SEC Approves Money Market Fund Reform
August 14, 2014
On August 14, the Securities and Exchange Commission (SEC) published final rules fundamentally altering the way money market funds (MMF) operate. The reform package will institute a floating net asset value (NAV), however, government and retail money market funds will be allowed to continue using the amortized cost and/or penny-rounding method of pricing.
The SEC explains this part of the new regulations as follows:
Under the floating NAV amendments, institutional prime money market funds would be required to transact at a floating NAV, instead of at a $1.00 stable share price. The floating NAV amendments are designed to reduce the first mover advantage inherent in a stable NAV fund, by dis-incentivizing redemption activity that can result from investors attempting to exploit the possibility of redeeming shares at the stable share price even if the portfolio has suffered a loss. They are also intended to reduce the chance of unfair investor dilution and make it more transparent to certain of the impacted investors that they, and not the fund sponsors or the federal government, bear the risk of loss.
Institutional prime money market funds would no longer be able to use amortized cost to value their portfolio securities. Daily share prices of these money market funds would fluctuate along with changes in the market-based value of their portfolio securities.
Exception for Government and Retail Money Market Funds
During the comment period, NACUBO responded to the 2013 proposal echoing the concerns of state and local governments and others that the proposal put forth by the SEC that would force institutional prime and tax-exempt municipal money market mutual funds to abandon the stable $1.00 NAV and "float" their per-share price would jeopardize cash management and potentially raise the cost of capital for our members.
For many colleges and universities, MMFs are a preferred vehicle for cash management as well as for short-term financing options. Many nonprofit institutions are required, by law or by investment policy, to invest cash only in products offering a stable value. NACUBO urged the SEC to reject the transition to a floating NAV for municipal MMFs. The SEC recognized those concerns stating:
Government and Retail Money Market Funds—Government and retail money market funds would be allowed to continue using the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price. A government money market fund would be defined as any money market fund that invests 99.5 percent (formerly 80 percent) or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash. A retail money market fund would be defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons. A municipal (or tax-exempt) fund would be required to transact at a floating NAV unless the fund meets the definition of a retail money market fund, in which case it would be allowed to use the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.
In announcing the reforms, SEC Chair Mary Jo White stated, "Today's reforms will fundamentally change the way that most money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis."
Senior Fellow, Finance and Campus Management
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