One June 5, 2013, the SEC proposed amendments impacting money market funds and money market type funds. This is Part II of a Four-Part Blog on the 671-page proposal delineated in the following compliance areas: (ia) changes the net asset value per share (“NAV”) from fixed-rate to floating-rate for certain money market funds; (ib) authorizes money market funds to suspend redemptions or impose liquidity fees during heavy redemption periods. These proposed 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.” Under this proposal, the SEC continued that they could adopt either alternative by itself or a combination of the two alternatives.;” (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.
Disclose on SAI the Investment Adviser Financial Support
The SEC proposed amendments that would require enhanced SAI and website disclosure on: (i) any type of financial support provided to a money market fund by the fund’s sponsor or an affiliated person of the fund; (ii) the fund’s daily and weekly liquidity levels; and (iii) the fund’s daily current NAV per share, rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price (e.g., $10.000 or $100.00 per share).
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.”
Specifically, Form N-1A would require money market funds to provide SAI disclosure regarding historical instances in which the fund has received financial support from a sponsor or fund affiliate. The proposed amendments would require each money market fund to disclose any occasion during the last ten years on which an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, provided any form of financial support to the fund. With respect to each such occasion, funds would describe the nature of support, the amount of support, the date the support was provided, the security supported and its value on the date the support was initiated (if applicable), the reason for the support, the term of support (if applicable), and any contractual restrictions relating to the support. “Financial support” is defined as, but not be limited to (i) any capital contribution, (ii) purchase of a security from the fund in reliance on rule 17a-9, (iii) purchase of any defaulted or devalued security at par, (iv) purchase of fund shares, (v) execution of a letter of credit or letter of indemnity, (vi) capital support agreement (whether or not the fund ultimately received support), (vii) performance guarantee, or (viii) any other similar action to increase the value of the fund’s portfolio or otherwise support the fund during times of stress. In addition, if the fund has participated in a merger with another investment company during the last ten years, the fund must additionally provide the required disclosure with respect to the other investment company.
New Disclosures on Websites and Form N-MFP
Proposed amendments to rule 2a-7 would require money market funds to disclose prominently on their websites the percentage of the fund’s total assets that are invested in daily and weekly liquid assets, as well as the fund’s net inflows or outflows, as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its investments in daily liquid assets and weekly liquid assets, as well as the fund’s net inflows or outflows, for the previous 6 months, and would require the fund to update this historical information each business day, as of the end of the preceding business day. These amendments would complement the proposed requirement, as discussed elsewhere in the proposal, for money market funds to provide on their monthly reports on Form N-MFP the percentage of total assets invested in daily liquid assets and weekly liquid assets broken out on a weekly basis. The daily website disclosure of liquid asset levels would help investors estimate, in near-real time, the likelihood that a fund may be able to satisfy redemptions by using internal cash sources (rather than by selling portfolio securities) in times of market turbulence, or, if our liquidity fees and gates proposal is adopted, whether a fund may approach or exceed a trigger for the potential imposition of a liquidity fee or gate. In addition, each money market fund would disclose daily, prominently on its website, the fund’s current NAV per share, rounded to the fourth decimal place in the case of a fund with a $1.0000 share price of an equivalent level of accuracy for funds with a different share price (the fund’s “current NAV”) as of the end of the previous business day. The fund would maintain a schedule, chart, graph, or other depiction on its website showing historical information about its daily current NAV per share for the previous 6 months, and would require the fund to update this historical information each business day as of the end of the preceding business day.
New Form N-CR
A new rule was proposed that would require money market funds to file new Form N-CR with the SEC when certain events occur. Funds would file Form N-CR in instances of portfolio security default, sponsor support of funds, and other similar significant events. The SEC stated that “this information would enable the Commission to enhance its oversight of money market funds and its ability to respond to market events. It would also provide investors with better and more timely disclosure of potentially important events.”
No matter what alternative is adopted, it was proposed that a money market fund file a report on Form N-CR if the issuer of one or more of the fund’s portfolio securities, or the issuer of a demand feature or guarantee, experiences a default or event of insolvency (other than an immaterial default unrelated to the financial condition of the issuer), and immediately before the default or event of insolvency the portfolio security or securities (or the securities subject to the demand feature or guarantee) accounted for at least 1/2 of 1% of the fund’s total assets. Although rule 2a-7 currently requires money market funds to report defaults or events of insolvency to the SEC by email, the SEC indicated that reporting these events on Form N-CR would provide important transparency to fund shareholders, and also would provide information more uniformly and efficiently to the SEC. Funds would disclose certain information about these reportable events, including the nature and financial effect of the default or event of insolvency, as well as the security or securities affected. The form would be filed within one business day after the default or event of insolvency occurs.
Additionally, under each proposed reform alternative, all money market funds would be required to report all instances of sponsor support on proposed Form N-CR. In addition to the new requirements on the SAI, Form N-CR would require funds receiving such financial support to disclose certain information about the support, including the nature, amount, and terms of the support, as well as the relationship between the person providing the support and the fund. The form would be filed within one business day after a fund receives such financial support.
In addition, funds that are permitted to transact at a stable price would file a report on proposed Form N-CR on the first business day after any day on which the fund’s current NAV per share (rounded to the fourth decimal place in the case of a fund with a $1.0000 share price, or an equivalent level of accuracy for funds with a different share price) deviates downward significantly from its intended stable price (generally, $1.00). Specifically, if the floating NAV alternative is adopted, only government or retail money market funds would file a report on Form N-CR if the fund’s current NAV per share deviates downward from its intended stable price by more than 1/4 of 1 percent.
If the liquidity fees and gates alternative is adopted, all money market funds would file a report on Form N-CR if the fund’s current NAV per share deviates downward from its intended stable price by more than 1/4 of 1 percent. The form would be filed within one business day following the reportable movement of the fund’s current NAV. Also, report on Form N-CR if fund reaches the threshold triggering board consideration of a liquidity fee or redemption gate, if the proposed liquidity fees and gates alternative are adopted. Include a description of the fund’s response (such as whether and why a fee was not imposed, as rule 2a-7 requires by default, or whether any why a gate was imposed). The SEC stated that “the factors specified in the required disclosure are necessary for investors and the Commission to understand the circumstances surrounding the fund’s weekly liquid assets falling below 15% of total fund assets, or the imposition or removal of a liquidity fee or gate. This in turn could affect the Commission’s oversight of the fund and regulation of money market funds generally, and could influence investors’ decisions to purchase shares of the fund or remain invested in the fund. Disclosure of the board’s analysis regarding whether to impose a liquidity fee or gate could provide investors and the Commission with a greater understanding of the events affecting and potentially causing stress to the fund, and could provide insight into the manner in which the board handles periods of fund stress.”
Funds would file Form N-CR when the board lifts the fee or resumes redemptions of fund shares. Funds would file the initial report on Form N-CR on the first business day following any occasion on which the fund’s weekly liquid assets fall below 15% of its total assets, the fund’s board imposes (or removes) a liquidity fee, or the fund’s board temporarily suspends (or resumes) the fund’s redemptions, which report would provide the date of the triggering event(s). Funds would need to file an amendment to the initial report on Form N-CR by the fourth business day following any of these triggering events, which amendment would provide additional detailed information about the event(s) (namely, a description of the facts and circumstances leading to the triggering event, as well as a discussion of the fund board’s analysis supporting the decision with respect to the imposition of fees or gates).
Amendments to Form N-MFP
There were several additional proposed amendments to Form N-MFP. Currently, each money market fund must file information on Form N-MFP electronically within five business days after the end of each month and that information is made publicly available 60 days after the end of the month for which it is filed. It was proposed, that regardless of the alternative proposal adopted to make Form N-MFP publicly available immediately upon filing. Also, to provide flexibility, unless otherwise specified, a fund may report information on Form N-MFP as of the last business day or any later calendar day of the month.
First, report on Form N-MFP the IOSCO established security Legal Entity Identifier along with the security CUSIP.
Second, for SEC industry evaluation purposes, money market funds would report whether a security is categorized as a level 1, level 2, or level 3 measurements in the fair value hierarchy under U.S. Generally Accepted Accounting Principles. Level 1 measurements include quoted prices for identical securities in an active market (e.g., active exchange-traded equity securities; U.S. government and agency securities). Level 2 measurements include: (i) quoted prices for similar securities in active markets; (ii) quoted prices for identical or similar securities in non-active markets; and (iii) pricing models whose inputs are observable or derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the security. Securities categorized as level 3 are those whose value cannot be determined by using observable measures (such as market quotes and prices of comparable instruments) and often involve estimates based on certain assumptions.
Finally, money market funds would report, on a weekly basis, the amount of cash they hold, the fund’s Daily Liquid Assets and Weekly Liquid Assets, and whether each security is considered a Daily Liquid Asset or Weekly Liquid Asset, and the weekly gross subscriptions (including dividend reinvestments) and weekly gross redemptions for each share class, once each week during the month reported. Money market funds would continue to file reports on Form N-MFP once each month, but certain information (including disclosure of Daily Weekly Liquid Assets and shareholder flow) would be reported weekly within the Form.