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SEC Amendments to Money Market Fund Rules: Portfolio Diversification and Stress Testing (Abstract)

One July 23, 2014, the SEC issued final amendments impacting money market funds and money market type funds.  This is Part III of a Four-Part Blog on the 869-page final rules delineated in the following compliance areas: (i.a) changes the net asset value per share (“NAV”) from fixed-rate to floating-rate for institutional prime money market funds; (i.b) authorizes money market funds to suspend redemptions or impose liquidity fees during heavy redemption periods, with the exception of government money market funds.  These rule changes are “designed to address money market funds’ susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds.”  Also under these final rules, the SEC adopted;” (ii) additional disclosures, including new Form  N-CR and Form N-MFP; (iii) portfolio diversification and stress testing of money market funds holdings; (iv) additional disclosure on Form PF of money market type funds held by private equity firms.

The current rule 2a-7 requires a money market fund’s portfolio to be diversified, both as to the issuers of the securities it acquires and providers of guarantees and demand features related to those securities.  Money market funds must limit their investments in the securities of any one issuer of a first tier security (other than government securities) to no more than 5% of fund assets.  They must also limit their investments in securities subject to a demand feature or a guarantee to no more than 10% of fund assets from any one provider, except that the rule provides a so-called “twenty-five percent basket,” under which as much as 25% of the value of securities held in a fund’s portfolio may be subject to guarantees or demand features from a single institution.  However, the SEC’s concern that the diversification requirements in rule 2a-7 today may not appropriately limit money market fund risk exposures has resulted in the following amendments to rule 2a-7:

 

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SEC Amendments to Money Market Fund Rules: Portfolio Diversification and Stress Testing

One July 23, 2014, the SEC issued final amendments impacting money market funds and money market type funds.  This is Part III of a Four-Part Blog on the 869-page final rules delineated…

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SEC Amendments to Money Market Fund Rules: Additional Disclosures on Websites, SAI, Form N-MFP and New Form N-CR (Abstract)

One July 23, 2014, the SEC issued final amendments impacting money market funds and money market type funds.  This is Part II of a Four-Part Blog on the 869-page final rules delineated in the following compliance areas: (i.a) changes the net asset value per share (“NAV”) from fixed-rate to floating-rate for institutional prime money market funds; (i.b) authorizes money market funds to suspend redemptions or impose liquidity fees during heavy redemption periods, with the exception of government money market funds.  These rule changes are “designed to address money market funds’ susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds.”  Also under these final rules, the SEC adopted;” (ii) additional disclosures, including new Form  N-CR and Form N-MFP; (iii) portfolio diversification and stress testing of money market funds holdings; (iv) additional disclosure on Form PF of money market type funds held by private equity firms.

Disclosure on Statutory Prospectus

The final rules requires money market funds that maintain a stable NAV to include the following disclosure statement in their advertisements or other sales materials and in the summary section of the statutory prospectus:

You could lose money by investing in the Fund.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.  The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.  An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

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

You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

All money market funds would have to disclose current and historical events of sponsor support.  The SEC stated that they “believe that these disclosure requirements would clarify, to current and prospective money market fund investors as well as to the Commission, the frequency, nature, and amount of financial support provided by money market fund sponsors.”  They continued that “[c]urrently, when sponsor support is provided during circumstances in which a money market fund experiences stress but does not “break the buck,” and sponsor support is not immediately disclosed, investors may be unaware that their money market fund has come under stress.”

The adopting release clarified the instructions to Item 3 of Form N-1A (“Risk/Return Summary: Fee Table”) that the term “redemption fee,” for purposes of the prospectus fee table, does not include a liquidity fee that may be imposed in accordance with rule 2a-7

 

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