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MARKET PERSPECTIVES
August 2014
Nancy Prior
Upon implementation, the new rules will create new definitions for government funds and retail
funds, and require institutional prime (general purpose) and institutional municipal money
market mutual funds to price and transact at a floating net asset value (NAV). During periods
of extraordinary market stress, the new rules permit some money market mutual funds to charge
shareholders liquidity fees, payable to the fund upon redemption, as well as provide for redemption
gates that would halt all withdrawals (see Exhibit 1, below). Government and U.S. Treasury money
market mutual funds will not be subject to any of the new structural changes.1 The new rules are
Kevin Meagher
Senior Vice President,
Deputy General Counsel
Liquidity Fee
Redemption Gate
U.S. Treasury
Stable
No
No
Government
Stable
No
No
Retail Municipal/Tax-Exempt
Stable
Yes
Yes
Stable
Yes
Yes
Institutional Municipal/Tax-Exempt
Floating
Yes
Yes
Floating
Yes
Yes
Final Rule
Implementation
Date
Redemption Gate
Treasury
Government
Municipal/Tax
Exempt
Tax-exempt securities issued by state and local governments and nonprofit entities.
Prime/General
Purpose
The study laid the foundation for a June 2013 proposal for
structural reform, as well as the recently announced changes. The
SEC received more than 1,400 comment letters in response to
the proposal. Ultimately, the recently adopted structural changes
incorporated new definitions and tools designed to further
enhance the high degree of safety and liquidity in money market
mutual funds.
New definitions
Government fund
The SEC created a new definition for government money market
mutual funds and exempted those funds from structural reform.
Government money market mutual funds will be defined as those
that invest 99.50% of their total assets in cash, government
securities, or repurchase agreements collateralized by government securities. U.S. Treasury and U.S. Treasury Only funds are
expected to meet this definition.
Government and U.S. Treasury money market mutual funds will
be eligible to price and transact at a stable $1.00 NAV, and will
not be subject to liquidity fees or redemption gates.
Retail fund
The rules also created a new definition for retail funds, which
apply to prime and municipal money market mutual funds.
A retail fund will be defined as a money market mutual fund
that has policies and procedures reasonably designed to
limit beneficial owners to natural persons, meaning individual
investors, or human beings. The action was based on the SECs
conclusion that, historically, unlike institutional investors, retail
investors have been less likely to make large redemptions from
money market mutual funds during times of market stress. The
SEC definition differs from how the terms are commonly used in
todays marketplace. Currently, fund advisors self-classify funds
as either retail or institutional based on varying criteria.
Endowments
Ordinary trusts
Any prime or municipal money market mutual fund that does not
meet the retail fund definition will be considered an institutional
fund. Natural persons will, however, be able to purchase institutional funds. Examples of both retail and institutional accounts
are listed in Exhibit 3 (see page 2).
The new SEC rules will require money market mutual funds to provide
additional disclosure. By July 2015, each fund must disclose daily on
its website: the funds daily market NAV, reported out to four decimal
places ($1.0000); daily and weekly liquid assets as a percentage of
the funds total assets; and the funds net flows from the previous day.
Structural changes
Stable versus floating net asset values
While retail prime and retail municipal money market mutual
funds will be eligible to use amortized cost accounting, and to
price and transact at a stable $1.00 NAV, the SECs new rules
require all institutional prime and institutional municipal money
market mutual funds to have a floating NAV. Floating NAV money
market mutual funds will not be able to use amortized cost
accounting, except to the extent it is available to all mutual funds.
Instead, institutional funds will price and transact their shares to
four decimal places, a practice known as basis point rounding.
Basis point rounding may cause a shareholder to experience a
gain or loss if the per-share value of the fund changes by 1/100th
of a penny. For example, if a shareholder owned 10,000 shares
priced at $1.0000, a 1 basis point change in a floating NAV fund
would result in a gain or loss of $1.00.
Floating NAV tax, accounting, and disclosure matters
Concerns were raised during the SECs public comment period
regarding the tax, accounting, and same-day settlement issues
the new rules would create. For example, under existing tax law,
any gains or losses in a floating NAV fund could create taxable
events for shareholders. The U.S. Department of the Treasury
(Treasury) and the Internal Revenue Service (IRS) provided guidance that floating NAV shareholders will be able to report a single
net number for the gains and losses over the course of a year,
rather than reporting individual transactions. This will significantly reduce tax recordkeeping for shareholders. Additionally,
the Treasury and the IRS made it clear that sales of floating NAV
EXHIBIT 4: Types of money market mutual fund assets that satisfy SEC requirements for daily and weekly liquid assets.
Daily Liquid Assets
Cash
the funds best interest. The board also will have the authority to
impose a lower fee or even no fee at all if, in its opinion, that is in
the best interests of the fund. The fee would be lifted when weekly
liquid assets return to 30% or when the funds board determines
that a liquidity fee is no longer in the best interests of the fund.
For more information about the SECs final rules, please read the
Fidelity Investments Money Market Reform Communication Series
to include:
Authors
Nancy Prior
Kevin Meagher
Fidelity Thought Leadership Vice President and Senior Investment Writer Maggie Stenman provided editorial direction.
4
A wash sale occurs when a security is sold at a loss and within 30 days
prior to or after that, a substantially identical stock or security, or a
contract or option is purchased by the same individual, the individuals
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