By Amy Leisinger, J.D.
The staff of the SEC’s Division of Investment Management has issued responses to frequently asked questions related to the money market fund reforms adopted in July 2014. In addition to providing specific guidance concerning reporting and disclosure obligations, compliance dates, and valuation practices, the FAQs address the reform package’s new fund classifications and practices surrounding the redemption fee and gate requirements. The staff plans to amend its positions going forward to assist money market funds in their compliance efforts as novel issues arise.
Disclosures. Among other comments on specific form and item requirements, the staff advised that a capital contribution made by the fund’s investment adviser to a fund to avoid fund dilution would not need to be reported on Form N-CR as financial support, provided that it occurs as part of a one-time reorganization intended to bring a fund into compliance with the money market fund reforms. The staff also stated that a retail money market fund may disclose in the summary section of its statutory prospectus that it limits investments to accounts beneficially owned by natural persons. In addition, the staff explained the methods money market funds should use to update their registration statements to reflect the disclosure requirements of the reforms, highlighting the distinctions between post-effective amendments or prospectus supplements. These updates are particularly important given the materiality and breadth of disclosure necessary in transitioning to a floating NAV and the new ability to impose fees and gates, according to the staff.
As to website disclosures, the staff noted that tax-exempt funds are not required to maintain daily liquid assets and that floating NAV funds using existing guidance allowing them to value certain portfolio securities that mature in 60 days or less at amortized cost are subject to certain reporting obligations. Floating NAV funds must also refrain from stating in advertisements or prospectus materials that they will seek to maintain stable NAV by limiting portfolio securities to securities with a remaining maturity of 60 days or less and valuing those securities using amortized cost, the staff explained, as these types of contradictory statements could be confusing or misleading to investors. The staff directed funds to the SEC’s valuation guidance FAQs for further information on the amortized cost method.
Retail money market funds. The staff also noted that, for the purpose of qualifying as a retail money market fund, a fund may not determine beneficial ownership using the pecuniary-interest test, as a decision to redeem securities is an exercise of investment power and the purpose behind the retail money market fund exemption would not be served if beneficial ownership could be determined based solely on entitlement to funds. The staff also explained that the existence of certain accounts used in conjunction with a defined contribution plan would not disqualify the plan from investing in a retail money market fund, so long as the plan is owned by natural persons with voting and investment power. The staff also stated that a non-natural person affiliate may beneficially own shares of a retail money market fund provided that the investment is intended to facilitate fund operations. Further, according to the staff, a master fund in a master-feeder money market fund structure can qualify as a retail money market fund if all of its feeder funds are qualified retail money market funds.
Fees and gates. With regard to the new redemption fee and gate requirements, the staff explained that, if a shareholder of a money market fund submits a redemption order while a gate is in effect, the shareholder submits a new order after the gate is lifted and that a fund may choose procedures for how it handles unprocessed purchase orders that it has received prior to notification of the implementation of a liquidity fee or gate. The staff also stated that it would not object if a money market fund’s board chooses to honor written redemption orders or pay redemptions without the liquidity fee if the fund can verify that the order was submitted before the fund suspended redemptions or imposed a liquidity fee. While it may not be practical to immediately affect a fee or gate, a fund should work to implement them quickly after the board’s determination to impose them, the staff advised.