose the credit rating given by Commission’s EDGAR system. the Designated NRSRO. If there is Money Market Fund Material Events no rating given by the Designated Form N–CR is to be used by registered E. Paperwork Reduction Act NRSRO, indicate ‘‘NR.’’ open-end management investment Information e. The amount (i.e., percentage) of companies, or series thereof, that are A registrant is not required to respond fractional support provided by each regulated as money market funds to the collection of information enhancement provider. pursuant to rule 2a–7 under the contained in Form N–CR unless the Item C.17 The yield of the security as Investment Company Act of 1940 form displays a currently valid Office of of the reporting date. (‘‘Investment Company Act’’) (17 CFR Management and Budget (‘‘OMB’’) Item C.18 The total Value of the fund’s 270.2a–7) (‘‘money market funds’’), to control number. Please direct comments position in the security, to the file current reports with the concerning the accuracy of the nearest cent: (See General Commission pursuant to rule 30b1–8 information collection burden estimate Instruction E.) under the Investment Company Act (17 a. Including the value of any sponsor and any suggestions for reducing the CFR 270.30b1–8). The Commission may support: burden to the Secretary, Securities and use the information provided on Form b. Excluding the value of any sponsor Exchange Commission, 100 F Street NE., N–CR in its regulatory, disclosure support: Washington, DC 20549–1090. The OMB Item C.19 The percentage of the money review, inspection, and policymaking has reviewed this collection of market fund’s net assets invested in roles. information under the clearance the security, to the nearest General Instructions requirements of 44 U.S.C. 3507. hundredth of a percent. F. Definitions Item C.20 Is the security categorized at A. Rule as to Use of Form N–CR level 3 in the fair value hierarchy References to sections and rules in Form N–CR is the public reporting this Form N–CR are to the Investment under U.S. Generally Accepted form that is to be used for current Accounting Principles (ASC 820, Company Act (15 U.S.C. 80a), unless reports of money market funds required otherwise indicated. Terms used in this Fair Value Measurement) [Y/N]? by section 30(b) of the Act and rule Item C.21 Is the security a Daily Liquid Form N–CR have the same meaning as 30b1–8 under the Act. A money market in the Investment Company Act or rule Asset? [Y/N] fund must file a report on Form N–CR Item C.22 Is the security a Weekly 2a–7 under the Investment Company upon the occurrence of any one or more Act, unless otherwise indicated. In Liquid Asset? [Y/N] of the events specified in Parts B–H of Item C.23 Is the security an Illiquid addition, as used in this Form N–CR, this form. Unless otherwise specified, a Security? [Y/N] the term ‘‘fund’’ means the registrant or report is to be filed within one business Item C.24 Explanatory notes. Disclose a separate series of the registrant. day after occurrence of the event, and any other information that may be will be made public immediately upon United States Securities and Exchange material to other disclosures related filing. If the event occurs on a Saturday, Commission Washington, DC 20549 to the portfolio security. If none, Sunday, or holiday on which the leave blank. Form N–CR Commission is not open for business, Signatures then the report is to be filed on the first Current Report Money Market Fund Material Events Pursuant to the requirements of the business day thereafter. Part A: General Information Investment Company Act of 1940, the B. Application of General Rules and registrant has duly caused this report to Regulations Item A.1 Report for [mm/dd/yyyy]. be signed on its behalf by the Item A.2 CIK Number of registrant. undersigned hereunto duly authorized. The General Rules and Regulations Item A.3 EDGAR Series Identifier. lllllllllllllllllllll under the Act contain certain general Item A.4 Securities Act File Number. (Registrant) requirements that are applicable to Item A.5 Provide the name, email lllllllllllllllllllll reporting on any form under the Act. address, and telephone number of Date These general requirements should be the person authorized to receive lllllllllllllllllllll carefully read and observed in the information and respond to (Signature)* preparation and filing of reports on this questions about this Form N–CR. form, except that any provision in the *Print name and title of the signing Part B: Default or Event of Insolvency officer under his/her signature. form or in these instructions shall be controlling. of Portfolio Security Issuer ■ 16. Section 274.222 and Form N–CR are added to read as follows: C. Information To Be Included in Report If the issuer of one or more of the Filed on Form N–CR fund’s portfolio securities, or the issuer § 274.222 Form N–CR, Current report of of a demand feature or guarantee to money market fund material events. Upon the occurrence of any one or which one of the fund’s portfolio This form shall be used by registered more of the events specified in Parts B– securities is subject, and on which the investment companies that are regulated H of Form N–CR, a money market fund fund is relying to determine the quality, as money market funds under § 270.2a– must file a report on Form N–CR that maturity, or liquidity of a portfolio 7 of this chapter to file current reports includes information in response to security, experiences a default or event pursuant to § 270.30b1–8 of this chapter each of the items in Part A of the form, of insolvency (other than an immaterial within the time periods specified in the as well as each of the items in the default unrelated to the financial form. applicable Parts B–H of the form. condition of the issuer), and the

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00239 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47974 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

portfolio security or securities (or the 9, (iii) purchase of any defaulted or the case of a fund with a $1.00 share securities subject to the demand feature devalued security at par, (iv) execution price, or an equivalent level of accuracy or guarantee) accounted for at least 1⁄2 of of letter of credit or letter of indemnity, for funds with a different share price) 1 percent of the fund’s total assets (v) capital support agreement (whether deviates downward from its intended immediately before the default or event or not the fund ultimately received stable price per share by more than 1⁄4 of insolvency, disclose the following support), (vi) performance guarantee, or of 1 percent, disclose: information: (vii) any other similar action reasonably Item D.1 Date(s) on which such Item B.1 Security or securities intended to increase or stabilize the downward deviation exceeded 1⁄4 of affected. Disclose the name of the value or liquidity of the fund’s portfolio; 1 percent. issuer, the title of the issue excluding, however, any (i) routine Item D.2 Extent of deviation between (including coupon or yield, if waiver of fees or reimbursement of fund the fund’s current net asset value applicable) and at least two expenses, (ii) routine inter-fund lending per share and its intended stable identifiers, if available (e.g., CUSIP, (iii) routine inter-fund purchases of price per share. ISIN, CIK, LEI). fund shares, or (iv) any action that Item D.3 Principal reason or reasons Item B.2 Date(s) on which the would qualify as financial support as for the deviation, including the default(s) or Event(s) of Insolvency defined above, that the board of name of any security whose value occurred. directors has otherwise determined not calculated using available market Item B.3 Value of affected security or to be reasonably intended to increase or quotations (or an appropriate securities on the date(s) on which stabilize the value or liquidity of the substitute that reflects current the default(s) or event(s) of fund’s portfolio), disclose the following market conditions) or sale price, or insolvency occurred. information: whose issuer’s downgrade, default, Item B.4 Percentage of the fund’s total Item C.1 Description of nature of or event of insolvency (or similar assets represented by the affected support. event), has contributed to the security or securities. Item C.2 Person providing support. deviation. For any such security, Item B.5 Brief description of actions Item C.3 Brief description of disclose the name of the issuer, the fund plans to take, or has taken, in relationship between the person title of the issue (including coupon response to the default(s) or event(s) providing support and the fund. or yield, if applicable) and at least of insolvency. Item C.4 Date support provided. two identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI). Instruction. For purposes of Part B, an Item C.5 Amount of support. Instruction. A report responding to instrument subject to a demand feature Item C.6 Security supported (if Items D.1 and D.2 is to be filed within or guarantee will not be deemed to be applicable). Disclose the name of one business day after occurrence of an in default (and an event of insolvency the issuer, the title of the issue event contemplated in this Part D. An with respect to the security will not be (including coupon or yield, if amended report responding to Items D.3 deemed to have occurred) if: (i) In the applicable) and at least two is to be filed within four business days case of an instrument subject to a identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI). after occurrence of an event demand feature, the demand feature has contemplated in this Part D. been exercised and the fund has Item C.7 Value of security supported recovered either the principal amount or on date support was initiated (if Part E: Imposition of Liquidity Fee the amortized cost of the instrument, applicable). If a fund (except a government money plus accrued interest; (ii) the provider of Item C.8 Brief description of reason for market fund that is relying on the the guarantee is continuing, without support. exemption in rule 2a–7(c)(2)(iii)): (i) At protest, to make payments as due on the Item C.9 Term of support. the end of a business day, has invested instrument; or (iii) the provider of a Item C.10 Brief description of any less than ten percent of its total assets guarantee with respect to an asset- contractual restrictions relating to in weekly liquid assets or (ii) has backed security pursuant to rule 2a– support. invested less than thirty percent of its 7(a)(16)(ii) is continuing, without Instruction. If an affiliated person, total assets in weekly liquid assets and protest, to provide credit, liquidity or promoter, or principal underwriter of imposes a liquidity fee pursuant to rule other support as necessary to permit the the fund, or an affiliated person of such 2a–7(c)(2)(i) or (ii), disclose the asset-backed security to make payments a person, purchases a security from the following information: as due. fund in reliance on § 270.17a–9, the Item E.1 Initial date on which the fund A report responding to Items B.1 fund must provide the purchase price of invested less than ten percent of its through B.4 is to be filed within one the security in responding to Item C.6. total assets in weekly liquid assets, business day after occurrence of an A report responding to Items C.1 if applicable. event contemplated in this Part B. An through C.7 is to be filed within one Item E.2 If the fund imposes a amended report responding to Item B.5 business day after occurrence of an liquidity fee pursuant to rule 2a– is to be filed within four business days event contemplated in this Part C. An 7(c)(2), date on which the fund after occurrence of an event amended report responding to Items C.8 instituted the liquidity fee. contemplated in this Part B. through C.10 is to be filed within four Item E.3 Percentage of the fund’s total business days after occurrence of an Part C: Provision of Financial Support assets invested in weekly liquid event contemplated in this Part C. To Fund assets as of the dates reported in Part D: Deviation Between Current Net items E.1 and E.2, as applicable. If an affiliated person, promoter, or Item E.4 Size of the liquidity fee, if Asset Value per Share and Intended principal underwriter of the fund, or an any. affiliated person of such a person, Stable Price per Share Item E.5 Brief description of the facts provides any form of financial support If a retail money market fund’s or a and circumstances leading to the to the fund (including any (i) capital government money market fund’s fund’s investing in the amount of contribution, (ii) purchase of a security current net asset value per share weekly liquid assets reported in from the fund in reliance on § 270.17a– (rounded to the fourth decimal place in Item E.3.

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00240 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47975

Item E.6 Brief discussion of the event contemplated in this Part F. An be signed on its behalf by the primary considerations or factors amended report responding to Items F.3 undersigned hereunto duly authorized. taken in account by the board of and F.4 is to be filed within four lllllllllllllllllllll directors in its decision to impose business days after occurrence of an (Registrant) (or not impose) a liquidity fee. event contemplated in this Part F. lllllllllllllllllllll Instruction. A report responding to Part G: Removal of Liquidity Fees and/ Date Items E.1 though E.4 is to be filed or Resumption of Fund Redemptions lllllllllllllllllllll within one business day after (Signature)* If a fund that has imposed a liquidity occurrence of an event contemplated in fee and/or suspended the fund’s *Print name and title of the signing this Part E. An amended report redemptions pursuant to rule 2a–7(c)(2) officer under his/her signature. responding to Items E.5 and E.6 is to be determines to remove such fee and/or filed within four business days after resume fund redemptions, disclose the PART 279—FORMS PRESCRIBED occurrence of an event contemplated in following, as applicable: UNDER THE INVESTMENT ADVISERS this Part E. Item G.1 Date on which the fund ACT OF 1940 Part F: Suspension of Fund removed the liquidity fee and/or ■ Redemptions resumed fund redemptions. 17. The authority citation for Part 279 continues to read as follows: If a fund suspends redemptions Part H: Optional Disclosure pursuant to rule 2a–7(c)(2)(i), disclose Authority: The Investment Advisers Act of If a fund chooses, at its option, to 1940, 15 U.S.C. 80b-1, et seq. the following information: disclose any other events or information ■ 18. Form PF (referenced in § 279.9) is Item F.1 Percentage of the fund’s total not otherwise required by this form, it amended by: assets invested in weekly liquid may do so under this Item H.1. ■ assets as of the date on which the a. In General Instruction 15, removing Item H.1 Optional disclosure. the reference to Question 57 from the fund suspended redemptions. Instruction. Item H.1 is intended to Item F.2 Date on which the fund last bulleted sentence; provide a fund with additional ■ b. Revising section 3; initially suspended redemptions. flexibility, if it so chooses, to disclose Item F.3 Brief description of the facts ■ c. In the Glossary of Terms, adding any other events or information not and revising certain terms. and circumstances leading to the otherwise required by this form, or to ■ The additions and revisions read as fund’s investing in the amount of supplement or clarify any of the follows: weekly liquid assets stated in Item disclosures required elsewhere in this F.1. form. Part H does not impose on funds Note: The text of Form PF does not, and Item F.4 Brief discussion of the any affirmative obligation. A fund may this amendment will not, appear in the Code primary considerations or factors file a report on Form N–CR responding of Federal Regulations. taken in account by the board of to Part H at any time. directors in its decision to suspend Form PF the fund’s redemptions. Signatures * * * * * Instruction. A report responding to Pursuant to the requirements of the Items F.1 and F.2 is to be filed within Investment Company Act of 1940, the Section 3 one business day after occurrence of an registrant has duly caused this report to BILLING CODE 8011–01–P

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00241 Fmt 4701 Sfmt 4700 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 47976 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

Section 3: Information about liquidity funds that you advise.

You must complete a separate Section 3 for each liquidity fund that you advise. However, with respect to master-feeder arrangements and parallel fund structures, you may report collectively or separately about the component funds as provided in the General Instructions.

Item A. Reporting fund identifying and operational information

51. (a) Name ofthe reportingfund ...... (b) Private fund identification number of the reporting fund ...... 52. Does the reporting fond use the amortized cost method of valuation in computing its net asset value? D Yes D No 53. Does the reporting fond use the penny rounding method of pricing in computing its net asset value? D Yes D No 54. (a) Does the reporting fund have a policy of complying with the risk limiting conditions of rule 2a-7? D Yes D No (b) If you responded "no" to Question 54( a) above, does the reporting fond have a policy of complying with the following provisions of rule 2a-7: (i) the diversification conditions? D Yes D No (ii) the credit quality conditions? D Yes D No (iii) the liquidity conditions? D Yes D No (iv) the maturity conditions? D Yes D No

Item B. Reporting fund assets

55. Provide the following information for each month ofthe reporting period. 1st 2nd 3rd Month Month Month (a) Net asset value of reporting fund as reported to current and prospective investors ...... L------~------L------~

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00242 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.009 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47977

(b) Net asset value per share of reporting fund as reported to current and prospective investors (to the nearest hundredth of a cent) ...... ~------~------~------~ (c) Net asset value per share of reporting fund (to the nearest hundredth ofa cent; exclude the value ofany capital support agreement or similar arrangement)...... (d) WAM of reporting fund (in days) ...... r------r------r------~ (e) WAL ofreportingfund (in days) ...... r------r------r------~ (f) 7-day gross yield of reporting fund (to the nearest hundredth ofone percent) ...... r------r------r------~ (g) Dollar amount of the reporting fund's assets that are daily liquid assets ...... r------r------r------~ (h) Dollar amount of the reporting fund's assets that are weekly liquid assets ...... r------r------r------~ (i) Dollar amount of the reporting fund's assets that have a maturity greater than 397 days ...... L______L ______L______~

Item C. Financing information

56. (a) Is the amount of total borrowing reported in response to Question 12 equal to or greater than 5% of the reportingfund's net asset value? D Yes D No (b) If you responded "yes" to Question 56(a) above, divide the dollar amount of total borrowing reported in response to Question 12 among the periods specified below depending on the type of borrowing, the type of creditor and the latest date on which the reporting fund may repay the principal amount of the borrowing without defaulting or incurring penalties or additional fees. (If a creditor (or syndicate or administrative/collateral agent) is permitted to vary unilaterally the economic terms of the financing or to revalue posted collateral in its own discretion and demand additional collateral, then the borrowing should be deemed to have a maturity of 1 day or less for purposes ofthis question. For amortizing loans, each amortization payment should be treated separately and grouped with other borrowings based on its payment date.) (The total amount ofborrowings reported below should equal approximately the total amount ofborrowing reported in response to Question 12.) 31 days Greater 1 day or 2 days to 8 days to to than 397 less 7 days 30 days 397 days days (i) Unsecured borrowing (A) US. financial institutions ...... r------+------+------,_------r------_,

(B) Non-US. financial institutions ...... c______c______JL______J ______, ______,

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00243 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.010 47978 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

(C) Other U.S. creditors ...... ~------+------+------,_------~------__, (D) Other non-U.S. creditors ...... ~------~------~------~------~------~

(ii) Secured borrowing (A) US. financial institutions...... 1------+------+------+------+------l (B) Non-US. financial institutions ...... l------f------11------1------t------l (C) Other U.S. creditors ...... 1------+----+----t------+-----l (D) Other non-U.S. creditors ...... ~------~------~------~------~------~

57. (a) Does the reportingjimdhave in place one or more committed liquidity facilities? D Yes D No

(b) If you responded "yes" to Question 57(a), provide the aggregate dollar

amount of commitments under the liquidity facilities ......

Item D. Investor information

58. ~;:~~~a~h:e~~~~=~ -~~-~~~-~~~~~~~~-~~~~~-~-~~-~~~~~--~~~-~-~-~~~~~~i-~~~~~~:~.~-~~-~~;'------' 59. Provide the following information regarding investor concentration. (For purposes of this question, ifyou know that two or more beneficial owners of the reporting fund are affiliated with each other, you should treat them as a single beneficial owner.) (a) Specify the percentage of the reporting fund's equity that is beneficially owned by the beneficial owner having the largest equity interest in the reporting fund ...... (b) How many investors beneficially own 5% or more of the reporting fund's equity? 60. Provide a good faith estimate, as of the data reporting date, of the percentage of the reporting fund's outstanding equity that was purchased using securities lending collateral ...... 61. Provide the following information regarding the restrictions on withdrawals and redemptions by investors in the reportingfund. (For Questions 61 and 62, please note that the standards for imposing suspensions and restrictions on withdrawals/redemptions may vary amongfimds. Make a goodfaith determination of the provisions that would likely be triggered during conditions that you view as significant market stress.)

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00244 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.011 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47979

As of the data reporting date, what percentage of the reporting fund's net asset value, if any: (a) May be subjected to a suspension of investor withdrawals/redemptions by an adviser or fund governing body (this question relates to an adviser's or governing body's right to suspend and not just whether a suspension is currently effective) ...... (b) May be subjected to material restrictions on investor withdrawals/ redemptions (e.g., "gates") by an adviser or fund governing body (this question relates to an adviser's or governing body's right to impose a restriction and not just whether a restriction has been imposed) ...... (c) Is subject to a suspension of investor withdrawals/redemptions (this question relates to whether a suspension is currently effective and not just an adviser's or governing body's right to suspend) ...... (d) Is subject to a material restriction on investor withdrawals/redemptions (e.g., a "gate") (this question relates to whether a restriction has been imposed and not just an adviser's or governing body's right to impose a restriction) ...... 62. Investor liquidity (as a % of net asset value): (Divide the reporting fund's net asset value among the periods specified below depending on the shortest period within which investors are entitled, under the fund documents, to withdraw invested funds or receive redemption payments, as applicable. Assume that you would impose gates where applicable but that you would not completely suspend withdrawals/redemptions and that there are no redemption fees. Please base on the notice period before the valuation date rather than the date proceeds would be paid to investors. The total should add up to 1 00%.) % of NAV locked for (i) 1 day or less ...... (ii) 2 days -7 days ...... (iii) 8 days- 30 days ...... (iv) 31 days- 90 days ...... (v) 91 days- 180 days ...... (vi) 181 days- 365 days ...... (vii) Longer than 365 days ......

Item E. Portfolio Information

63. For each security held by the reporting fund, provide the following information for each month of the reporting period. (a) Name ofthe issuer ......

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00245 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.012 47980 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

(b) Title of the issue (including coupon, if applicable) ...... (c) CUSIP ...... (d) LEI, if available ...... (e) In addition to CUSIP and LEI, provide at least one of the following other identifiers, if available: (i) ISIN ...... (ii) CIK ...... (iii) Other unique identifier ...... (f) The category of investment that most closely identifies the instrument ...... (Select from among the following categories ofinvestment: US. Treasury Debt; US. Government Agency Debt; Non-US. Sovereign, Sub-Sovereign and Supra-National debt; Certificate ofDeposit; Non­ Negotiable Time Deposit; Variable Rate Demand Note; Other Municipal Security; Asset Backed Commercial Paper; Other Asset Backed Securities; US. Treasury Repurchase Agreement, if collateralized only by US. Treasuries (including Strips) and cash; US. Government Agency Repurchase Agreement, collateralized only by US. Government Agency securities, US. Treasuries, and cash; Other Repurchase Agreement, if any collateral falls outside Treasury, Government Agency and cash; Insurance Company Funding Agreement; Investment Company; Financial Company Commercial Paper; Non-Financial Company Commercial Paper; or Tender Option Bond If Other Instrument, include a briefdescription.) (g) For repos, specify whether the repo is "open" (i.e., the repo has no specified end date and, by its terms, will be extended or "rolled" each business day (or at another specified period) unless the investor chooses to terminate it), and provide the following information about the securities subject to the repo (i.e., the collateral): (If multiple securities ofan issuer are subject to the repo, the securities may be aggregated, in which case provide: (i) the total principal amount and value and (ii) the range ofmaturity dates and interest rates.) (i) Whether the repo is "open" ...... (ii) Name of the collateral issuer ...... (iii) CUSIP ...... (iv) LEI, if available ...... (v) Maturity date ...... (vi) Coupon or yield ...... (vii) The principal amount, to the nearest cent...... (viii) Value of the collateral, to the nearest cent ...... (ix) The category of investment that most closely represents the

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00246 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.013 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47981

collateral ...... (Select from among the following categories of investment: Asset­ Backed Securities; Agency Collateralized Mortgage Obligations; Agency Debentures and Agency Strips; Agency Mortgage-Backed Securities; Private Label Collateralized Mortgage Obligations; Corporate Debt Securities; Equities; Money Market; U.S. Treasuries (including strips); Other Instrument. If Other Instrument, include a briefdescription, including, if applicable, whether it is a collateralized debt obligation, municipal debt, whole loan, or international debt). (h) If the rating assigned by a credit rating agency played a substantial role in the reporting fund's (or its adviser's) evaluation of the quality, maturity or liquidity of the security, provide the name of each credit rating agency and the rating each assigned to the security. (i) The maturity date used to calculate WAM...... (j) The maturity date used to calculate WAL ...... (k) The ultimate legal maturity date (i.e., the date on which, in accordance with the terms of the security without regard to any interest rate readjustment or demand feature, the principal amount must unconditionally be paid) ...... (1) If the security has a demand feature on which the reporting fund (or its adviser) is relying when evaluating the quality, maturity, or liquidity of the security, provide the following information: (If the security does not have such a demand feature, enter "NA. ") (i) Identity ofthe demand feature issuer(s) ...... (ii) If the rating assigned by a credit rating agency played a substantial role in the reporting fund's (or its adviser's) evaluation of the quality, maturity or liquidity of the demand feature, its issuer, or the security to which it relates, provide the name of each credit rating agency and the rating assigned by each credit rating agency ...... (iii) The period remaining until the principal amount of the security may be recovered through the demand feature ...... (iv) The amount (i.e., percentage) of fractional support provided by each demand feature issuer...... (v) Whether the demand feature is a conditional demand feature

(m) If the security has a guarantee (other than an unconditional letter of credit reported in response to Question 63(1) above) on which the reportingfund (or its adviser) is relying when evaluating the quality, maturity, or liquidity of the security, provide the following information: (If the security does not have such a guarantee, enter NA. ") (i) Identity of the guarantor(s) ......

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00247 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.014 47982 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations

(ii) If the rating assigned by a credit rating agency played a substantial role in the reporting fund's (or its adviser's) evaluation of the quality, maturity or liquidity of the guarantee, the guarantor, or the security to which the guarantee relates, provide the name of each credit rating agency and the rating assigned by each credit rating agency

(iii) The amount (i.e., percentage) of fractional support provided by each guarantor ...... (n) If the security has any enhancements, other than those identified in response to Questions 63(1) and (m) above, on which the reporting fund (or its adviser) is relying when evaluating the quality, maturity, or liquidity of the security, provide the following information: (If the security does not have such an enhancement, enter "NA. ") (i) Identity of the enhancement provider(s) ...... (ii) The type of enhancement(s) ...... (iii) If the rating assigned by a credit rating agency played a substantial role in the reporting fund's (or its adviser's) evaluation of the quality, maturity or liquidity of the enhancement, its provider, or the security to which it relates, provide the name of each credit rating agency used and the rating assigned by the credit rating agency ...... (iv) The amount (i.e., percentage) of fractional support provided by each enhancement provider ...... ( o) The yield of the security as of the reporting date: ...... (p) The total value of the reporting fund's position in the security, and separately, if the reporting fund uses the amortized cost method of valuation, the amortized cost value, in both cases to the nearest cent: (i) Including the value of any sponsor support ...... (ii) Excluding the value of any sponsor support ...... (q) The percentage of the reporting fund's net assets invested in the security, to the nearest hundredth of a percent...... (r) Is the security categorized as a level3 asset or liability in Question 14? (s) Is the security a daily liquid asset? (t) Is the security a weekly liquid asset? (u) Is the security an illiquid security? (v) Explanatory notes. Disclose any other information that may be material to other disclosures related to the portfolio security. (If none, leave blank.)

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00248 Fmt 4701 Sfmt 4725 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.015 Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 / Rules and Regulations 47983

* * * * * Guarantor For purposes of Question taking into account the maturity 63, the provider of any guarantee. Glossary of Terms shortening provisions contained in * * * * * paragraph (i) of rule 2a–7, but * * * * * Illiquid security Has the meaning determined without reference to the Conditional demand feature Has the provided in rule 2a–7. exceptions in paragraph (i) of rule 2a– meaning provided in rule 2a–7. * * * * * 7 regarding interest rate readjustments. * * * * * Credit rating agency Any nationally Maturity The maturity of the relevant WAM Weighted average portfolio recognized statistical rating asset, determined without reference to maturity of a liquidity fund calculated organizations, as that term is defined in the maturity shortening provisions taking into account the maturity section 3(a)(62) of the Securities contained in paragraph (i) of rule 2a–7 shortening provisions contained in Exchange Act of 1934. regarding interest rate readjustments. paragraph (i) of rule 2a–7. * * * * * * * * * * By the Commission. Risk limiting conditions The Demand feature Has the meaning Dated: July 23, 2014. provided in rule 2a–7. conditions specified in paragraph (d) of Kevin M. O’Neill, * * * * * rule 2a–7. Guarantee For purposes of Question * * * * * Deputy Secretary. 63, has the meaning provided in WAL Weighted average portfolio [FR Doc. 2014–17747 Filed 8–13–14; 8:45 a.m.] paragraph (a)(16)(i) of rule 2a–7. maturity of a liquidity fund calculated BILLING CODE 8011–01–C

VerDate Mar<15>2010 17:22 Aug 13, 2014 Jkt 232001 PO 00000 Frm 00249 Fmt 4701 Sfmt 9990 E:\FR\FM\14AUR2.SGM 14AUR2 tkelley on DSK3SPTVN1PROD with RULES2 ER14AU14.016