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Thursday, July 24, 2014

SEC Approves Floating NAV, Fees, Restrictions for MMFs

The SEC approved a plan to increase regulation of money market mutual funds. The 3-2 vote adopted both approaches outlined in the SEC’s proposal last summer: a floating net asset value and redemption fees and limitations for certain funds -- plus an enhanced disclosure regime. ABA has opposed this plan, arguing that enhanced disclosures alone would be sufficient to protect MMFs and that the new rules will limit the usefulness of the funds.

Institutional prime MMFs, including institutional municipal funds, will be required to have a floating net asset value, instead of the current practice of fixing the NAV at $1 per share. Government and retail MMFs would be exempt from this requirement. For all prime funds, should weekly liquid assets fall below 30% of total assets, MMF boards would be allowed to impose up to a 2% liquidity fee on redemptions and stop redemptions for up to 10 days. The SEC also added new daily online disclosures, as well as additional reporting and diversification requirements.

“We’re disappointed that the final rule gives insufficient weight to the need for liquidity and stability of principal that drives this market,” said ABA VP Cris Naser. “Bank fiduciaries and corporate trustees have long invested client assets in money market mutual funds. Unfortunately, legal, regulatory or contractual considerations may now limit their ability to do so.”

The floating NAV and new fees and gates take effect two years after publication in the Federal Register, while the new reporting requirements take effect 9-18 months after publication. Meanwhile, the IRS proposed regulations to adjust MMF investors’ tax reporting requirements under a floating NAV.

Read the final rule.
Read the IRS proposal.

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