Money Market Fund Reform; Amendments to Form PF

1Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act, including rule 2a–7, will be to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270]. SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 230, 239, 270, 274 and 279 [Release No. 33–9408, IA–3616; IC–30551; File No. S7–03–13] RIN 3235–AK61 Money Market Fund Reform; Amendments to Form PF AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is proposing two alternatives for amending rules that govern money market mutual funds (or ‘‘money market funds’’) under the Investment Company Act of 1940. The two alternatives 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. The first alternative proposal would require money market funds to sell and redeem shares based on the current market￾based value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., $1.0000), i.e., transact at a ‘‘floating’’ net asset value per share (‘‘NAV’’). The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund’s board determines that it is not in the best interest of the fund) if a fund’s liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to ‘‘gate’’ the fund under the same circumstances. Under this proposal, we could adopt either alternative by itself or a combination of the two alternatives. The SEC also is proposing additional amendments that are designed to make money market funds more resilient by increasing the diversification of their portfolios, enhancing their stress testing, and increasing transparency by requiring money market funds to provide additional information to the SEC and to investors. The proposal also includes amendments requiring investment advisers to certain unregistered liquidity funds, which can resemble money market funds, to provide additional information about those funds to the SEC. DATES: Comments should be received on or before September 17, 2013. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

• Use the Commission’s Internet
  comment form (http://www.sec.gov/ rules/proposed.shtml); or
• Send an email to rule￾comments@sec.gov. Please include File
  Number S7–03–13 on the subject line; or
• Use the Federal eRulemaking Portal
  (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments
• Send paper comments in triplicate
  to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–03–13. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/ proposed.shtml). Comments are also available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT:
  Adam Bolter, Senior Counsel; Brian McLaughlin Johnson, Senior Counsel; Kay-Mario Vobis, Senior Counsel; Amanda Hollander Wagner, Senior Counsel; Thoreau A. Bartmann, Branch Chief; or Sarah G. ten Siethoff, Senior Special Counsel, Investment Company Rulemaking Office, at (202) 551–6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment amendments to rules 419 [17 CFR 230.419] and 482 [17 CFR 230.482] under the Securities Act of 1933 [15 U.S.C. 77a—z–3] (‘‘Securities Act’’), rules 2a–7 [17 CFR 270.2a–7], 12d3–1 [17 CFR 270.12d3–1], 18f–3 [17 CFR 270.18f–3], 22e–3 [17 CFR 270.22e–3], 30b1–7 [17 CFR 270.30b1–7], 31a–1 [17 CFR 270.31a–1], and new rule 30b1–8 [17 CFR 270.30b1–8] under the Investment Company Act of 1940 [15 U.S.C. 80a] (‘‘Investment Company Act’’ or ‘‘Act’’), Form N–1A under the Investment Company Act and the Securities Act, Form N–MFP under the Investment Company Act, and section 3 of Form PF under the Investment Advisers Act [15 U.S.C. 80b], and new Form N–CR under the Investment Company Act.1
  Table of Contents
  I. Introduction
  II. Background
  A. Role of Money Market Funds B. Economics of Money Market Funds

1. Incentives Created by Money Market
   Funds’ Valuation and Pricing Methods
2. Incentives Created by Money Market
   Funds’ Liquidity Needs
3. Incentives Created by Imperfect
   Transparency, Including Sponsor Support
4. Incentives Created by Money Market
   Funds Investors’ Desire To Avoid Loss
5. Effects on Other Money Market Funds,
   Investors, and the Short-Term Financing Markets
   C. The 2007–2008 Financial Crisis
   D. Examination of Money Market Fund Regulation Since the Financial Crisis
6. The 2010 Amendments
7. The Eurozone Debt Crisis and U.S. Debt
   Ceiling Impasse of 2011
8. Our Continuing Consideration of the
   Need for Additional Reforms
   III. Discussion
   A. Floating Net Asset Value
9. Certain Considerations Relating to the
   Floating NAV Proposal
10. Money Market Fund Pricing
11. Exemption to the Floating NAV
    Requirement for Government Money Market Funds
12. Exemption to the Floating NAV
    Requirement for Retail Money Market Funds
13. Effect on Other Money Market Fund
    Exemptions
14. Tax and Accounting Implications of
    Floating NAV Money Market Funds
15. Operational Implications of Floating
    NAV Money Market Funds
16. Disclosure Regarding Floating NAV
17. Transition
    B. Standby Liquidity Fees and Gates
18. Analysis of Certain Effects of Liquidity
    Fees and Gates
19. Terms of the Liquidity Fees and Gates
20. Exemptions To Permit Liquidity Fees
    and Gates
21. Amendments to Rule 22e–3
22. Exemptions From the Liquidity Fees and
    Gates Requirement
23. Operational Considerations Relating to
    Liquidity Fees and Gates
24. Tax Implications of Liquidity Fees
25. Disclosure Regarding Liquidity Fees and
    Gates

2Money market funds are also sometimes called ‘‘money market mutual funds’’ or ‘‘money funds.’’ 3See generally Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds), Investment Company Act Release No. 13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)] (‘‘1983 Adopting Release’’). Most money market funds seek to maintain a stable net asset value per share of $1.00, but a few seek to maintain a stable net asset value per share of a different amount, e.g., $10.00. For convenience, throughout this Release, the discussion will simply refer to the stable net asset value of $1.00 per share. 4Based on Form N–MFP data. SEC regulations require that money market funds report certain portfolio information on a monthly basis to the SEC on Form N–MFP. See rule 30b1–7. 5Throughout this Release, we generally use the term ‘‘stable share price’’ to refer to the stable share price that money market funds seek to maintain and compute for purposes of distribution, redemption and repurchases of fund shares. 6Money market funds use a combination of the two methods so that, under normal circumstances, they can use the penny rounding method to maintain a price of $1.00 per share without pricing to the third decimal point like other mutual funds, and the amortized cost method so that they need not strike a daily market-based NAV. See infra text accompanying nn.163, 177. 7See rule 2a–7(a)(2). See also infra note 10. 8See rule 2a–7(a)(20). 9When the Commission initially established its regulatory framework allowing money market funds to maintain a stable share price through use of the amortized cost method of valuation and/or the penny rounding method of pricing (so long as they abided by certain risk limiting conditions), it did so understanding the benefits that stable value money market funds provided as a cash management vehicle, particularly for smaller investors, and focusing on minimizing inappropriate dilution of assets and returns for shareholders. See Proceedings before the Securities and Exchange Commission in the Matter of InterCapital Liquid Asset Fund, Inc. et al., 3–5431, Dec. 28, 1978, at 1533 (Statement of Martin Lybecker, Division of Investment Management at the Securities and Exchange Commission) (stating that Commission staff had learned over the course of the hearings the strong preference of money market fund investors to have a stable share price and that with the right risk limiting conditions the Commission could limit the likelihood of a deviation from that stable value, addressing Commission concerns about dilution); 1983 Adopting Release, supra note 3, at nn.42–43 and accompanying text (‘‘[T]he provisions of the rule impose obligations on the board of directors to assess the fairness of the valuation or pricing method and take appropriate steps to ensure that shareholders always receive their proportionate interest in the money market fund.’’). At that time, the
Commission was persuaded that deviations to an extent that would cause material dilution Continued
9. Alternative Redemption Restrictions
C. Potential Combination of Standby
Liquidity Fees and Gates and Floating Net Asset Value

1. Potential Benefits of a Combination
2. Potential Drawbacks of a Combination
3. Effect of Combination
4. Operational Issues
   D. Certain Alternatives Considered
5. Alternatives in the FSOC Proposed
   Recommendations
6. Alternatives in the PWG Report
   E. Macroeconomic Effects of the Proposals
7. Effect on Current Investment in Money
   Market Funds
8. Effect on Current Issuers and the Short￾Term Financing Markets
   F. Amendments to Disclosure Requirements
9. Financial Support Provided to Money
   Market Funds
10. Daily Disclosure of Daily Liquid Assets
    and Weekly Liquid Assets
11. Daily Web Site Disclosure of Current
    NAV per Share
12. Disclosure of Portfolio Holdings
13. Daily Calculation of Current NAV per
    Share Under the Liquidity Fees and Gates Proposal
14. Money Market Fund Confirmation
    Statements
    G. New Form N–CR
15. Proposed Disclosure Requirements
    Under Both Reform Alternatives
16. Additional Proposed Disclosure
    Requirements Under Liquidity Fees and Gates Alternative
17. Economic Analysis
    H. Amendments to Form N–MFP Reporting Requirements
18. Amendments Related to Rule 2a–7
    Reforms
19. New Reporting Requirements
20. Clarifying Amendments
21. Public Availability of Information
22. Request for Comment on Frequency of
    Filing
23. Operational Implications
    I. Amendments to Form PF Reporting
    Requirements
24. Overview of Proposed Amendments to
    Form PF
25. Utility of New Information, Including
    Benefits, Costs, and Economic Implications J. Diversification
26. Treatment of Certain Affiliates for
    Purposes of Rule 2a–7’s Five Percent Issuer Diversification Requirement
27. Asset-Backed Securities
28. The Twenty-Five Percent Basket
29. Additional Diversification Alternatives
    Considered
    K. Issuer Transparency
    L. Stress Testing
30. Stress Testing Under the Floating NAV
    Alternative
31. Stress Testing Under the Liquidity Fees
    and Gates Alternative
32. Economic Analysis
33. Combined Approach
    M. Clarifying Amendments
34. Definitions of Daily Liquid Assets and
    Weekly Liquid Assets
35. Definition of Demand Feature
36. Short-Term Floating Rate Securities
37. Second Tier Securities
    N. Proposed Compliance Date
38. Compliance Period for Amendments
    Related to Floating NAV
39. Compliance Period for Amendments
    Related to Liquidity Fees and Gates
40. Compliance Period for Other
    Amendments to Money Market Fund Regulation
41. Request for Comment
    O. Request for Comment and Data
    IV. Paperwork Reduction Act Analysis
    A. Alternative 1: Floating Net Asset Value
42. Rule 2a–7
43. Rule 22e–3
44. Rule 30b1–7 and Form N–MFP
45. Rule 30b1–8 and Form N–CR
46. Rule 34b–1(a)
47. Rule 482
48. Form N–1A
49. Advisers Act Rule 204(b)–1 and Form PF
    B. Alternative 2: Standby Liquidity Fees and Gates
50. Rule 2a–7
51. Rule 22e–3
52. Rule 30b1–7 and Form N–MFP
53. Rule 30b1–8 and Form N–CR
54. Rule 34b–1(a)
55. Rule 482
56. Form N–1A
57. Advisers Act Rule 204(b)–1 and Form PF
    C. Request for Comments
    V. Regulatory Flexibility Act Certification
    VI. Statutory Authority
    Text of Proposed Rules and Forms
    I. Introduction
    Money market funds are a type of mutual fund registered under the Investment Company Act and regulated under rule 2a–7 under the Act.2 Money market funds pay dividends that reflect prevailing short-term interest rates, generally are redeemable on demand, and, unlike other investment companies, seek to maintain a stable net asset value per share (‘‘NAV’’), typically $1.00.3 This combination of principal stability, liquidity, and payment of short-term yields has made money market funds popular cash management vehicles for both retail and institutional investors. As of February 28, 2013, there were approximately 586 money market funds registered with the Commission, and these funds collectively held over $2.9 trillion of assets.4 Money market funds seek to maintain a stable share price by limiting their investments to short-term, high-quality debt securities that fluctuate very little in value under normal market conditions.5 They also rely on exemptions provided in rule 2a–7 that permit them to value their portfolio securities using the ‘‘amortized cost’’ method of valuation and to use the ‘‘penny-rounding’’ method of pricing.6 Under the amortized cost method, a money market fund’s portfolio securities generally are valued at cost plus any amortization of premium or accumulation of discount, rather than at their value based on current market factors.7 The penny rounding method of pricing permits a money market fund when pricing its shares to round the fund’s net asset value to the nearest one percent (i.e., the nearest penny).8 Together, these valuation and pricing techniques create a ‘‘rounding convention’’ that permits a money market fund to sell and redeem shares at a stable share price without regard to small variations in the value of the securities that comprise its portfolio.9

generally would not occur given the risk limiting conditions of the rule. See id., at nn.41–42 and accompanying text (noting that testimony from the original money market fund exemptive order hearings alleged that the risk limiting conditions, short of extraordinarily adverse conditions in the market, should ensure that a properly managed money market fund should be able to maintain a stable price per share and that rule 2a–7 is based on that representation). 10For a mutual fund not regulated under rule 2a– 7, the Investment Company Act and applicable rules generally require that it price its securities at the current net asset value per share by valuing portfolio instruments at market value or, if market quotations are not readily available, at fair value as determined in good faith by the fund’s board of directors. See section 2(a)(41)(B) of the Act and rules 2a–4 and 22c–1. The Commission, however, has stated that it would not object if a mutual fund board of directors determines, in good faith, that the value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise. See Valuation of Debt Instruments by Money Market Funds and Certain Other Open-End Investment Companies, Investment Company Act Release No. 9786 (May 31, 1977) [42 FR 28999 (June 7, 1977)] (‘‘1977 Valuation Release’’). In this regard, the Commission has stated that the ‘‘fair value of securities with remaining maturities of 60 days or less may not always be accurately reflected through the use of amortized cost valuation, due to an impairment of the credit worthiness of an issuer, or other factors. In such situations, it would appear to be incumbent upon the directors of a fund to recognize such factors and take them into account in determining ‘fair value.’ ’’ Id. 11See FASB ASC paragraph 320–10–35–1c indicating investments in debt securities classified as held-to-maturity shall be measured subsequently at amortized cost in the statement of financial position. See also Vincent Ryan, FASB Exposure Draft Alarms Bank CFOs (June 2, 2010) available at http://www.cfo.com/article.cfm/14502294. 12See rule 2a–7(c)(2), (3), (4), and (5). 13See rule 2a–7(a)(12), (c)(3)(ii). 14Rule 2a–7(c)(2). 15See rule 2a–7(c)(5). The 10% daily liquid asset requirement does not apply to tax exempt funds. 16See rule 2a–7(c)(4). 17See rule 2a–7(c)(8)(ii)(A). 18See rule 2a–7(c)(8)(ii)(A) and (B). Regardless of the extent of the deviation, rule 2a–7 imposes on the board of a money market fund a duty to take appropriate action whenever the board believes the extent of any deviation may result in material dilution or other unfair results to investors or current shareholders. Rule 2a–7(c)(8)(ii)(C). In addition, the money market fund can use the amortized cost or penny-rounding methods only as long as the board of directors believes that they fairly reflect the market-based net asset value per share. See rule 2a–7(c)(1). 19See
Investment Company Institute, 2013 Investment Company Fact Book, at 178, Table 37 (2013), available at http://www.ici.org/pdf/ 2013_factbook.pdf. 20Throughout this Release, we generally refer to ‘‘short-term financing markets’’ to describe the markets for short-term financing of corporations, banks, and governments. 21See Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a report by staff of the Division of Risk, Strategy, and Financial Innovation (Nov. 30, 2012), available at http://www.sec.gov/news/studies/2012/money￾market-funds-memo-2012.pdf. Other types of mutual funds not regulated by rule 2a–7, must calculate their daily NAVs using market-based factors (with some exceptions) and do not use penny rounding.10 We note, however, that banks and other companies also make wide use of amortized cost accounting to value certain of their assets.11 In exchange for the ability to rely on the exemptions provided by rule 2a–7, the rule imposes important conditions designed to limit deviations between the fund’s $1.00 share price and the market value of the fund’s portfolio. It requires money market funds to maintain a significant amount of liquid assets and to invest in securities that meet the rule’s credit quality, maturity, and diversification requirements.12 For example, a money market fund’s portfolio securities must meet certain credit quality requirements, such as posing minimal credit risks.13 The rule also places limits on the remaining maturity of securities in the fund’s portfolio to limit the interest rate and credit spread risk to which a money market fund may be exposed. A money market fund generally may not acquire any security with a remaining maturity greater than 397 days, and the dollar￾weighted average maturity of the securities owned by the fund may not exceed 60 days and the fund’s dollar￾weighted average life to maturity may not exceed 120 days.14 Money market funds also must maintain sufficient liquidity to meet reasonably foreseeable redemptions, and generally must invest at least 10% of their portfolios in assets that can provide daily liquidity and invest at least 30% of their portfolios in assets that can provide weekly liquidity.15 Finally, rule 2a–7 also requires money market funds to diversify their portfolios by generally limiting the funds to investing no more than 5% of their portfolios in any one issuer and no more than 10% of their portfolios in securities issued by, or subject to guarantees or demand features (i.e., puts) from, any one institution.16 Rule 2a–7 also includes certain procedural requirements overseen by the fund’s board of directors. These include the requirement that the fund periodically calculate the market-based value of the portfolio (‘‘shadow price’’) 17 and compare it to the fund’s stable share price; if the deviation between these two values exceeds 1⁄2 of 1 percent (50 basis points), the fund’s board of directors must consider what action, if any, should be initiated
by the board, including whether to re-price the fund’s securities above or below the fund’s $1.00 share price (an event colloquially known as ‘‘breaking the buck’’).18 Different types of money market funds have been introduced to meet the differing needs of money market fund investors. Historically, most investors have invested in ‘‘prime money market funds,’’ which hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper.19 ‘‘Government money market funds’’ principally hold obligations of the U.S. government, including obligations of the U.S. Treasury and federal agencies and instrumentalities, as well as repurchase agreements collateralized by government securities. Some government money market funds limit themselves to holding only U.S. Treasury obligations or repurchase agreements collateralized by U.S. Treasury securities and are called ‘‘Treasury money market funds.’’ Compared to prime funds, government and Treasury money market funds generally offer greater safety of principal but historically have paid lower yields. ‘‘Tax-exempt money market funds’’ primarily hold obligations of state and local governments and their instrumentalities, and pay interest that is generally exempt from federal income tax for individual taxpayers. In the analysis that follows, we begin by reviewing the role of money market funds and the benefits they provide investors. We then review the economics of money market funds. This includes a discussion of several features of money market funds that, when combined, can create incentives for fund shareholders to redeem shares during periods of stress, as well as the potential impact that such redemptions can have on the fund and the markets that provide short-term financing.20 We then discuss money market funds’ experience during the 2007–2008 financial crisis against this backdrop. We next analyze our 2010 reforms and their impact on the heightened redemption activity during the 2011 Eurozone sovereign debt crisis and U.S. debt ceiling impasse. Based on these analyses as well as other publicly available analytical works, some of which are contained in the report responding to certain questions posed by Commissioners Aguilar, Paredes and Gallagher (‘‘RSFI Study’’) 21 prepared by staff from the Division of Risk, Strategy, and Financial Innovation (‘‘RSFI’’), we propose two alternative frameworks for additional regulation of money market funds. Each alternative seeks to preserve the ability of money market funds to function as an effective and efficient cash management tool for investors, but also address

22We note that we have consulted and coordinated with the Consumer Financial Protection Bureau regarding this proposed rulemaking in accordance with section 1027(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 23See infra notes 72–73 and accompanying text. 24See, e.g., Comment Letter of Harvard Business School Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8, 2013) (available in File No. FSOC–2012–0003) (‘‘Harvard Business School FSOC Comment Letter’’) (explaining that prime money market funds, by providing a way for investors to invest in the short￾term financing markets indirectly, ‘‘provides MMF investors with a diversified pool of deposit-like instruments with the convenience of a single deposit-like account,’’ and that, ‘‘[g]iven the fixed costs of managing a portfolio of such instruments, MMFs provide scale efficiencies for small-balance savers (e.g., households and small and mid-sized nonfinancial corporations) along with a valuable set of transactional services (e.g., check-writing and other cash-management functions).’’). 25 Id. See also, e.g., Comment Letter of Investment Company Institute (Jan. 24, 2013) (available in File No. FSOC–2012–0003) (‘‘ICI Jan. 24 FSOC Comment Letter’’) (explaining that although bank deposits are an alternative to money market funds, ‘‘corporate cash managers and other institutional investors do not view an undiversified holding in an uninsured (or underinsured) bank account as having the same risk profile as an investment in a diversified short￾term money market fund subject to the risk-limiting conditions of Rule 2a–7’’). 26See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 (‘‘The regulatory regime established by Rule 2a–7 has proven to be effective in protecting investors’ interests and maintaining their confidence in money market funds.’’). 27See, e.g., Harvard Business School FSOC Comment Letter, supra note 24 (‘‘secondary markets for commercial paper and other private money market assets such as CDs are highly illiquid. Continued certain features in money market funds that can make them susceptible to heavy redemptions, provide them with better tools to manage and mitigate potential contagion from high levels of redemptions, and increase the transparency of their risks. We are also proposing amendments that would apply under each alternative that would result in additional changes to money market fund disclosure, diversification limits, and stress testing, among other reforms.22
II. Background
A. Role of Money Market Funds The combination of principal stability, liquidity, and short-term yields offered by money market funds, which is unlike that offered by other types of mutual funds, has made money market funds popular cash management vehicles for both retail and institutional investors, as discussed above. Retail investors use money market funds for a variety of reasons, including, for example, to hold cash for short or long periods of time or to take a temporary ‘‘defensive position’’ in anticipation of declining equity markets. Institutional investors commonly use money market funds for cash management in part because, as discussed later in this Release, money market funds provide efficient diversified cash management due both to the scale of their operations and their expertise.23 Money market funds, due to their popularity with investors, have become an important source of financing in certain segments of the short-term financing markets, as discussed in more detail in section III.E.2 below. Money market funds’ ability to maintain a stable share price contributes to their popularity. Indeed, the $1.00 stable share price has been one of the fundamental features of money market funds. As discussed in more detail in
section III.A.7 below, the funds’ stable
share price facilitates the funds’ role as a cash management vehicle, provides tax and administrative convenience to both money market funds and their shareholders, and enhances money market funds’ attractiveness as an investment option. Rule 2a–7, in addition to facilitating money market funds’ maintenance of stable share prices, also benefits investors by making available an investment option that provides an efficient and diversified means for investors to participate in the short-term financing markets through a portfolio of short-term, high quality debt securities.24 Many investors likely would find it impractical or inefficient to invest directly in the short-term financing markets, and some investors likely would not want the relatively undiversified exposure that can result from investing in those markets on a smaller scale or that could be associated with certain alternatives to money market funds, like bank deposits.25 Although other types of mutual funds can and do invest in the short-term financing markets, investors may prefer money market funds because the risk the funds may undertake is limited under rule 2a–7 (and because of the funds’ corresponding ability to maintain a stable share price).26 Therefore, although rule 2a–7 permits money market funds to use techniques to value and price their shares not permitted to other mutual funds (or not permitted to the same extent), the rule also imposes additional protective conditions on money market funds. These additional conditions are designed to make money market funds’ use of the pricing techniques permitted by rule 2a–7 consistent with the protection of investors, and more generally, to make available an investment option for investors that seek an efficient way to obtain short￾term yields. These conditions thus reflect the differences in the way money market funds operate and the ways in which investors use money market funds compared to other types of mutual funds. We recognize, and considered when developing the reform proposals we are putting forward today, that money market funds are a popular investment product and that they provide many benefits to investors and to the short￾term financing markets. Indeed, it is for these reasons that we are proposing reforms designed to make the funds more resilient, as discussed throughout this Release, while preserving, to the extent possible, the benefits of money market funds. These reform proposals may, however, make money market funds less attractive to certain investors as discussed more fully below. B. Economics of Money Market Funds The combination of several features of money market funds can create an incentive for their shareholders to redeem shares heavily in periods of financial stress, as discussed in greater detail in the RSFI Study. We discuss these factors below, as well as the harm that can result from heavy redemptions in money market funds.

1. Incentives Created by Money Market
   Funds’ Valuation and Pricing Methods Money market funds are unique among mutual funds in that rule 2a–7 permits them to use the amortized cost method of valuation and the penny￾rounding method of pricing. As discussed above, these valuation and pricing techniques allow a money market fund to sell and redeem shares at a stable share price without regard to small variations in the value of the securities that comprise its portfolio, and thus to maintain a stable $1.00 share price under most conditions. Although the stable $1.00 share price calculated using these methods provides a close approximation to market value under normal market conditions, differences may exist because market prices adjust to changes in interest rates, credit risk, and liquidity. We note that the vast majority of money market fund portfolio securities are not valued based on market prices obtained through secondary market trading because the secondary markets for most portfolio securities such as commercial paper, repos, and certificates of deposit are not actively traded. Accordingly, most money market fund portfolio securities are valued largely through ‘‘mark-to￾model’’ or ‘‘matrix pricing’’ estimates.27

Therefore, the asset prices used to calculate the floating NAV would largely be accounting or model-based estimates, rather than prices based on secondary market transactions with sizable volumes.’’); Institutional Money Market Funds Association, The Use of Amortised Cost Accounting by Money Market Funds, available at http:// www.immfa.org/assets/files/IMMFA%20The%20 use%20of%20amortised%20cost%20 accounting%20by%20MMF.pdf (noting that ‘‘investors typically hold money market instruments to maturity, and so there are relatively few prices from the secondary market or broker quotes,’’ that as a result most money market funds value their assets using yield curve pricing, discounted cash flow pricing, and amortized cost valuation, and surveying several money market funds and finding that only U.S. Treasury bills are considered ‘‘level one’’ assets under the relevant accounting standards for which traded or quoted prices are generally available). 28The credit quality standards in rule 2a–7 are designed to minimize the likelihood of such a default or credit deterioration. 29 It is important to understand that, in practice, a money market fund cannot use future portfolio earnings to rebuild its shadow price because Subchapter M of the Internal Revenue Code effectively forces money market funds to distribute virtually all of their earnings to investors. These restrictions can cause permanent reductions in shadow prices to persist over time, even if a fund’s other portfolio securities are otherwise unimpaired. 30The value of this economic incentive is determined in part by the volatility of the fund’s underlying assets, which is, in turn, affected by the volatility of interest rates, the likelihood of default, and the maturities of the underlying assets. Since the risk limiting conditions imposed by rule 2a–7 require funds to hold high quality assets with short maturities, the volatility of the underlying assets is very low (which implies that the corresponding value of this economic incentive is low), except when the fund is under stress. 31We recognize that, absent the fund breaking the buck, arbitraging fluctuations in a money market fund’s shadow price would require some effort and may not be compelling in many cases given the small dollar value that could be captured. See, e.g., Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] (‘‘2009 Proposing Release’’), at nn.304–305 and accompanying text (discussing how to arbitrage around price changes from rising interest rates, investors would need to sell money market fund shares for $1.00 and reinvest the proceeds in equivalent short-term debt securities at then-current interest rates). 32See generally RSFI Study, supra note 21, at
section 4.A.
33See generally infra section II.C.
34FSOC, in formulating possible money market reform recommendations, solicited and received comments from the public (FSOC Comment File, File No. FSOC–2012–0003, available at http:// www.regulations.gov/#!docketDetail;D=FSOC-2012- 0003), some of which have made similar observations about the concentration and size of money market fund holdings. See, e.g., Harvard Business School FSOC Comment Letter, supra note 24 (noting that ‘‘prime MMFs mainly invest in money-market instruments issued by large, global banks’’ and providing information about the size of the holdings of ‘‘the 50 largest non-government issuers of money market instruments held by prime MMFs as of May 2012’’). The market value of a money market fund’s portfolio securities also may experience relatively large changes if a portfolio asset defaults or its credit profile deteriorates.28 Today differences within the tolerance defined by rule 2a– 7 are reflected only in a fund’s shadow price, and not the share price at which the fund satisfies purchase and redemption transactions. Deviations that arise from changes in interest rates and credit risk are temporary as long as securities are held to maturity, because amortized cost values and market-based values converge at maturity. If, however, a portfolio asset defaults or an asset sale results in a realized capital gain or loss, deviations between the stable $1.00 share price and the shadow price become permanent. For example, if a portfolio experiences a 25 basis point loss because an issuer defaults, the fund’s shadow price falls from $1.0000 to $0.9975. Even though the fund has not broken the buck, this reduction is permanent and can only be rebuilt internally in the event that the fund realizes a capital gain elsewhere in the portfolio, which generally is unlikely given the types of securities in which money market funds typically invest.29 If a fund’s shadow price deviates far enough from its stable $1.00 share price, investors may have an economic incentive to redeem money market fund shares.30 For example, investors may have an incentive to redeem shares when a fund’s shadow price is less than $1.00.31 If investors redeem shares when the shadow price is less than $1.00, the fund’s shadow price will decline even further because portfolio losses are spread across a smaller asset base. If enough shares are redeemed, a fund can ‘‘break the buck’’ due, in part, to heavy investor redemptions and the concentration of losses across a shrinking asset base. In times of stress, this reason alone provides an incentive for investors to redeem shares ahead of other investors: early redeemers get $1.00 per share, whereas later redeemers may get less than $1.00 per share even if the fund experiences no further losses. To illustrate the incentive for investors to redeem shares early, consider a money market fund that has one million shares outstanding and holds a portfolio worth exactly $1 million. Assume the fund’s stable share price and shadow
price are both $1.00. If the fund recognizes a $4,000 loss, the fund’s shadow price will fall below $1.00 as follows:
If investors redeem one quarter of the fund’s shares (250,000 shares), the redeeming shareholders are paid $1.00. Because redeeming shareholders are paid more than the shadow price of the fund, the redemptions further concentrate the loss among the remaining shareholders. In this case, the amount of redemptions is sufficient to cause the fund to ‘‘break the buck.’’ This example shows that if a fund’s shadow price falls below $1.00 and the fund experiences redemptions, the remaining investors have an incentive to redeem shares to potentially avoid holding shares worth even less, particularly if the fund re-prices its shares below $1.00. This incentive exists even if investors do not expect the fund to incur further portfolio losses. As discussed in greater detail in the RSFI Study and as we saw during the 2007–2008 financial crisis as further discussed below, money market funds, although generally able to maintain stable share prices, remain subject to credit, interest rate, and liquidity risks, all of which can cause a fund’s shadow price to decline below $1.00 and create an incentive for investors to redeem shares ahead of other investors.32 Although defaults are very low probability events, the resulting losses will be most acute if the default occurs in a position that is greater than 0.5% of the fund’s assets, as was the case in the Reserve Primary Fund’s investment in Lehman Brothers commercial paper in September 2008.33 As discussed further in section III.J of this Release, we note that money market funds hold significant numbers of such larger positions.34
2. Incentives Created by Money Market
Funds’ Liquidity Needs
The incentive for money market fund investors to redeem shares ahead of other investors also can be heightened EP19JN13.001</GPH> EP19JN13.002</GPH>

35Although the Act permits a money market fund to borrow money from a bank, such loans, assuming the proceeds of which are paid out to meet redemptions, create liabilities that must be reflected in the fund’s shadow price, and thus will contribute to the stresses that may force the fund to ‘‘break the buck.’’ See section 18(f) of the Investment Company Act. 36Money market funds normally meet redemptions by disposing of their more liquid assets, rather than selling a pro rata slice of all their holdings, which typically include less liquid securities such as certificates of deposit, commercial paper, or term repurchase agreements (‘‘repo’’). See Harvard Business School FSOC Comment Letter, supra note 24 (‘‘MMFs forced to liquidate commercial paper and bank certificates of deposits are likely to sell them at heavily discounted, ‘fire sale’ prices. This creates run risk because early investor redemptions can be met with the sale of liquid Treasury bills, which generate enough cash to fully pay early redeemers. In contrast, late redemptions force the sale of illiquid assets at discounted prices, which may not generate enough revenue to fully repay late redeemers. Thus, each investor benefits from redeeming earlier than others, setting the stage for runs.’’); Jonathan Witmer, Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices, Bank of Canada Working Paper 2012–25 (Aug. 2012) (‘‘Witmer’’), available at http:// www.bankofcanada.ca/wp-content/uploads/2012/ 08/wp2012-25.pdf. ‘‘Fire sales’’ refer to situations when securities deviate from their information￾efficient values typically as a result of sale price pressure. For an overview of the theoretical and empirical research on asset ‘‘fire sales,’’ see Andrei Shleifer & Robert Vishny, Fire Sales in Finance and Macroeconomics, 25 Journal of Economic Perspectives, Winter 2011, at 29–48 (‘‘Fire Sales’’). 37The RSFI Study examined whether money market funds are more resilient to redemptions following the 2010 reforms and notes that, ‘‘As expected, the results show that funds with a 30 percent [weekly liquid asset requirement] are more resilient to both portfolio losses and investor redemptions’’ than those funds without a 30 percent weekly liquid asset requirement. RSFI Study, supra note 21, at 37. 38See, e.g., RSFI Study, supra note 21, at 31 (stating that although disclosures on Form N–MFP have improved fund transparency, ‘‘it must be remembered that funds file the form on a monthly basis with no interim updates,’’ and that ‘‘[t]he Commission also makes the information public with a 60-day lag, which may cause it to be stale’’); Comment Letter of the Presidents of the 12 Federal Reserve Banks (Feb. 12, 2013) (available in File No. FSOC–2012–0003) (‘‘Federal Reserve Bank Presidents FSOC Comment Letter’’) (stating that ‘‘[e]ven more frequent and timely disclosure may be warranted to increase the transparency of MMFs’’ and noting that
‘‘[d]uring times of stress, [. . .] uncertainty regarding portfolio composition could heighten investors’ incentives to redeem in between reporting periods [of money market funds’ portfolio information], as they will not be able to determine if their fund is exposed to certain stressed assets’’); see also infra section III.H where we request comment on whether we should require money market funds to file Form N–MFP more frequently. 39See Nicola Gennaioli, Andrei Shleifer & Robert Vishny, Neglected Risks, Financial Innovation, and Financial Fragility, 104 J. Fin. Econ. 453 (2012) (‘‘A small piece of news that brings to investors’ minds the previously unattended risks catches them by surprise and causes them to drastically revise their valuations of new securities and to sell them. . . . When investors realize that the new securities are false substitutes for the traditional ones, they fly to safety, dumping these securities on the market and buying the truly safe ones.’’). 40See infra notes 65–67 and accompanying text. Based on Form N–MFP data as of February 28, 2013, there were 27 different issuers whose securities were held by more than 100 prime money market funds. 41Rule 17a–9 currently allows for discretionary support of money market funds by their sponsors and other affiliates. 42See, e.g., Comment Letter of Occupy the SEC (Feb. 15, 2013) (available in File No. FSOC–2012–
0003) (‘‘Occupy the SEC FSOC Comment Letter’’)
(‘‘The current strategies for maintaining a stable NAV—rounding and discretionary fund sponsor support—both serve to conceal important market signals of mounting problems within the fund’s portfolio.’’). See also Federal Reserve Bank Presidents FSOC Comment Letter, supra note 38 (warning that ‘‘[g]iven the perception of stability that discretionary support creates, this practice may attract investors that are not willing to accept the underlying risks in MMFs and who therefore are more prone to run in times of potential stress.’’) 43See, e.g., U.S. Securities and Exchange Commission, Roundtable on Money Market Funds and Systemic Risk, unofficial transcript (May 10, 2011), available at http://www.sec.gov/spotlight/ mmf-risk/mmf-risk-transcript-051011.htm (‘‘Roundtable Transcript’’) (Bill Stouten, Thrivent Financial) (‘‘I think the primary factor that makes money funds vulnerable to runs is the marketing of the stable NAV. And I think the record of money market funds and maintaining the stable NAV has largely been the result of periodic voluntary sponsor support. I think sophisticated investors that understand this and doubt the willingness or ability of the sponsor to make that support know that they need to pull their money out before a declining asset is sold.’’); (Lance Pan, Capital Advisors Group) (‘‘over the last 30 or 40 years, [investors] have relied on the perception that even though there is risk in money market funds, that risk is owned somehow implicitly by the fund sponsors. So once they perceive that they are not able to get that additional assurance, I believe that was one probable cause of the run’’); see also Federal Reserve Bank Presidents FSOC Comment Letter, supra note 38 (stating that ‘‘[t]hough [sponsor support] creates a perception of stability, it may not truly provide stability in times of stress. Indeed, events of 2008 showed that sponsor support cannot always be relied upon.’’); infra section III.F.1. by liquidity concerns. Money market funds, by definition and like all other mutual funds, offer investors the ability to redeem shares upon demand. A money market fund has three sources of internal liquidity to meet redemption requests: cash on hand, cash from investors purchasing shares, and cash from maturing securities. If these internal sources of liquidity are insufficient to satisfy redemption requests on any particular day, money market funds may be forced to sell portfolio securities to raise additional cash.35 Since the secondary market for many portfolio securities is not deeply liquid (in part because most money market fund securities are held to maturity), funds may have to sell securities at a discount from their amortized cost value, or even at fire-sale prices,36 thereby incurring additional losses that may have been avoided if the funds had sufficient liquidity.37 This, itself, can cause a fund’s portfolio to lose value. In addition, redemptions that deplete a fund’s most liquid assets can have incremental
adverse effects because they leave the fund with fewer liquid assets, making it more difficult to avoid selling less liquid assets, potentially at a discount, to meet further redemption requests.
3. Incentives Created by Imperfect
Transparency, Including Sponsor Support Lack of investor understanding and complete transparency concerning the risks posed by particular money market funds can exacerbate the concerns discussed above. If investors do not know a fund’s shadow price and/or its underlying portfolio holdings (or if previous disclosures of this information are no longer accurate), investors may not be able to fully understand the degree of risk in the underlying portfolio.38 In such an environment, a default of a large-scale commercial paper issuer, such as a bank holding company, could accelerate redemption activity across many funds because investors may not know which funds (if any) hold defaulted securities and initiate redemptions to avoid potential rather than actual losses in a ‘‘flight to transparency.’’ 39 Since many money market funds hold securities from the same issuer, investors may respond to a lack of transparency about specific fund holdings by redeeming assets from funds that are believed to be holding highly correlated positions.40 Money market funds’ sponsors on a number of occasions have voluntarily chosen to provide financial support for their money market funds 41 for various reasons, including to keep a fund from re-pricing below its stable value, but also, for example, to protect the sponsors’ reputations or brands. Considering that instances of sponsor support are not required to be disclosed outside of financial statements, and thus were not particularly transparent to investors, voluntary sponsor support has played a role in helping some money market funds maintain a stable value and, in turn, may have lessened investors’ perception of the risk in money market funds.42 Even those investors who were aware of sponsor support could not be assured it would be available in the future.43 Instances of discretionary sponsor support were relatively common during the financial crisis. For example, during the period from September 16, 2008 to October 1, 2008, a number of money market fund sponsors purchased large amounts of portfolio securities from their money market funds or provided capital support to the funds (or received staff no-action assurances in order to provide

44See Steffanie A. Brady et al., The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011, Federal Reserve Bank of Boston Risk and Policy Analysis Unit Working Paper No. 12–3 (Aug. 13, 2012), available at http://www.bos.frb.org/bankinfo/qau/wp/2012/ qau1203.pdf. Staff in the Federal Reserve Bank of Boston’s Risk and Policy Analysis Unit examine 341 money market funds and find that 78 of the funds disclosed sponsor support on Form N–CSR between 2007 and 2011 (some multiple times). This analysis excludes Capital Support Agreements and/ or Letters of Credit that were not drawn upon. Large sponsor support (in aggregate) representing over 0.5% of assets under management occurred in 31 money market funds, and the primary reasons disclosed for such support include losses on Lehman Brothers, AIG, and Morgan Stanley securities. Moody’s Investors Service Special Comment, Sponsor Support Key to Money Market Funds (Aug. 9, 2010) (‘‘Moody’s Sponsor Support Report’’), reported that 62 money market funds required sponsor support during 2007–2008. 45Our staff estimated that during the period from August 2007 to December 31, 2008, almost 20% of all money market funds received some support (or staff no-action assurances concerning support) from their money managers or their affiliates. We note that not all of such support required no-action assurances from Commission staff (for example, fund affiliates were able to purchase defaulted Lehman Brothers securities from fund portfolios under rule 17a–9 under the Investment Company Act without the need for any no-action assurances). See, e.g., http://www.sec.gov/divisions/investment/ im-noaction.shtml#money. 46See, e.g., Comment Letter of The Dreyfus Corporation (Aug. 7, 2012) (available in File No. 4–
619) (stating that no-action relief to provide sponsor
support ‘‘was sought by many money funds as a precautionary measure’’). 47See Moody’s Sponsor Support Report, supra note 44. 48The table does not comprehensively describe every instance of sponsor support of a money market fund or request for no-action assurances to provide support, but rather summarizes some of the more notable instances of sponsor support. 49See Moody’s Sponsor Support Report, supra note 44, noting in particular 13 funds requiring support in 1990 due to credit defaults or deterioration at MNC Financial, Mortgage & Realty Trust, and Drexel Burnham; 79 funds requiring support in 1994 due to the Orange County bankruptcy and holdings of certain floating rate securities when interest rates increased; and 25 funds requiring support in 1999 after the credit of certain General American Life Insurance securities deteriorated. 50Note that we are proposing changes to our rules and forms to require more comprehensive and timely disclosure of such sponsor support. See infra sections III.F.1 and III.G. 51The estimated total numbers of money market funds are from Table 38 of the Investment Company Institute’s 2013 Fact Book, available at http:// www.ici.org/pdf/2013_factbook.pdf. The numbers of money market funds are as of the end of the relevant year, and not necessarily as of the date that any particular money market fund received support (or whose sponsor received no-action assurances in order to provide support). 52See Jack Lowenstein, Should the Rating Agencies be Downgraded?, Euromoney (Feb. 1,
1990) (noting that Integrated Resources had been
rated A–2 by Standard & Poor’s until two days before default); Jonathan R. Laing, Never Say Never—Or, How Safe Is Your Money-Market Fund?, Barron’s (Mar. 26, 1990) (‘‘Laing’’), at 6; Randall W. Forsyth, Portfolio Analysis of Selected Fixed￾Income Funds—Muni Money-Fund Risks, Barron’s (July 2, 1990) (‘‘Forsyth’’), at 33; Georgette Jasen, SEC Is Accelerating Its Inspections of Money Funds, Wall St. J. (Dec. 4, 1990) (‘‘Jasen’’), at C1. One $630 million money market fund held a 3.5% position in Integrated Resources when it defaulted. See Linda Sandler, Cloud Cast on ‘Junk’ IOUs By Integrated Resources, Wall St. J. (June 28, 1989). 53See Laing, supra note 52; Forsyth, supra note 52; Jasen, supra note 52. 54See Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)] at n.12 (‘‘1993 Proposing Release’’). See also Leslie Eaton, Another Close Call—An Adviser Bails Out Its Money Fund, Barron’s (Mar. 11, 1991), at 42 (noting that Mercantile Bancorp bought out $28 million of MNC Financial notes from its affiliated money market fund, which had accounted for 3% of the money market fund’s assets). support).44 Commission staff provided no-action assurances to 100 money market funds in 18 different fund groups so that the fund groups could enter into such arrangements.45 Although a number of advisers to money market funds obtained staff no￾action assurances in order to provide sponsor support, several did not subsequently provide the support because it was no longer necessary.46 The 2007–2008 financial crisis is not the only instance in which some money market funds have come under strain, although it is unique in the amount of money market funds that requested or received sponsor support.47 Interest rate changes, issuer defaults, and credit rating downgrades can lead to significant valuation losses for individual funds. Table 1 documents that since 1989, in addition to the 2007– 2008 financial crisis, 11 events were deemed to have been sufficiently negative that some fund sponsors chose to provide support or to seek staff no￾action assurances in order to provide support.48 The table indicates that these events potentially affected 158 different money market funds. This finding is consistent with estimates provided by Moody’s that at least 145 U.S. money market funds received sponsor support to maintain either price stability or share liquidity before 2007.49 Note that although these events affected money market funds and their sponsors, there is no evidence that these events caused systemic problems, most likely because the events were isolated either to a single entity or class of security. Table 1 is consistent with the interpretation that outside a crisis period, these events did not propagate risk more broadly to the rest of the money market fund industry. However, a caveat that prevents making a strong inference about the impact of sponsor support on investor behavior from
Table 1 is that sponsor support generally was not immediately disclosed, and was not required to be disclosed by the Commission, and so investors may have been unaware that their money market fund had come under stress.50
TABLE 1
Year
Number of money market funds from 2013 ICI mutual fund fact book 51 Estimated number of money market funds supported by affiliate or for which no-action assurances obtained Event 1989 ....... 673 4 Default of Integrated Resources commercial paper (rated A–2 by Standard & Poor’s until shortly prior to default).52 1990 ....... 741 11 Default of Mortgage & Realty Trust commercial paper (rated A–2 by Standard & Poor’s until shortly prior to default).53 1990 ....... 741 10 MNC Financial Corp. commercial paper downgraded from being a second tier security.54 1991 ....... 820 10 Mutual Benefit Life Insurance (‘‘MBLI’’) seized by state insurance regulators, causing it to fail to honor put obligations after those holding securities with these features put the ob￾ligations en masse to MBLI.55 1994 ....... 963 40 Rising interest rates damaged the value of certain adjustable rate securities held by money market funds.56 1994 ....... 963 43 Orange County, California bankruptcy.57 1997 ....... 1,103 3 Mercury Finance Corp. defaults on its commercial paper.

55At the time of its seizure, MBLI debt was rated in the highest short-term rating category by Standard & Poor’s. See 1993 Proposing Release, supra note 54, at n.28 and accompanying text. The money market fund sponsors either repurchased the MBLI-backed instruments from the funds at their amortized cost or obtained a replacement guarantor in order to prevent shareholder losses. Id. 56See Money Market Fund Prospectuses, Investment Company Act Release No. 21216 (July 19, 1995) [60 FR 38454, (July 26, 1995)], at n.17; Investment Company Institute, Report of the Money Market Working Group (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (‘‘ICI 2009 Report’’), at 177; Leslie Wayne, Investors Lose Money in ‘Safe’ Fund, N.Y. Times, Sept. 28, 1994; Leslie Eaton, New Caution About Money Market Funds, N.Y. Times, Sept. 29, 1994. 57See ICI 2009 Report, supra note 56, at 178; Tom Petruno, Orange County in Bankruptcy: Investors Weigh Their Options: Muni Bond Values Slump but Few Trade at Fire-Sale Prices, L.A. Times, Dec. 8, 1994. 58See Sandra Ward, Money Good? How some fund managers sacrificed safety for yield, Barron’s (Aug. 23, 1999), at F3. 59See Aaron Lucchetti & Theo Francis, Parents Take on Funds’ Risks Tied to Utilities, Wall St. J. (Feb. 28, 2001), at C1; Lewis Braham, Commentary:
Money Market Funds Enter the Danger Zone, Businessweek (Apr. 8, 2001). 60See, e.g., Marcin Kacperczyk & Philipp Schnabl, How Safe are Money Market Funds?, 128 Q. J. Econ. (forthcoming Aug. 2013) (‘‘Kacperczyk & Schnabl’’) (‘‘. . . fund sponsors with more non￾money market fund business expect to incur large costs if their money market funds fail. Such costs are typically reputational in nature, in that an individual fund’s default generates negative spillovers to the fund’s sponsor[’s] other business. In practice, these costs could be outflows from other mutual funds managed by the same sponsor or a loss of business in the sponsor’s commercial banking, investment banking, or insurance operations.’’); Patrick E. McCabe, The Cross Section of Money Market Fund Risks and Financial Crises, Federal Reserve Board Finance and Economic Discussion Series Paper No. 2010–51 (2010) (‘‘Cross
Section’’) (‘‘Nothing required these sponsors to
provide support, but because allowing a fund to break the buck would have been destructive to a sponsor’s reputation and franchise, sponsors backstopped their funds voluntarily.’’); Value Line Posts Loss for 1st Period, Cites Charge of $7.5 Million, Wall St. J. (Sept. 18, 1989) (‘‘In discussing the charge in its fiscal 1989 annual report [for buying out defaulted commercial paper from its money market fund], Value Line said it purchased the fund’s holdings in order to protect its reputation and the continuing income from its investment advisory and money management business.’’); Comment Letter of James J. Angel (Feb. 6, 2013) (available in File No. FSOC–2012–0003) (‘‘Angel FSOC Comment Letter’’) (‘‘Sponsors have a strong commercial incentive to stand behind their funds. Breaking the buck means the immediate and catastrophic end of the sponsor’s entire asset management business.’’). 61See, e.g, Marcin Kacperczyk & Philipp Schnabl, Money Market Funds: How to Avoid Breaking the Buck, in Regulating Wall St: The Dodd-Frank Act and the New Architecture of Global Finance (Viral
V. Acharya, et al., eds., 2011), at 313 (‘‘Given that
money market funds provide both payment services to investors and refinancing to financial intermediaries, there is a strong case for the government to support money market funds during a financial crisis by guaranteeing the value of money market fund investments. As a result of such support, money market funds have an ex ante incentive to take on excessive risk, similarly to other financial institutions with explicit or implicit government guarantees . . . after the [government] guarantees were provided in September 2008 [to money market funds], most investors will expect similar guarantees during future financial crises. . . .’’). But see Comment Letter of Fidelity (Apr. 26,
2012) (available in File No. 4–619) (‘‘Fidelity April
2012 PWG Comment Letter’’) (citing a survey of Fidelity’s retail customers in which 75% of responding customers did not believe that money market funds are guaranteed by the government and 25% either believed that they were guaranteed or were not sure whether they were guaranteed). We note that investor belief that money market funds are not guaranteed by the government does not necessarily mean that investors do not believe that the government will support money market funds if there is another run on money market funds. 62See, e.g., Comment Letter of Investment Company Institute (Apr. 19, 2012) (available in File Continued
TABLE 1—Continued
Year
Number of money market funds from 2013 ICI mutual fund fact book 51 Estimated number of money market funds supported by affiliate or for which no-action assurances obtained Event 1999 ....... 1,045 25 Credit rating downgrade of General American Life Insurance Co. triggered a wave of de￾mands for repayment on its funding contracts, leading to liquidity problems and causing it to be placed under administrative supervision by state insurance regulators.58 2001 ....... 1,015 6 Pacific Gas & Electric Co. and Southern California Edison Co. commercial paper went from being first tier securities to defaulting in a 2-week period.59 2007 ....... 805 51 Investments in SIVs. 2008 ....... 783 109 Investments in Lehman Brothers, America International Group, Inc. (‘‘AIG’’) and other fi￾nancial sector debt securities. 2010 ....... 652 3 British Petroleum Gulf oil spill affects price of BP debt securities held by some money market funds. 2011 ....... 632 3 Investments in Eksportfinans, which was downgraded from being a first tier security to junk-bond status. It also is important to note that, as discussed above, fund sponsors may provide financial support for a number of different reasons. Sponsors may support funds to protect their reputations and their brands or the credit rating of the fund.60 Support also may be used to keep a fund from breaking a buck or to increase a fund’s shadow price if its sponsor believes investors avoid funds that may have low shadow prices. We note that the fact that no-action assurances were obtained or sponsor support was provided does not necessarily mean that a money market fund would have broken the buck without such support or assurances. Finally, the government assistance provided to money market funds during 2007–2008 financial crisis, discussed in more detail below, may have contributed to investors’ perceptions that the risk of loss in money market funds is low.61 If investors perceive money market funds as having an implicit government guarantee in times of crisis, any potential instability of a money market fund’s NAV could be mis-estimated. Investors will form expectations about the likelihood of a potential intervention to support money market funds, either by the U.S. government or fund sponsors. To the extent these forecasts are based on inaccurate information, investor estimates of potential losses will be biased.
4. Incentives Created by Money Market
Funds Investors’ Desire To Avoid Loss In addition to the incentives described above, other characteristics of money market funds create incentives to redeem in times of stress. Investors in money market funds have varying investment goals and tolerances for risk. Many investors use money market funds for principal preservation and as a cash management tool, and, consequently, these funds can attract investors who are unable or unwilling to tolerate even small losses. These investors may seek to minimize possible losses, even at the cost of forgoing higher returns.62 Such

No. 4–619) (‘‘ICI Apr 2012 PWG Comment Letter’’) (enclosing a survey commissioned by the Investment Company Institute and conducted by Treasury Strategies, Inc. finding, among other things. that 94% of respondents rated safety of principal as an ‘‘extremely important’’ factor in their money market fund investment decision and 64% ranked safety of principal as the ‘‘primary driver’’ of their money market fund investment). 63See, e.g., Comment Letter of County Commissioners Assoc. of Ohio (Dec. 21, 2012) (available in File No. FSOC–2012–0003) (‘‘County governments in Ohio operate under legal constraints or other policies that limit them from investing in instruments without a stable value.’’). 64One study documented that investors redirected assets from prime money market funds into government money market funds during September 2008. See Russ Wermers et al., Runs on Money Market Funds (Jan. 2, 2013), available at http://www.rhsmith.umd.edu/cfp/pdfs_docs/ papers/WermersMoneyFundRuns.pdf (‘‘Wermers Study’’). Another study found that redemption activity in money market funds during the financial crisis was higher for riskier money market funds. See Cross Section, supra note 60. 65See generally Douglas W. Diamond & Raghuram G. Rajan, Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes, 126 Q. J. Econ. 557 (May 2011); Fire Sales, supra note 36; Markus Brunnermeier et al., The Fundamental Principles of Financial Regulation, in Geneva Reports on the World Economy 11 (2009). 66For example, supra Table 1, which identifies certain instances in which money market fund sponsors supported their funds or sought staff no￾action assurances to do so, tends to show that correlated holdings across funds resulted in multiple funds experiencing losses that appeared to motivate sponsors to provide support or seek staff no-action assurances in order to provide support. 67See, e.g., Comment Letter of Better Markets, Inc. (Feb. 15, 2013) (available in File No. FSOC– 2012–0003) (‘‘Better Markets FSOC Comment Letter’’) (agreeing with FSOC’s analysis and stating that ‘‘MMFs tend to have similar exposures due to limits on the nature of permitted investments. As a result, losses creating instability and a crisis of confidence in one MMF are likely to affect other MMFs at the same time.’’); Comment Letter of Robert Comment (Dec. 31. 2012) (available in File No. FSOC–2012–0003) (‘‘Robert Comment FSOC Comment Letter’’) (discussing correlation in money market funds’ portfolios and stating, among other things, that ‘‘now that bank-issued money market instruments have come to comprise half the holdings of the typical prime fund, the SEC should acknowledge correlated credit risk by requiring that prime funds practice sector diversification (in addition to issuer diversification)’’); Occupy the SEC FSOC Comment Letter, supra note 42 (discussing concentration of risk across money market funds). 68See, e.g., Wermers Study, supra note 64 (based on an empirical analysis of data
from the 2008 run on money market funds, finding that, during 2008, ‘‘[f]unds that cater to institutional investors, which are the most sophisticated and informed investors, were hardest hit,’’ and that ‘‘investor flows from money market funds seem to have been driven both by strategic externalities . . . and information.’’). 69See infra Panels A, B, and C in section III.E for statistics on the types and percentages of outstanding short-term debt obligations held by money market funds. 70See Zoltan Pozsar, Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System, IMF Working Paper 11/190 (Aug. 2011) (‘‘Pozsar’’); Gary Gorton & Andrew Metrick, Securitized Banking and the Run on Repo, 104 J. Fin. Econ. 425 (2012) (‘‘Gorton & Metrick’’); Jeremy C. Stein, Monetary Policy as Financial Stability Regulation, 127 Q. J. Econ. 57 (2012); Nicola Gennaioli, Andrei Shleifer & Robert W. Vishny, A Model of Shadow Banking, J. Fin. (forthcoming 2013). The Pozsar paper defines institutional cash pools as ‘‘large, centrally managed, short-term cash balances of global non-financial corporations and institutional investors such as asset managers, securities lenders and pension funds.’’ Pozsar, at 4. 71See Pozsar, supra note 70, at 5–6. These institutional cash pools can come from corporations, bank trust departments, securities lending operations of brokerage firms, state and local governments, hedge funds, and other private funds. The rise in institutional cash pools increased demand for investments that were considered to have a relatively low risk of loss, including, in addition to money market funds, Treasury bonds, insured deposit accounts, repurchase agreements, and asset-backed commercial paper. See Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco & Steven Kamin, International Capital Flows and the Returns to Safe Assets in the United States, 2003–2007, Board of Governors of the Federal Reserve System International Finance Discussion Paper No. 1014 (Feb. 2011); Pozsar, supra note 70; Gorton & Metrick, supra note 70; Daniel M. Covitz, Nellie Liang & Gustavo A. Suarez, The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market, J. Fin. (forthcoming
2013) (‘‘Covitz’’). The incentive among these cash
pools to search for alternate ‘‘safe’’ investments was only heightened by factors such as limits on deposit insurance coverage and historical bans on banks paying interest on institutional demand deposit accounts, which limited the utility of deposit accounts for large pools of cash. See Pozsar, supra note 70; Gary Gorton & Andrew Metrick, Regulating the Shadow Banking System, Brookings Papers on Economic Activity (Fall 2010), at 262–263 (‘‘Gorton Shadow Banking’’). 72See, e.g., Roundtable Transcript, supra note 43 (Travis Barker, Institutional Money Market Funds Association) (‘‘[money market funds are] there to provide institutional investors with greater diversification than they could otherwise achieve’’); (Lance Pan, Capital Advisors Group) (noting diversification benefits of money market funds and investors’ need for a substitute to bank products to mitigate counterparty risk); (Kathryn L. Hewitt, investors may be very loss averse for many reasons, including general risk tolerance, legal or investment restrictions, or short-term cash needs.63 These overarching considerations may create incentives for money market investors to redeem and would be expected to persist, even if valuation and pricing incentives were addressed. The desire to avoid loss may cause investors to redeem from money market funds in times of stress in a ‘‘flight to quality.’’ For example, as discussed in the RSFI Study, one explanation for the heavy redemptions from prime money market funds and purchases in government money market fund shares during the financial crisis may be a flight to quality, given that most of the assets held by government money market funds have a lower default risk than the assets of prime money market funds.64
5. Effects on Other Money Market
Funds, Investors, and the Short-Term Financing Markets The analysis above generally describes how potential losses may create shareholder incentives to redeem at a specific money market fund. We now discuss how stress at one money market fund can be positively correlated across funds in at least two ways. Some market observers have noted that if a money market fund suffers a loss on one of its portfolio securities—whether because of a deterioration in credit quality, for example, or because the fund sold the security at a discount to its amortized-cost value—other money market funds holding the same security may have to reflect the resultant discounts in their shadow prices.65 Any resulting decline in the shadow prices of other funds could, in turn, lead to a contagion effect that could spread even further.66 For example, a number of commenters have observed that many money market fund holdings tend to be highly correlated, making it more likely that multiple money market funds will experience contemporaneous decreases in share prices.67 As discussed above, in times of stress if investors do not wish to be exposed to a distressed issuer (or correlated issuers) but do not know which money market funds own these distressed securities at any given time, investors may redeem from any money market funds that could own the security (e.g., redeeming from all prime funds).68 A fund that did not own the security and was not otherwise under stress could nonetheless experience heavy redemptions which, as discussed above, could themselves ultimately cause the fund to experience losses if it does not have adequate liquidity. As was experienced during the financial crisis, the potential for liquidity-induced contagion may have negative effects on investors and the markets for short-term financing of corporations, banks, and governments. This is in large part because of the significance of money market funds’ role in such short-term financing markets.69 Indeed, money market funds had experienced steady growth before the financial crisis, driven in part by growth in the size of institutional cash pools,70 which grew from under $100 billion in 1990 to almost $4 trillion just before the 2008 financial crisis.71 Money market funds’ suitability for cash management operations also has made them popular among corporate treasurers, municipalities, and other institutional investors, some of whom rely on money market funds for their cash management operations because the funds provide diversified cash management more efficiently due both to the scale of their operations and their expertise.72 For example, according to

Government Finance Officers Association) (‘‘Most of us don’t have the time, the energy, or the resources at our fingertips to analyze the credit quality of every security ourselves. So we’re in essence, by going into a pooled fund, hiring that expertise for us . . . it gives us diversification, it gives us immediate cash management needs where we can move money into and out of it, and it satisfies much of our operating cash investment opportunities.’’); (Brian Reid, Investment Company Institute) (‘‘there’s a very clear stated demand out there on the part of investors for a non-bank product that creates a pooled investment in short￾term assets . . . banks can’t satisfy this because an undiversified exposure to a single bank is considered to be far riskier. . . .’’); (Carol A. DeNale, CVS Caremark) (‘‘I think that it would be very small investment [in] deposits in banks. I don’t think there’s—you know, the ratings of some of the banks would make me nervous, also; [sic] they’re not guaranteed. I’m not going to put a $20 million investment in some banks.’’). 73See 2012 Association for Financial Professionals Liquidity Survey, at 15, available at http://www.afponline.org/liquidity (subscription required) (‘‘2012 AFP Liquidity Survey’’). The size of this allocation to money market funds is down substantially from prior years. For example, prior AFP Liquidity Surveys show higher allocations of organizations’ short-term investments to money market funds: Almost 40% in the 2008 survey, approximately 25% in the 2009 and 2010 surveys, and almost 30% in the 2011 survey. This shift has largely reflected a re-allocation of cash investments to bank deposits, which rose from representing 25% of organizations’ short-term investment allocations in the 2008 Association for Financial Professionals Liquidity Survey, available at http:// www.afponline.org/pub/pdf/ 2008_Liquidity_Survey.pdf (‘‘2008 AFP Liquidity Survey’’), to 51% of organizations’ short-term investment allocations in the 2012 survey. The 2012 survey notes that some of this shift has been driven by the temporary unlimited FDIC deposit insurance coverage for non-interest bearing bank transaction accounts (which expired at the end of 2012) and the above-market rate that these bank accounts are able to offer in the low interest rate environment through earnings credits. See 2012 AFP Liquidity Survey, this note. As of August 14, 2012, approximately 66% of money market fund assets were held in money market funds or share classes intended to be sold to institutional investors according to iMoneyNet data. All of the AFP Liquidity Surveys are available at http://www.afponline.org. 74See supra text preceding and accompanying n.35. Although money market funds also can build liquidity internally by retaining (rather than investing) cash from investors purchasing shares, this is not likely to be a material source of liquidity for a distressed money market fund experiencing heavy redemptions. 75This likely is
because some institutional investors generally have more capital at stake, sophisticated tools, and professional staffs to monitor risk. See 2009 Proposing Release, supra note 31, at nn.46–48 and 178 and accompanying text. 76See, e.g., RSFI Study, supra note 21, at 10 (‘‘Investor redemptions during the 2008 financial crisis, particularly after Lehman’s failure, were heaviest in institutional share classes of prime money market funds, which typically hold securities that are illiquid relative to government funds. It is possible that sophisticated investors took advantage of the opportunity to redeem shares to avoid losses, leaving less sophisticated investors (if co-mingled) to bear the losses.’’). 77As discussed further below, retail money market funds experienced a lower level of redemptions in 2008 than institutional money market funds, although the full predictive power of this empirical evidence is tempered by the introduction of the Treasury Department’s temporary guarantee program for money market funds, which may have prevented heavier shareholder redemptions among generally slower moving retail investors. See infra n.91. 78See generally RSFI Study, supra note 21, at
section 3.
79See generally RSFI Study, supra note 21, at
section 3. See also 2009 Proposing Release supra
note 31, at section I.D; infra section II.D.2 (discussing the financial distress in 2011 caused by the Eurozone sovereign debt crisis and U.S. debt ceiling impasse and money market funds’ experience during that time). 80See also 2009 Proposing Release, supra note 31, at n.44 and accompanying text. We note that the Reserve Primary Fund’s assets have been returned to shareholders in several distributions made over a number of years. We understand that assets returned constitute approximately 99% of the fund’s assets as of the close of business on September 15, 2008, including the income earned during the liquidation period. Any final distribution to former Reserve Primary Fund shareholders will not occur until the litigation surrounding the fund is complete. See Consolidated Class Action Complaint, In Re The Reserve Primary Fund Sec. & Derivative Class Action Litig., No. 08– CV–8060–PGG (S.D.N.Y. Jan. 5, 2010). 81See generally RSFI Study, supra note 21, at
section 3.
82See 2009 Proposing Release, supra note 31, at
Section I.D.
83See RSFI Study, supra note 21, at section 3. one survey, approximately 19% of organizations’ short-term investments were allocated to money market funds (and, according to this observer, this
figure is down from almost 40% in 2008
due in part to the reallocation of cash investments to bank deposits following temporary unlimited Federal Deposit Insurance Corporation deposit insurance for non-interest bearing bank transaction accounts, which recently expired).73 Money market funds’ size and significance in the short-term markets, together with their features that can create an incentive to redeem as discussed above, have led to concerns that money market funds may contribute to systemic risk. Heavy redemptions from money market funds during periods of financial stress can remove liquidity from the financial system, potentially disrupting the secondary market. Issuers may have difficulty obtaining capital in the short￾term markets during these periods because money market funds are focused on meeting redemption requests through internal liquidity generated either from maturing securities or cash from subscriptions, and thus may be purchasing fewer short-term debt obligations.74 To the extent that multiple money market funds experience heavy redemptions, the negative effects on the short-term markets can be magnified. Money market funds’ experience during the 2007–2008 financial crisis illustrates the impact of heavy redemptions, as we discuss in more detail below. Heavy redemptions in money market funds may disproportionately affect slow-moving shareholders because, as discussed further below, redemption data from the 2007–2008 financial crisis show that some institutional investors are likely to redeem from distressed money market funds more quickly than other investors and to redeem a greater percentage of their prime fund holdings.75 Slower-to-redeem shareholders may be harmed because, as discussed above, redemptions at a money market fund can concentrate existing losses in the fund or create new losses if the fund must sell assets at a discount. In both cases, redemptions leave the fund’s portfolio more likely to lose value, to the detriment of slower￾to-redeem investors.76 Retail investors— who tend to be slower moving—also could be harmed if market stress begins at an institutional money market fund and spreads to other funds, including funds composed solely or primarily of retail investors.77
C. The 2007–2008 Financial Crisis
There are many possible explanations for the redemptions from money market funds during the 2007–2008 financial crisis.78 Regardless of the cause (or causes), money market funds’ experience in the 2007–2008 financial crisis demonstrates the harm that can result from such rapid heavy redemptions in money market funds.79 As explained in the RSFI study, on September 16, 2008, the day after Lehman Brothers Holdings Inc. announced its bankruptcy, The Reserve Fund announced that as of that afternoon, its Primary Fund—which held a $785 million (or 1.2% of the fund’s assets) position in Lehman Brothers commercial paper—would ‘‘break the buck’’ and price its securities at $0.97 per share.80 At the same time, there was turbulence in the market for financial sector securities as a result of the bankruptcy of Lehman Brothers and the near failure of American International Group (‘‘AIG’’), whose commercial paper was held by many prime money market funds. In addition to Lehman Brothers and AIG, there were other stresses in the market as well, as discussed in greater detail in the RSFI Study.81 Redemptions in the Primary Fund were followed by redemptions from other Reserve money market funds.82 Prime institutional money market funds more generally began experiencing heavy redemptions.83 During the week of September 15, 2008, investors withdrew approximately $300 billion

84See INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY MARKET WORKING GROUP, at 62 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (‘‘ICI REPORT’’) (analyzing data from iMoneyNet). The latter figure describes aggregate redemptions from all prime money market funds. Some money market funds had redemptions well in excess of 14% of their assets. Based on iMoneyNet data (and excluding the Reserve Primary Fund), the maximum weekly redemptions from a money market fund during the 2008 financial crisis was over 64% of the fund’s assets. 85See Philip Swagel, ‘‘The Financial Crisis: An Inside View,’’ Brookings Papers on Economic Activity, at 31 (Spring 2009) (conference draft), available at http://www.brookings.edu/economics/ bpea/∼/media/Files/Programs/ES/BPEA/ 2009_spring_bpea_papers/ 2009_spring_bpea_swagel.pdf; Christopher Condon & Bryan Keogh, Funds’ Flight from Commercial Paper Forced Fed Move, BLOOMBERG, Oct. 7, 2008, available at http://www.bloomberg.com/apps/ news?pid=newsarchive&sid=a5hvnKFCC_pQ. 86See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25. 87See 2009 Proposing Release, supra note 31, at nn.51–53 & 65–68 and accompanying text (citing to minutes of the Federal Open Market Committee, news articles, Federal Reserve Board data on commercial paper spreads over Treasury bills, and books and academic articles on the financial crisis). 88As discussed in section III.A.3, government money market funds historically have faced different redemption pressures in times of stress and have different risk characteristics than other money market funds because of their unique portfolio composition, which typically has lower credit default risk and greater liquidity than non￾government portfolio securities typically held by money market funds. 89We understand that iMoneyNet differentiates retail and institutional money market funds based on factors such as minimum initial investment amount and how the fund provider self-categorizes the fund. 90See 2009 Proposing Release, supra note 31, at nn.55–59 and accompanying text for a fuller description of the various forms of governmental assistance provided to money market funds during this time. 91Treasury used the $50 billion Exchange Stabilization Fund to fund the Temporary Guarantee Program, but legislation has since been enacted prohibiting Treasury from using this fund again for guarantee programs for money market funds. See Emergency Economic Stabilization Act of 2008 § 131(b), 12 U.S.C. § 5236 (2008). The $50 billion Exchange Stabilization Fund was never drawn upon by money market funds under this program and the Temporary Guarantee Program expired on September 18, 2009. The Federal Reserve Board also established the Asset-Backed from prime money market funds or 14% of the assets in those funds.84 During that time, fearing further redemptions, money market fund managers began to retain cash rather than invest in commercial paper, certificates of deposit, or other short-term
instruments.85 Commenters have stated that money market funds were not the only investors in the short-term financing markets that reduced or halted investment in commercial paper and other riskier short-term debt securities during the 2008 financial crisis.86 Short￾term financing markets froze, impairing access to credit, and those who were still able to access short-term credit often did so only at overnight maturities.87
Figure 1, below, provides context for
the redemptions that occurred during the financial crisis. Specifically, it shows daily total net assets over time, where the vertical line indicates the date that Lehman Brothers filed for bankruptcy, September 15, 2008. Investor redemptions during the 2008 financial crisis, particularly after Lehman’s failure, were heaviest in institutional share classes of prime money market funds, which typically hold securities that are less liquid and of lower credit quality than those typically held by government money market funds. The figure shows that institutional share classes of government money market funds, which include Treasury and government funds, experienced heavy inflows.88 The aggregate level of retail investor redemption activity, in contrast, was not particularly high during September and October 2008, as shown in Figure 1.89 On September 19, 2008, the U.S. Department of the Treasury (‘‘Treasury’’) announced a temporary guarantee program (‘‘Temporary Guarantee Program’’), which would use the $50 billion Exchange Stabilization Fund to support more than $3 trillion in shares of money market funds, and the Board of Governors of the Federal Reserve System authorized the temporary extension of credit to banks to finance their purchase of high-quality asset-backed commercial paper from money market funds.90 These programs successfully slowed redemptions in prime money market funds and provided additional liquidity to money market funds. The disruptions to the short-term markets detailed above could have continued for a longer period of time but for these programs.91 EP19JN13.003</GPH>

Commercial Paper Money Market Mutual Fund Liquidity Facility (‘‘AMLF’’), through which credit was extended to U.S. banks and bank holding companies to finance purchases of high-quality asset-backed commercial paper (‘‘ABCP’’) from money market funds, and it may have mitigated fire sales to meet redemptions requests. See Burcu Duygan-Bump et al., How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, 68 J. Fin. 715 (Apr. 2013) (‘‘Our results suggest that the AMLF provided an important source of liquidity to MMMFs and the ABCP market, as it helped to stabilize MMMF asset flows and to reduce ABCP yields.’’). The AMLF expired on February 1, 2010. Given the significant decline in money market investments in ABCP since 2008, reopening the AMLF would provide little benefit to money market funds today. For example, ABCP investments accounted for over 20% of Moody’s-rated U.S. prime money market fund assets at the end of August 2008, but accounted for less than 10% of those assets by the end of August 2011. See Moody’s Investors Service, Money Market Funds:
ABCP Investments Decrease, Dec. 7, 2011, at 2. Form N–MFP data shows that as of February 28, 2013, prime money market funds held 6.9% of their assets in ABCP. 92Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (‘‘2010 Adopting Release’’). 93Specifically, the amendments placed tighter limits on a money market fund’s ability to acquire ‘‘second tier’’ securities by (1) restricting a money market fund from investing more than 3% of its assets in second tier securities (rather than the previous limit of 5%), (2) restricting a money market fund from investing more than 1⁄2 of 1% of its assets in second tier securities issued by any single issuer (rather than the previous limit of the greater of 1% or $1 million), and (3) restricting a money market fund from buying second tier securities that mature in more than 45 days (rather than the previous limit of 397 days). See rule 2a– 7(c)(3)(ii) and (c)(4)(i)(C). Second tier securities are eligible securities that, if rated, have received other than the highest short-term term debt rating from the requisite NRSROs or, if unrated, have been determined by the fund’s board of directors to be of comparable quality. See rule 2a–7(a)(24) (defining ‘‘second tier security’’); rule 2a–7(a)(12) (defining ‘‘eligible security’’); rule 2a–7(a)(23) (defining ‘‘requisite NRSROs’’). 94The requirements are that, for all taxable money market funds, at least 10% of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day and, for all money market funds, at least 30% of assets must be in cash, U.S. Treasury securities, certain other Government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week. See rule 2a– 7(c)(5)(ii) and (iii). 95The 2010 amendments also introduced a weighted average life requirement of 120 days, which limits the money market fund’s ability to invest in longer-term floating rate securities. See rule 2a–7(c)(2)(ii) and (iii). 96See rule 30b1–7. 97See rule 2a–7(c)(12). 98See rule 2a–7(c)(10)(v). 99See 2009 Proposing Release, supra note 31, at
section II.C.3.
100See RSFI Study, supra note 21, at 32. 101 Id. 102 Id. 103See also id. at 33. D. Examination of Money Market Fund Regulation Since the Financial Crisis

1. The 2010 Amendments
   In March 2010, we adopted a number of amendments to rule 2a–7.92 These amendments were designed to make money market funds more resilient by reducing the interest rate, credit, and liquidity risks of fund asset portfolios. More specifically, the amendments decreased money market funds’ credit risk exposure by further restricting the amount of lower quality securities that funds can hold.93 The amendments, for the first time, also require that money market funds maintain liquidity buffers in the form of specified levels of daily and weekly liquid assets.94 These liquidity buffers provide a source of internal liquidity and are intended to help funds withstand high redemptions during times of market illiquidity. Finally, the amendments reduce money market funds’ exposure to interest rate risk by decreasing the maximum weighted average maturities of fund portfolios from 90 to 60 days.95 In addition to reducing the risk profile of the underlying money market fund portfolios, the reforms increased the amount of information that money market funds are required to report to the Commission and the public. Money market funds are now required to submit to the SEC monthly information on their portfolio holdings using Form N–MFP.96 This information allows the Commission, investors, and third parties to monitor compliance with rule 2a–7 and to better understand and monitor the underlying risks of money market fund portfolios. Money market funds are now required to post portfolio information on their Web sites each month, providing investors with important information to help them make better-informed investment decisions and helping them impose market discipline on fund managers.97 Finally, money market funds must undergo stress tests under the direction of the board of directors on a periodic basis.98 Under this stress testing requirement, each fund must periodically test its ability to maintain a stable NAV per share based upon certain hypothetical events, including an increase in short-term interest rates, an increase in shareholder redemptions, a downgrade of or default on portfolio securities, and widening or narrowing of spreads between yields on an appropriate benchmark selected by the fund for overnight interest rates and commercial paper and other types of securities held by the fund. This reform was intended to provide money market fund boards and the Commission a better understanding of the risks to which the fund is exposed and give fund managers a tool to better manage those risks.99
2. The Eurozone Debt Crisis and U.S.
   Debt Ceiling Impasse of 2011 One way to evaluate the efficacy of the 2010 reforms is to examine redemption activity during the summer of 2011. Money market funds experienced substantial redemptions during this time as the Eurozone sovereign debt crisis and impasse over the U.S. debt ceiling unfolded. As a result of concerns about exposure to European financial institutions, prime money market funds began experiencing substantial redemptions.100 Assets held by prime money market funds declined by approximately $100 billion (or 6%) during a three-week period beginning June 14, 2011.101 Some prime money market funds had redemptions of almost 20% of their assets in each of June, July, and August 2011, and one fund lost 23% of its assets during that period after articles began to appear in the financial press that warned of indirect exposure of money market funds to Greece.102 Figures 2 and 3 below show the redemptions from prime money market funds during this time, and also show that investors purchased shares of government money market funds in late June and early July in response to these concerns, but then began redeeming government money market fund shares in late July and early August, likely as a result of concerns about the U.S. debt ceiling impasse and possible ratings downgrades of government securities.103

104 Id. at 33–34. 105 Id. at 7–13.
While it is difficult to isolate the effects of the 2010 amendments, these events highlight the potential increased resilience of money market funds after the reforms were adopted. Most significantly, no money market fund had to re-price below its stable $1.00 share price. As discussed in greater detail in the RSFI Study, unlike September 2008, money market funds did not experience significant capital losses that summer, and the funds’ shadow prices did not deviate significantly from the funds’ stable share prices; also unlike in 2008, money market funds in the summer of 2011 had sufficient liquidity to satisfy investors’ redemption requests, which were made over a longer period than in 2008, suggesting that the 2010 amendments acted as intended to enhance the resiliency of money market funds.104 The redemptions in the summer of 2011 also did not take place against the backdrop of a broader financial crisis, and therefore may have reflected more targeted concerns by investors (concern about exposure to the Eurozone and U.S. government securities as the debt ceiling impasse unfolded). Money market funds’ experience in 2008, in contrast, may have reflected a broader range of concerns as reflected in the RSFI Study, which discusses a number of possible explanations for redemptions during the financial crisis.105 Although money market funds’ experiences differed in 2008 and the summer of 2011, the heavy redemptions money market funds experienced in the EP19JN13.004</GPH>

106See id. at 34–35 (‘‘It is important to note, however, investor redemptions has a direct effect on short-term funding liquidity in the U.S. commercial paper market. Chernenko and Sunderam (2012) report that ‘creditworthy issuers may encounter financing difficulties because of risk taking by the funds from which they raise financing.’ Similarly, Correa, Sapriza, and Zlate (2012) finds U.S. branches of foreign banks reduced lending to U.S. entities in 2011, while Ivashina, Scharfstein, and Stein (2012) document European banks that were more reliant on money funds experienced bigger declines in dollar lending.’’) (internal citations omitted); Sergey Chernenko & Adi Sunderam, Frictions in Shadow Banking:
Evidence from the Lending Behavior of Money Market Funds, Fisher College of Business Working Paper No. 2012–4 (Sept. 2012); Ricardo Correa et al., Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis, Federal Reserve Board International Finance Discussion Paper No. 2012– 1059 (Nov. 2012); Victoria Ivashina et al., Dollar Funding and the Lending Behavior of Global Banks, National Bureau of Economic Research Working Paper No. 18528 (Nov. 2012). 107See 2009 Proposing Release, supra note 31, at
section III; 2010 Adopting Release, supra note 92,
at section I.
108See 2009 Proposing Release, supra note 31, at
section III.A.
109Comments on the 2009 Proposing Release can be found at http://www.sec.gov/comments/s7-11-09/ s71109.shtml. 110See 2010 Adopting Release, supra note 92, at
section I.
111Report of the President’s Working Group on Financial Markets, Money Market Fund Reform Options (Oct. 2010) (‘‘PWG Report’’), available at http://www.treasury.gov/press-center/press￾releases/Documents/ 10.21%20PWG%20Report%20Final.pdf. The members of the PWG included the Secretary of the Treasury Department (as chairman of the PWG), the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the SEC, and the Chairman of the Commodity Futures Trading Commission. 112See President’s Working Group Report on Money Market Fund Reform, Investment Company Act Release No. 29497 (Nov. 3, 2010) [75 FR 68636 (Nov. 8, 2010)]. See also Roundtable Transcript, supra note 43. 113The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the ‘‘Dodd-Frank Act’’) established the FSOC: (A) To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system. The ten voting members of the FSOC include the Treasury Secretary (who serves as Chairman of the FSOC), the Chairmen of the Commission, the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, and the National Credit Union Administration Board, the Directors of the Bureau of Consumer Financial Protection and the Federal Housing Finance Agency, the Comptroller of the Currency, and an independent insurance expert appointed by the President of the United States. See Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376 §§ 111–112 (2010). 114See Proposed Recommendations Regarding Money Market Mutual Fund Reform, Financial Stability Oversight Council [77 FR 69455 (Nov. 19, 2012)] (the ‘‘FSOC Proposed Recommendations’’). Under section 120 of the Dodd-Frank Act, if the FSOC determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of a financial activity or practice conducted by bank holding companies or nonbank financial companies could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, the financial markets of the United States, or low-income, minority or under￾served communities, the FSOC may provide for more stringent regulation of such financial activity or practice by issuing recommendations to primary financial regulators, like the Commission, to apply new or heightened standards or safeguards. FSOC has proposed to issue a
recommendation to the Commission under this authority concerning money market funds. If FSOC issues a final recommendation to the Commission, the Commission, under section 120, would be required to impose the recommended standards, or similar standards that FSOC deems acceptable, or explain in writing to FSOC why the Commission has determined not to follow FSOC’s recommendation. 115See FSOC Proposed Recommendations, supra note 114, at section V.A. 116See id. at section V.B. summer of 2011 appear to have negatively affected the markets for short-term financing. Academics researching these issues have found, as detailed in the RSFI Study, that ‘‘creditworthy issuers may encounter financing difficulties because of risk taking by the funds from which they raise financing’’; ‘‘local branches of foreign banks reduced lending to U.S. entities in 2011’’; and that ‘‘European banks that were more reliant on money funds experienced bigger declines in dollar lending.’’ 106 Thus, while such redemptions often exemplify rational risk management by money market fund investors, they can also have certain contagion effects on the short-term financing markets.
3. Our Continuing Consideration of the
Need for Additional Reforms When we proposed and adopted the 2010 amendments, we acknowledged that money market funds’ experience during the 2007–2008 financial crisis raised questions of whether more fundamental changes to money market funds might be warranted.107 We solicited and received input from a number of different sources analyzing whether or not additional reforms may be necessary, and we began to solicit and evaluate potential options for additional regulation of money market funds to address these vulnerabilities. In the 2009 Proposing Release we requested comment on certain options, including whether money market funds should be required to move to the ‘‘floating net asset value’’ used by all other mutual funds or satisfy certain redemptions in-kind.108 We received over 100 comments on this aspect of the 2009 Proposing Release.109 In adopting the 2010 amendments, we noted that we would continue to explore more significant regulatory changes in light of the comments we received.110 At the time, we stated that we had not had the opportunity to fully explore possible alternatives and analyze the potential costs, benefits, and consequences of those alternatives. Our subsequent consideration of money market funds has been informed by the work of the President’s Working Group on Financial Markets, which published a report on money market fund reform options in 2010 (the ‘‘PWG Report’’).111 We solicited comment on the features of money market funds that make them susceptible to heavy redemptions and potential options for reform both through our request for comment on the PWG Report and by hosting a May 2011 roundtable on Money Market Funds and Systemic Risk (the ‘‘2011 Roundtable’’).112 The potential financial stability risks associated with money market funds also have attracted the attention of the Financial Stability Oversight Council (‘‘FSOC’’), which has been tasked with monitoring and responding to threats to the U.S. financial system and which superseded the PWG.113 On November 13, 2012, FSOC proposed to recommend that we implement one or a combination of three reforms designed to address risks to financial companies and markets that money market funds may pose.114 The first option would require money market funds to use floating NAVs.115 The second option would require money market funds to have a NAV buffer with a tailored amount of assets of up to 1% (raised through various means) to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV.116 The NAV buffer would be paired with a requirement that 3% of a shareholder’s highest account value in excess of $100,000 during the previous 30 days— a ‘‘minimum balance at risk’’ (‘‘MBR’’)— be made available for redemption on a delayed basis. These requirements would not apply to certain money market funds that invest primarily in U.S. Treasury obligations and repurchase agreements collateralized with U.S. Treasury
securities. The third option would require money market funds to have a risk-based NAV buffer of 3%. This 3% NAV buffer potentially could be combined with other measures aimed at enhancing the effectiveness of the buffer and potentially increasing the resiliency of money market funds, and

117See id. at section V.C.
118See id. at section V.D.
119See id. at section III.B.
120See generally RSFI Study, supra note 21, at
section 4.
121 Id. at 30.
122 Id. at 34.
123 Id. at 38, Table 5. In fact, even at capital losses of only 0.75% of the fund’s non-weekly liquid assets and no investor redemptions, funds are already more likely than not (64.6%) to ‘‘break the buck.’’ Id. 124To further illustrate the point, the RSFI Study noted that the Reserve Primary Fund ‘‘would have broken the buck even in the presence of the 2010 liquidity requirements.’’ Id. at 37. 125Our proposed exemptions for government and retail money market funds (including our proposed definition for a retail money market fund) are discussed in sections III.A.3 and III.A.4, respectively. The exemptive amendments we are proposing are within the Commission’s broad authority under section 6(c) of the Act. Section 6(c) authorizes the Commission to exempt by rule, conditionally or unconditionally, any person, security, or transaction (or classes of persons, securities, or transactions) from any provision of the Act ‘‘if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions’’ of the Act. 15 U.S.C. 80a–6(c). For the reasons discussed throughout this Release, the Commission preliminarily believes that the proposed amendments to rules 2a–7, 12d3–1, 18f– 3, and 22e–3 meet these standards. 126 In the text of the proposed rules and forms below we refer to our floating NAV alternative as ‘‘Alternative 1,’’ and our liquidity fees and gates alternative as ‘‘Alternative 2.’’ thereby justifying a reduction in the level of the required NAV buffer.117 Finally, in addition to proposing to recommend these three reform options, FSOC requested comment on other potential reforms, including standby liquidity fees and temporary restrictions on redemptions (‘‘gates’’), which would be implemented during times of market stress to reduce money market funds’ vulnerability to runs.118 In its proposed recommendation FSOC stated that the Commission, ‘‘by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risk that [money market funds] present to the economy,’’ and that if the Commission ‘‘moves forward with meaningful structural reforms of [money market funds] before [FSOC] completes its Section 120 process, [FSOC] expects that it would not issue a final Section 120 recommendation.’’ 119 We strongly agree that the Commission is best positioned to consider and implement any further reforms to money market funds, and we have considered FSOC’s analysis of its proposed recommended reform options and the public comments that FSOC has received in formulating the money market reforms we are proposing today. The RSFI Study, discussed throughout this Release, also has informed our consideration of the risks that may be posed by money market funds and our formulation of today’s proposals. The RSFI Study contains, among other things, a detailed analysis of our 2010 amendments to
rule 2a–7 and some of the amendments’ effects to date, including changes in some of the characteristics of money market funds, the likelihood that a fund with the maximum permitted weighted average maturity (‘‘WAM’’) would ‘‘break the buck’’ before and after the 2010 reforms, money market funds’ experience during the 2011 Eurozone sovereign debt crisis and the U.S. debt-ceiling impasse, and how money market funds would have performed during September 2008 had the 2010 reforms been in place at that time.120 In particular, the RSFI Study found that under certain assumptions the expected probability of a money market fund breaking the buck was lower with the additional liquidity required by the 2010 reforms.121 In addition, funds in 2011 had sufficient liquidity to withstand investors’ redemptions during the summer of 2011.122 The fact that no fund experienced a credit event during that time also contributed to the evidence that funds’ were able to withstand relatively heavy redemptions while maintaining a stable $1.00 share price. Finally, using actual portfolio holdings from September 2008, the RSFI Study analyzed how funds would have performed during the financial crisis had the 2010 reforms been in place at that time. While funds holding 30% weekly liquid assets are more resilient to portfolio losses, funds will ‘‘break the buck’’ with near certainty if capital losses of the fund’s non-weekly liquid assets exceed 1%.123 The RSFI Study concludes that the 2010 reforms would have been unlikely to prevent a fund from breaking the buck when faced with large credit losses like the ones experienced in 2008.124 The inferences that can be drawn from the RSFI Study lead us to conclude that while the 2010 reforms were an important step in making money market funds better able to withstand heavy redemptions when there are no portfolio losses (as was the case in the summer of 2011), they are not sufficient to address the incentive to redeem when credit losses are expected to cause fund’s portfolios to lose value or when the short-term financing markets more generally are expected to, or do, come under stress. Accordingly, we preliminarily believe that the alternative reforms proposed in this Release could lessen money market funds’ susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from high levels of redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds.
III. Discussion
We are proposing alternative amendments to rule 2a–7, and related rules and forms, that would either (i) require money market funds (other than government and retail money market funds) 125 to ‘‘float’’ their NAV per share or (ii) require that a money market fund (other than a government fund) whose weekly liquid assets fall below 15% of its total assets be required to impose a liquidity fee of 2% on all redemptions (unless the fund’s board determines that the liquidity fee is not in the best interest of the fund). Under the second alternative, once the money market fund crosses this threshold, the fund’s board also would have the ability to temporarily suspend redemptions (or ‘‘gate’’) the fund for a limited period of time if the board determines that doing so is in the fund’s best interest.126 We discuss each of these alternative proposals in this section, along with potential tax, accounting, operational, and economic implications. We also discuss a potential combination of our floating NAV proposal and liquidity fees and gates proposal, as well as the potential benefits, drawbacks, and operational issues associated with such a potential combination. We also discuss various alternative approaches that we have considered for money market fund reform. In addition, we are proposing a number of other amendments that would apply under either alternative proposal to enhance the disclosure of money market fund operations and risks. Certain of our proposed disclosure requirements would vary depending on the alternative proposal adopted (if any) as they specifically relate to the floating NAV proposal or the liquidity fees and gates proposal. In addition, we are proposing additional disclosure reforms to improve the transparency of risks present in money market funds, including daily Web site disclosure of funds’ daily and weekly liquid assets and market-based NAV per share and historic instances of sponsor support. We also are proposing to establish a new current event disclosure form that would require funds to make prompt public disclosure of certain events, including portfolio security defaults, sponsor support, a fall in the funds’ weekly liquid assets below 15% of total

127See infra section III.I.
128The ‘‘twenty-five percent basket’’ currently allows money market funds to only comply with the 10% guarantee concentration limit with respect to 75% of the fund’s total assets. See infra section III.J. 129See References to Credit Ratings in Certain Investment Company Act Rules and Forms, Investment Company Act Release No. 29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (proposing to also eliminate references to credit ratings from rule 5b–3 and Forms N–1A, N–2, and N–3, and establish new rule 6a–5 to replace a reference to credit ratings in section 6(a)(5) that the Dodd-Frank Act eliminated). 130See 2010 Adopting Release, supra note 92. We note that after enactment of the Dodd-Frank Act, our staff issued a no-action letter assuring money market funds and their managers that, in light of
section 939A of the Dodd-Frank Act, the staff would
not recommend enforcement action to the Commission under section 2(a)(41) of the Act and rules 2a–4 and 22c–1 thereunder if a money market fund board did not designate NRSROs and did not make related disclosures in its SAI before the Commission had completed its review of rule 2a– 7 required by the Dodd-Frank Act and made any modifications to the rule. See SEC Staff No-Action Letter to the Investment Company Institute (Aug. 19, 2010). This staff guidance remains in effect until such time as the Commission or its staff indicate otherwise. 131The definitions of government and retail money market funds, as considered exempt under our proposals from certain proposed reforms, are discussed in sections III.A.3 and III.A.4. These funds would also price their portfolio securities using market-based factors, but would continue to be able to maintain a stable price per share through the use of the penny rounding method of pricing. 132References to rule 2a–7 as amended under our floating NAV proposal will be ‘‘proposed (FNAV) rule’’; similarly, references to rule 2a–7 as amended under our liquidity fees and gates proposal discussed in section III.B will be ‘‘proposed (Fees & Gates) rule.’’ 133We also propose to amend rule 18f–3(c)(2)(i) to replace the phrase ‘‘that determines net asset value using the amortized cost method permitted by § 270.2a–7’’ with ‘‘that operates in compliance with § 270.2a–7’’ because money market funds would not use the amortized cost method to a greater extent than mutual funds generally under either of our core reform proposals. 134We have not previously proposed, but have sought comment on requiring money market funds to use a floating NAV. See 2009 Proposing Release, supra note 31, at section II.A. The floating NAV alternative on which we seek comment today is informed by the comments we received in response to the 2009 comment request, as well as relevant comments submitted in response to: (i) the PWG Report and (ii) the FSOC Proposed Recommendations. 135See infra note 27 for a discussion of how money market funds generally value their portfolio securities using market-based factors based on estimates from models rather than trading inputs. 136See 1977 Valuation Release, supra note 10. In this regard, the Commission has stated that the ‘‘fair value of securities with remaining maturities of 60 days or less may not always be accurately reflected through the use of amortized cost valuation, due to an impairment of the creditworthiness of an issuer, or other factors. In such situations, it would appear to be incumbent on the directors of a fund to recognize such factors and take them into account in determining ‘fair value.’ ’’ Id. Accordingly, this guidance effectively limits the use of amortized cost valuation to circumstances where it is the same as valuation based on market factors. Some commenters voiced concern about allowing an exemption for money market funds with remaining maturities of 60 days or less. See, e.g., Federal
Reserve Bank Presidents FSOC Comment Letter, supra note 38. However, we believe that these commenters misunderstood Commission guidance in this area, which limits the use of amortized cost valuation for these securities to circumstances under which the amortized cost value accurately reflects the fair value, as determined using market factors. See 1977 Valuation Release, supra note 10. 137See proposed (FNAV) rule 2a–7(d) (risk￾limiting conditions). 138See proposed (FNAV) rule 2a–7(c) (share price). We discuss our proposed amendment to share pricing in infra section III.A.2. assets, and a fall in the market-based price of the fund below $0.9975. We are proposing to amend Form N– MFP to provide additional information relevant to assessing the risk of funds and make this information public immediately upon filing. In addition, we are proposing to require that a large liquidity fund adviser that manages a private liquidity fund provide security￾level reporting on Form PF that are substantially the same as those currently required to be reported by money market funds on Form N–MFP.127 Our proposed amendments also would tighten the diversification requirements of rule 2a–7 by requiring consolidation of certain affiliates for purposes of the 5% issuer diversification requirement, requiring funds to presumptively treat the sponsors of asset-backed securities (‘‘ABSs’’) as guarantors subject to rule 2a–7’s diversification requirements, and removing the so-called ‘‘twenty-five percent basket.’’ 128 Finally, we are proposing to amend the stress testing provision of rule 2a–7 to enhance how funds stress test their portfolios and require that money market funds stress test against the fund’s level of weekly liquid assets falling below 15% of total assets. We note finally that we are not rescinding our outstanding 2011 proposal to remove references to credit ratings from two rules and four forms under the Investment Company Act, including rule 2a–7 and Form N–MFP, under section 939A of the Dodd-Frank Act, and on which we welcome additional comments.129 The Commission intends to address this matter at another time and, therefore, this Release is based on rule 2a–7 and Form N–MFP as amended and adopted in 2010.130 A. Floating Net Asset Value Our first alternative proposal—a floating NAV—is designed primarily to address the incentive of money market fund shareholders to redeem shares in times of fund and market stress based on the fund’s valuation and pricing methods, as discussed in section II.B.1 above. It should also improve the transparency of pricing associated with money market funds. Under this alternative, money market funds (other than government and retail money market funds 131) would be required to ‘‘float’’ their net asset value. This proposal would amend 132 rule 2a–7 to rescind certain exemptions that have permitted money market funds to maintain a stable price by use of amortized cost valuation and penny￾rounding pricing of their portfolios.133 As
a result, the money market funds subject to this reform would sell and redeem shares at prices that reflect the value using market-based factors of their portfolio securities and would not penny round their prices.134 In other words, the daily share prices of these money market funds would ‘‘float,’’ which means that each fund’s NAV would fluctuate along with changes, if any, in the value using market-based factors of the fund’s underlying portfolio of securities.135 Money market funds would only be able to use amortized cost valuation to the extent other mutual funds are able to do so— where the fund’s board of directors determines, in good faith, that the fair value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise.136 Under this approach, the ‘‘risk limiting’’ provisions of rule 2a–7 would continue to apply to money market funds.137 Accordingly, mutual funds that hold themselves out as money market funds would continue to be limited to investing in short-term, high￾quality, dollar-denominated instruments. We would, however, rescind rule 2a–7’s provisions that relate to the maintenance of a stable value for these funds, including shadow pricing, and would adopt the other reforms discussed in this Release that are not related to the discretionary standby liquidity fees and gates alternative, as discussed in section III.B below. We also propose to require that all money market funds, other than government and retail money market funds, price their shares using a more precise method of rounding.138 The proposal would require that each money market fund round prices and transact in its shares at the fourth decimal place in the case of a fund with a $1.00 target share price (i.e., $1.0000) or an equivalent level of precision if a fund prices its shares at a different target level (e.g., a fund with a $10 target share price would price its shares at $10.000). Depending on the degree of fluctuation, this precision would increase the

139See, e.g., Roundtable Transcript, supra note
43. (Bill Stouten, Thrivent Financial) (‘‘I think the
primary factor that makes money funds vulnerable to runs is the marketing of the stable value.’’); (Gary Gensler, U.S. Commodity Futures Trading Commission (‘‘CFTC’’)) (‘‘But one thing comes along with the money market funds, which is the stable value, or if I can say as an old market guy, it’s a ‘free put.’ You can put back an instrument and get 100 cents on the dollar. And it’s that free put that I think causes some structural challenges.’’); Comment Letter of Federal Reserve Bank of Richmond (Jan. 10, 2011) (available in File No. 4–
619) (‘‘Richmond Fed PWG Comment Letter’’). See
also supra section II.B (discussing the structural features of money market funds that can make them vulnerable to runs); Statement 309 of the Shadow Financial Regulatory Committee, Systemic Risk and Money Market Mutual Funds (Feb. 14, 2011) (available in File No. 4–619), (‘‘[I]f fund valuations were marked to market immediately using the full NAV approach—as required for other types of mutual funds—this type of run [the September 2008 run on money market funds] would not have occurred, and there would not have been a strong economic incentive for money market mutual funds to liquidate positions.’’); Gorton Shadow Banking, supra note 71, at 269–270 (explaining that money market funds’ ability to transact at a stable $1.00 per share distinguishes them from other mutual funds, allows them to compete with bank demand deposits, and ‘‘may have instilled a false sense of security in investors who took the implicit promise as equivalent to the explicit insurance offered by deposit accounts’’). 140As discussed supra in Section II, we recognize that incentives other than those created by money market fund’s stable share price exist for money market fund shareholders to redeem in times of stress, including avoidance of loss and the tendency of investors to engage in flights to quality, liquidity, and transparency. 141See Fidelity April 2012 PWG Comment Letter, supra note 61. For example, 41% of the retail customers surveyed said they either would expect the government to protect money market funds’ stable values in times of crisis (10%) or were unsure about whether the government would do so (31%). 47% of the retail customers thought money market funds present comparable risks to ‘‘bank products,’’ which in context appears to refer to insured deposits, 12% thought money market funds posed less risk than bank products, while 36% of the retail customers thought money market funds posed more risk than bank products. 142See, e.g., Roundtable Transcript, supra note 43 (Lance Pan, Capital Advisors Group) (‘‘I would like to add that money fund investors do view money funds as liquidity vehicles, not as investment vehicles. What I mean by that is they will take zero loss, and they’re loss averse as opposed to risk averse. So to the extent that they own that risk [i.e., investors, rather than fund sponsors, may be exposed to a loss], at a certain point they started to own that risk, then the run would start to develop.’’); Comment Letter of Treasury Strategies, Inc. (Jan. 10, 2011) (available in File No. 4–619) (‘‘The added risk [in The Reserve Primary Fund resulting from its taking on more risk] produced higher yields, and as a result attracted substantial ‘hot money’ from highly sophisticated, institutional investors. These investors were fully knowledgeable of the risks they were taking, and assumed they would be the first to be able to sell their investments if the Reserve Fund’s bet on a government bailout of Lehman Brothers failed.’’). observed sensitivity of
a fund’s share price to changes in the market values of the fund’s portfolio securities, and should better inform shareholders of the floating nature of the fund’s value. Finally, we propose a relatively long compliance date of 2 years to provide time for money market funds converting to a floating NAV on a permanent basis to make system modifications and time for funds to respond to redemption requests. The extended compliance date would also allow shareholders time to understand the implications of any reforms, determine if a floating NAV money market fund is an appropriate investment, and if not, redeem their shares in an orderly fashion. The financial crisis of 2007–2008 had significant impacts on investors, money market funds, and the short-term financing markets. The floating NAV alternative is designed to respond, at least in part, to the contagion effects from heavy redemptions from money market funds that were revealed during that crisis. As discussed in greater detail below, although it is not possible to state with certainty what would have happened if money market funds had operated with a floating NAV at that time, we expect that if a floating NAV had been in place, it could have mitigated some of the heavy redemptions that occurred due to the stable share price. Many factors, however, contributed to these heavy redemptions, and we recognize that a floating NAV requirement is a targeted reform that may not ameliorate all of those factors. Under a floating NAV, investors would not have had the incentive to redeem money market fund shares to benefit from receiving the stable share price of a fund that may have experienced losses, because they would have received the actual market-based value of their shares. The transparency provided by the floating NAV alternative might also have reduced redemptions during the crisis that were a result of investor uncertainty about the value of the securities owned by money market funds because investors would have seen fluctuations in money market fund share prices that reflect market￾based factors. Of course, a floating NAV would not have prevented redemptions from money market funds that were driven by certain other investing decisions, such as a desire to own higher quality assets than those that were in the portfolios of prime money market funds, or not to be invested in securities at all, but rather to hold assets in another form such as in insured bank deposits. The floating NAV alternative is not intended to deter redemptions that constitute rational risk management by shareholders or that reflect a general incentive to avoid loss. Instead, it is designed to increase transparency, and thus investor awareness, of money market fund risks and dis-incentivize redemption activity that can result from informed investors attempting to exploit the possibility of redeeming shares at their stable share price even if the portfolio has suffered a loss.

1. Certain Considerations Relating to the
   Floating NAV Proposal a. A Reduction in the Incentive To Redeem Shares As discussed above, when a fund’s shadow price is less than the fund’s $1.00 share price, money market fund shareholders have an incentive to redeem shares ahead of other investors in times of fund and market stress. Given the size of institutional investors’ holdings and their resources for monitoring funds, institutions have both the motivation and ability to act on this incentive. Indeed, as discussed above and in the RSFI Study, institutional investors redeemed shares more heavily than retail investors from prime money market funds in both September 2008 and June 2011. Some market observers have suggested that the valuation and pricing techniques permitted by rule 2a–7 may exacerbate the incentive to redeem in money market funds if investors expect that the value of the fund’s shares will fall below $1.00.139 Our floating NAV proposal is designed to lower this risk by reducing investors’ incentive to redeem shares in times of fund and market stress. Under our floating NAV proposal, money market funds would transact at share prices that reflect current market-based factors (not amortized cost or penny rounding) and thus investor incentives to redeem early to take advantage of transacting at a stable value are ameliorated.140 b. Improved Transparency Our floating NAV proposal also is designed to increase the transparency of money market fund risk. Money market funds are investment products that have the potential for the portfolio to deviate from a stable value. Although many investors understand that money market funds are not guaranteed, survey data shows that some investors are unsure about the amount of risk in money market funds and the likelihood of government assistance if losses occur.141 Similarly, many institutional investors use money market funds for liquidity purposes and are extremely loss averse; that is, they are unwilling to suffer any losses on money market fund investments.142 Money market funds’ stable share price, combined with the practice of fund management companies providing financial support to money market funds when necessary, may have

143See also, e.g., Better Markets FSOC Comment Letter, supra note 67, at 11–12 (‘‘a fluctuating NAV would correct the basic misconception among many investors that their investment is guaranteed’’). 144See, e.g., PWG Report, supra note 111, at 10 (‘‘Investors have come to view MMF shares as extremely safe, in part because of the funds’ stable NAVs and sponsors’ record of supporting funds that might otherwise lose value. MMFs’ history of maintaining stable value has attracted highly risk￾averse investors who are prone to withdraw assets rapidly when losses appear possible.’’); Comment Letter of Capital Advisers (Apr. 2, 2012) (available in File No. 4–619) (stating that institutional money market fund investors ‘‘derive their risk-free assumptions from the fact that very few (a total of two) funds have experienced losses and in all other ‘near miss’ instances fund sponsors have provided voluntary capital or liquidity support to cover potential losses’’ and that the ‘‘Treasury Department further reinforced these assumptions when it announced the Temporary Guarantee Program for Money Market Funds on September 29, 2008’’) (emphasis in original). 145For a more detailed discussion of a floating NAV and investors’ expectations, see PWG Report, supra note 111, at 19–22; 2009 Proposing Release, supra note 31, at section III.A. 146See, e.g., Comment Letter of Deutsche Investment Management Americas Inc. (Jan. 10,
2011) (available in File No. 4–619) (‘‘Deutsche PWG
Comment Letter’’) (noting that a ‘‘variable NAV fund . . . will treat all investors fairly during times of stress’’; that ‘‘large and sudden redemptions runs [are] a phenomenon exacerbated by the fact that amortized cost accounting rules can embed realized losses in the fund that are not reflected in the NAV’’; and that ‘‘[t]o avoid having to absorb these embedded losses, investors have the incentive to redeem early’’); Comment Letter of TDAM USA Inc. (Sept. 8, 2009) (available in File No. S7–11–09) (agreeing that ‘‘requiring money market funds to issue and redeem their shares at market value, or to float their NAVs, would in certain respects advance shareholder fairness’’). 147 In section III.A.5.a we discuss the economic implications of sponsor support under our floating NAV proposal. We are not proposing any changes that would prohibit fund sponsors from supporting money market funds under our floating NAV proposal. Our proposal also includes new disclosure requirements related to sponsor support. See infra section III.F. 148See, e.g., PWG Report, supra note 111, at 20 (‘‘To be sure, a floating NAV itself would not eliminate entirely MMFs’ susceptibility to runs. Rational investors still would have an incentive to redeem as fast as possible the shares of any MMF that is at risk of depleting its liquidity buffer before that buffer is exhausted, because subsequent redemptions may force the fund to dispose of less￾liquid assets and incur losses.’’); 2009 Proposing Release, supra note 31, at 106 (‘‘We recognize that a floating net asset value would not necessarily eliminate the incentive to redeem shares during a liquidity crisis—shareholders still would have an incentive to redeem before the portfolio quality deteriorated further from the fund selling securities into an illiquid market to meet redemption demands.’’). See also supra notes 36–37 and accompanying text. implicitly encouraged investors to view these funds as ‘‘risk-free’’ cash.143 However, the stability of money market fund share prices has been due, in part, to the willingness of fund sponsors to support the stable value of the fund. As discussed in section II.B.3 above, sponsor support has not always been transparent to investors, potentially causing investors to underestimate the investment risk posed by money market funds. As a result, money market fund investors, who were not accustomed to seeing their funds lose value, may have increased their redemptions of shares when values fell in recent times.144 Our floating NAV proposal is designed to increase the transparency of risks present in money market funds. By making gains and losses a more regular and observable occurrence in money market funds, a floating NAV could alter investor expectations by making clear that money market funds are not risk free and that the funds’ share price will fluctuate based on the value of the funds’ assets.145 Investors in money market funds with floating NAVs should become more accustomed to, and
tolerant of, fluctuations in money market funds’ NAVs and thus may be less likely to redeem shares in times of stress. The proposal would also treat money market fund shareholders more equitably than the current system by requiring redeeming shareholders to receive the fair value of their shares.146 To further enhance transparency, we also are proposing to require a number of new disclosures related to fund sponsor support (see section III.F below). As discussed further in section III.E below, investors unwilling to bear the risk of a floating NAV would likely move to other products, such as government or retail money market funds (which we propose would be exempt from our floating NAV proposal and permitted to maintain a stable price). We seek comment on this aspect of our proposal.

• Do commenters agree that floating a
  money market fund’s NAV would lessen the incentive to redeem shares in times of fund and market stress that can result from use of amortized cost valuation and penny rounding pricing by money market funds today?
• What would be the effect of the
  other incentives to redeem that would remain under a floating NAV with basis point pricing requirement?
• Would floating a money market
  fund’s NAV provide sufficient transparency to cause investors to estimate more accurately the investment risks of money market funds? Do commenters believe that daily disclosure of shadow prices on fund Web sites would accomplish the same goal without eliminating the stable share price at which fund investors purchase and redeem shares? Why or why not? Is daily disclosure of a fund’s shadow price without transacting at that price likely to lead to higher or lower risks of large redemptions in times of stress? If the enhanced disclosure requirements proposed elsewhere in this Release were in place, what would be the incremental benefit of the enhanced transparency of a floating NAV?
• Are there other places to disclose
  the shadow price that would make the disclosure more effective in enhancing transparency?
• If the fluctuations in money market
  funds’ NAVs remained relatively small even with a $1.0000 share price, would investors become accustomed only to experiencing small gains and losses, and therefore be inclined to redeem heavily if a fund experienced a loss in excess of investors’ expectations?
• Would investors in a floating NAV
  money market fund that appears likely to suffer a loss be less inclined to redeem because the loss would be shared pro rata by all shareholders? Would a floating NAV make investors in a fund more likely to redeem at the first sign of potential stress because any loss would be immediately reflected in the floating NAV?
• Would floating NAV money market
  funds treat non-redeeming shareholders, and particularly slower-to-redeem shareholders, more equitably in times of stress?
• To the extent that some investors
  choose not to invest in money market funds due to the prospect of even a modest loss through a floating NAV, would the funds’ resiliency to heightened redemptions be improved?
• Would money market fund
  sponsors voluntarily make cash contributions or use other available means to support their money market funds and thereby prevent their NAVs from actually floating? 147 Would larger fund sponsors or those sponsors with more access to capital have a competitive advantage over other fund sponsors?
  c. Redemptions During Periods of
  Illiquidity
  We recognize that a floating NAV may not eliminate investors’ incentives to redeem fund shares, particularly when financial markets are under stress and investors are engaging in flights to quality, liquidity, or transparency.148 As discussed above, the RSFI Study noted that the incentive for investors to redeem ahead of other investors is heightened by liquidity concerns–when liquidity levels are insufficient to meet redemption requests, funds may be forced to sell portfolio securities into illiquid secondary markets at

149See RSFI Study, supra note 21, at 4 (noting that most money market fund portfolio securities are held to maturity, and secondary markets in these securities are not deeply liquid). 150Although we recognize that managers of certain other mutual funds, and not just money market funds, generally sell the most liquid portfolio securities first to satisfy redemptions that exceed available cash, non-money market mutual funds generally are not as susceptible to heightened redemptions as are money market funds for a variety of reasons, including that non-money market mutual funds generally are not used for cash management. 151See, e.g., Statement of the Investment Company Institute, SEC Open Meeting of the Investor Advisory Committee, May 10, 2010, at 4, available at www.ici.org/pdf/24289.pdf (stating that ‘‘[u]ltra-short bond funds lost more than 60% of their assets from mid-2007 to the end of 2008, and French floating NAV dynamic money funds lost about 40% of their assets in a three-month time span from July 2007 to September 2007’’ and that ‘‘[s]hareholders in fixed-income funds [including those with floating NAVs] also tend to be more risk adverse and more likely to redeem shares quickly when fixed-income markets show any signs of distress’’); Comment Letter of the European Fund and Asset Management Association (Jan. 10, 2011) (available in File No. 4–619) (‘‘EFAMA PWG Comment Letter’’) (noting that ‘‘[i]n a matter of weeks, EUR 70 billion were redeemed from these [enhanced money market] funds, predominantly by institutional investors; around 15–20 suspended redemptions for a short period, and 4 of them were [definitively] closed.’’). 152Many European floating NAV money market funds, not all of which suffered heavy redemptions, price their shares differently than floating NAV money market funds would under our proposal by accumulating rather than distributing dividends. The shares of accumulating dividend funds therefore generally will exceed one euro, and a loss in these funds would be a small reduction in the excess value above one euro as opposed to a drop in value below a single euro. This kind of floating NAV money market fund may not have affected shareholders’ expectations of and tolerance for losses to the same extent as would our proposal. See, e.g., Deutsche PWG Comment Letter, supra note 146 (stating that ‘‘drawing parallels to the return or redemption experiences within [European money market funds and ultra-short bond funds] and those in the proposed variable NAV rule 2a– 7 money market funds is not entirely accurate due to the differences in the duration of time and the magnitude of the redemption experiences’’ and noting that (i) ‘‘the variable NAV structure prevalent in many European money market funds is based on a system of accumulating dividends, not the use of a mark to market accounting system’’ and (ii) ‘‘one of the weaknesses addressed through the European Fund and Asset Management Association (‘‘EFAMA’’) and the Committee
of European Securities Regulators (‘‘CESR’’) in the European style of money market funds was the lack of standardization in the definition of money market funds and the broad investment policies across EU member states’’). See also Witmer, supra note 36. 153For a discussion of the regulation of European money market funds, see infra Table 2, notes E and H; Common Definition of European Money Market Funds (Ref. CESR/10–049). 154See EFAMA PWG Comment Letter, supra note 151 (emphasis in original). 155 Id. (noting that ‘‘[i]n a matter of weeks, EUR 70 billion were redeemed from these [enhanced money market] funds, predominantly by institutional investors; around 15–20 suspended redemptions for a short period, and 4 of them were [definitively] closed’’). 156See Comment Letter of HSBC Global Asset Management on the European Commission’s Green Paper on Shadow Banking (May 28, 2012) (‘‘HSBC EC Letter’’), available at http://ec.europa.eu/ internal_market/consultations/2012/shadow/ individual-others/hsbc_en.pdf (comparing inflows and outflows of European money market funds); EFAMA PWG Comment Letter, supra note 151 (describing the outflows from European enhanced money market funds). 157 Deutsche PWG Comment Letter, supra note 146 (emphasis in original). 158See, e.g., Witmer, supra note 36, at 23 (noting that ultra-short bond funds in the U.S. and enhanced money market funds in Europe both maintain a floating NAV structure, but are not subject to the same liquidity, credit, and maturity restrictions as money market funds). discounted or even fire-sale prices.149 Because the potential cost of liquidity transformation is not reflected in market-based pricing until after the redemption has occurred, this liquidity pressure may create an additional incentive for investors to redeem shares in times of fund and market stress.150 In addition, market-based pricing does not capture the likely increasing illiquidity of a fund’s portfolio as it sells its more liquid assets first during a period of market stress to defer liquidity pressures as long as possible. As discussed in
section II.D.1 above, our 2010
amendments, including new daily and weekly liquid asset requirements, strengthened the resiliency of money market funds to both portfolio losses and investor redemptions as compared with 2008. We note, however, that other financial intermediaries that engage in maturity transformation, including banks, also have liquidity mismatches to some degree. We request comment on the incentive to redeem that exists in a liquidity crisis.

• Do commenters believe that a
  floating NAV is sufficient to address the incentive to redeem caused by liquidity concerns in times of market stress? Would other tools, such as redemption gates or liquidity fees, also be necessary?
• Do commenters believe that money
  market funds as currently structured present unique risks as compared with other mutual funds, all of which may face some degree of liquidity pressure during times of market stress? Would the floating NAV proposal suffice to address those risks?
• Did the 2010 amendments,
  including new daily and weekly liquid asset requirements, address sufficiently the incentive to redeem in periods of illiquidity? d. Empirical Evidence in Other Floating NAV Cash Management Vehicles Commenters have cited to the fact that some floating value money market funds in other jurisdictions and U.S. ultra￾short bond mutual funds also suffered heavy redemptions during the 2007– 2008 financial crisis.151 These commenters suggest, therefore, that money market fund floating NAVs would likely not stop investors from redeeming shares. One qualification in considering these experiences is that many of the European floating NAV products that experienced heavy shareholder redemptions were priced and managed differently than our proposal and that U.S. ultra-short bond mutual funds are not subject to rule 2a– 7’s risk-limiting conditions.152 Europe, for example, has several different types of money market funds, all of which can take on more risk than U.S. money market funds as they are not currently subject to regulatory restrictions on their credit quality, liquidity, maturity, and diversification as stringent as those imposed under rule 2a–7, among other differences in regulation.153 One commenter observed that the financial crisis was first felt in Europe when ‘‘so-called ‘enhanced money market funds,’ which used the ‘money market’ fund label in their marketing strategies while taking on more risk than traditional money market funds, [ran] into problems.’’ 154 The difficulties experienced by these funds, the commenter asserted, ‘‘created confusion for investors about the definition, classification and risk characteristics of money market funds.’’ 155 In contrast, French mone´taire funds, which are managed more conservatively than ‘‘enhanced money market funds’’ and thus resemble more closely the floating NAV money market funds contemplated by our proposal, generally did not experience heavy redemptions.156 The experience of French mone´taire funds would be consistent with another commenter’s observation that ‘‘one could reach the opposite conclusion that a variable NAV structure can, and in fact has, operated as intended during times of market stress in a manner consistent with minimizing systemic risk.’’ 157 U.S ultra-short bond funds also experienced redemptions in this period. U.S. ultra-short bond funds are not subject to rule 2a–7’s risk-limiting conditions and although their NAVs float, pose more risk of loss to investors than most U.S. money market funds, including floating NAV money market funds under our proposal.158 One reason that investors redeemed shares in ultra-short bond funds during the 2007– 2008 financial crisis may have been because they did not fully understand the riskiness or liquidity of ultra-short

159See, e.g., Witmer, supra note 36 (empirically testing whether floating NAVs (as compared with constant NAVs) provide a benefit in reducing run￾like behavior by examining flow and withdrawal behavior (from 2006 through 2011) of money market mutual funds in the United States and Europe and concluding that the variable NAV fund structure is less susceptible to run-like behavior relative to constant NAV money market funds). But see Comment Letter of Jeffrey Gordon (Feb. 28, 2013) (available in File No. FSOC–2012–0003) (‘‘Gordon FSOC Comment Letter’’). 160See, e.g., Comment Letter of Treasury Strategies, Inc. (Alternative One: Floating Net Asset Value) (Jan. 15, 2013) (available in File No. FSOC– 2012–0003). 161See proposed (FNAV) rule 2a–7(c). In its proposed recommendations the FSOC proposed that money market funds re-price their shares to $100.00, which is the mathematical equivalent of our $1.0000 proposed share price. See FSOC Proposed Recommendations, supra note 114, at 31. FSOC commenters generally opposed the $100.00 per share re-pricing, stating that the Investment Company Act does not require that a registered investment company offer its shares at a particular price. See, e.g., Comment Letter of Federated Investors, Inc. (Re: Alternative One) (Jan. 25. 2013) (available in File No. FSOC–2012–0003) (‘‘Federated Investors Alternative 1 FSOC Comment Letter’’); ICI Jan. 24 FSOC Comment Letter, supra note 25. While our proposed pricing is mathematically the same as that proposed by the FSOC, pricing fund shares using $1.00 extended to four decimal places reduces other potential costs, including, for example, the possibility that funds would require corporate actions (e.g., reverse stock splits) to re-price their shares at $100.00. Our proposed pricing does not mandate that funds establish a particular share price, but rather amends the precision by which a fund prices its shares. 162Money market funds are permitted to use penny rounding under rule 2a–7(c) and therefore, a money market fund priced at $1.00 per share may round its NAV to the nearest penny. 163Currently, money market funds priced at $1.00 may round their NAV to the nearest penny ($1.00). See rule 2a–7(c). Mutual funds other than money market funds must calculate the fund’s NAV to the nearest 1/10th of 1% (i.e., for funds with shares priced at $1.00, the funds should price their shares to the third decimal place, or $1.000). See 1977 Valuation Release, supra note 10. Many mutual funds typically price their shares at an initial NAV of $10 and round their NAV to the nearest penny. See rule 2a–4. Because floating NAV money market funds, under our proposal, would continue to adhere to rule 2a–7s’s risk-limiting conditions and generally seek principal stability, we are proposing that money market funds with a floating NAV value their shares to the nearest 1/100th of 1%, a more precise standard than that required of most mutual funds today. 164We expect that floating $100.00 NAVs (which
is the mathematical equivalent of our proposed $1.0000 NAV) would change by a penny or more during all but the shortest investment horizons. Commission staff compared reported shadow prices on Form N–MFP between November 2010 and March 2012 over consecutive one-, three-, and six￾month periods. Staff estimated that there would have been no penny change over a one-month period in 98% of the months using a $10.00 NAV but only 69% of the months using a $100 NAV. Staff estimated that there would have been no penny change over a three-month period in 98% of the time using a $10 NAV but only 59% of the time using a $100.00 NAV. Staff estimates that there would have been no penny change over a six-month period in 96% of the time using a $10 NAV but only 43% of the time using a $100.00 NAV. No money market fund had a support agreement in place during this time period. 165Many large fund complexes have begun (or plan) to disclose daily money market fund market valuations (i.e., shadow prices) of at least some of their money market funds, rounded to four decimal places (‘‘basis point’’ rounding), for example, BlackRock, Fidelity Investments, and J.P. Morgan. See, e.g., Money Funds’ New Openness Unlikely to Stop Regulation, Wall St. J. (Jan. 30, 2013). bond funds. That some ultra-short bond funds experienced heavy redemptions during the financial crisis, therefore, does not necessarily suggest that investors in the floating NAV money market funds contemplated by our proposal also would experience redemptions in a financial crisis. Empirical analysis in this area also yields different opinions.159 Having pointed out these differences, we recognize that the data is consistent with certain commenters’ view that other incentives may lead to heavy redemptions of floating NAV funds in times of stress.160 We seek comment on the performance of other floating NAV investment products during the 2007– 2008 financial crisis.

• Do commenters agree with the
  preceding discussion of what may have caused investors to heavily redeem shares in some floating value money market funds in other jurisdictions and in U.S. ultra-short bond funds during the 2007–2008 financial crisis? Are there other possible factors that we should consider?
• Do commenters agree with the
  distinctions we identified between money market funds under our proposed floating NAV and money market funds in other jurisdictions and U.S. ultra-short bond funds? Are there similarities or differences we have not identified?
• Do commenters believe that the risk
  limiting requirements of rule 2a–7 would deter heavy redemptions in money market funds with a floating NAV because of the restrictions on the underlying assets?
• Do commenters believe that money
  market funds attract very risk averse investors? If so, are these investors more or less likely to rapidly redeem in times of stress to avoid even small losses?

2. Money Market Fund Pricing
   We are proposing that money market funds, other than government and retail money market funds, price their shares using a more precise method of valuation that would require funds to price and transact in their shares at an NAV that is calculated to the fourth decimal place for shares with a target NAV of one dollar (e.g., $1.0000). Funds with a current share price other than $1.00 would be required to price their shares at an equivalent level of precision (e.g., a fund with a $10 target share price would price its shares at $10.000).161 The proposed change to money market fund pricing under our floating NAV proposal would change the rounding convention for money market funds—from penny rounding (i.e., to the nearest one percent) to ‘‘basis point’’ rounding (to the nearest 1/100th of one percent).162 ‘‘Basis point’’ rounding is a significantly more precise standard than the 1/10th of one percent currently required for most mutual funds.163 For the reasons discussed below, we believe that our proposal provides the level of precision necessary to convey the risks of money market funds to investors. Market-based valuation with penny rather than ‘‘basis point’’ rounding effectively provides the same rounding convention as exists in money market funds today—the underlying valuation based on market-based factors may deviate by as much as 50 basis points before the fund breaks the buck. Accordingly, it is unlikely to change investor behavior. A $1.0000 share price, however, would reflect small fluctuations in value more than a $1.00 price, which may more effectively inform investor expectations. For example, the value of a $1.00 per share fund’s portfolio securities would have to change by 50 basis points for investors to currently see a one-penny change in the NAV; under our proposal, the share price at which investors purchase and redeem shares would reflect single basis point variations.164 We do not anticipate significant operational difficulties or overly burdensome costs arising from funds pricing shares using ‘‘basis point’’ rounding: A number of money market funds recently elected to voluntarily report daily shadow NAVs at this level of precision.165 ‘‘Basis point’’ rounding should enhance many of the potential advantages of having a floating NAV. It should allow funds to reflect gains and losses more precisely. In addition, it should help reduce incentives for investors to redeem shares ahead of other investors when the shadow price is less than $1.0000 as investors would sell shares at a more precise and equitable price than under the current rules. At the same time, it should help reduce penalties for investors buying shares when shadow prices are less than $1.0000. ‘‘Basis point’’ rounding should therefore help stabilize funds in times of market stress by deterring redemptions from investors that would otherwise seek to take advantage of less precise pricing to redeem at a higher value than a more precise valuation would provide

166Similar to other mutual funds, our proposed pricing of money market fund shares would continue to allow shareholders to purchase and redeem fractional shares, and therefore would not affect the ability of shareholders to purchase and redeem shares with round or precise dollar amounts as they do today. 167See, e.g., PWG Report, supra note 111, at 22 (‘‘Investors’ perceptions that MMFs are virtually riskless may change slowly and unpredictably if NAV fluctuations remain small and rare. MMFs with floating NAVs, at least temporarily, might even be more prone to runs if investors who continue to see shares as essentially risk-free react to small or temporary changes in the value of their shares.’’); Comment Letter of Federated Investors, Inc. (May 19, 2011) (available in File No. 4–619) (stating that ‘‘managers would employ all manners of techniques to minimize the fluctuations in their funds’ NAVs’’ and, therefore, ‘‘[i]nvestors would then expect the funds to exhibit very low volatility, and would redeem their shares if the volatility exceeded their expectations’’). 168Proposed (FNAV) rule 2a–7(c)(2). 169For example, some government money market funds limit themselves to holding mostly Treasury securities and Treasury repos and are referred to as ‘‘Treasury money market funds.’’ To comply with the investment company names rule, funds that hold themselves out as Treasury money market funds must hold at least 80% of their portfolio assets in U.S. Treasury securities and for Treasury repos. See rule 35d–1 (a materially deceptive and misleading name of a fund (for purposes of section 35(d) of the Investment Company Act (Unlawful representations and names)) includes a name suggesting that the fund focuses its investments in a particular type of investment or in investments in a particular industry or group of industries, unless, among other requirements, the fund has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets in the particular type of investments or industry suggested by the fund’s name). 170As discussed in greater detail below, money market funds that take advantage of an exemption to the floating NAV requirement would not be able to use the amortized cost method of valuation, but would instead be required to only use the penny rounding method of pricing to facilitate a stable price per share. 171See, e.g., Comment Letter of Charles Schwab (Jan. 17, 2013) (available in File No. FSOC–2012–
0003) (‘‘Schwab FSOC Comment Letter’’); FSOC
Proposed Recommendations, supra note 114, at 9. 172See, e.g., RSFI Study, supra note 21, at 8–9; Comment Letter of Vanguard (Jan. 15, 2013) (available in File No. FSOC–2012–0003) (‘‘Vanguard FSOC Comment Letter’’). 173See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 (‘‘Given the short duration of [government] money market fund portfolios, any interest rate movements have a modest and temporary effect on the value of the fund’s securities’’). and thus dilute the value of the fund for remaining shareholders. Our proposed amendment to require that money market funds use ‘‘basis point’’ rounding should provide shareholders with sufficient price transparency to better understand the tradeoffs between risk and return across competing funds, and become more accustomed to fluctuations in market value of a fund’s portfolio securities.166 It should allow them to appreciate that some money market funds may experience greater price volatility than others, and thus that there are variations in the risk profiles of different money market funds. We also considered whether to require that money market funds price to three decimal places (for a fund with a target share price of $1.000), as other mutual funds do. We are concerned, however, that such ‘‘10 basis point’’ rounding may not be sufficient to ensure that investors do not underestimate the investment risks of money market funds, particularly if funds manage themselves in such a way that their NAVs remain constant or nearly constant. Fund investment managers may respond to a floating NAV with ‘‘10 basis point’’ rounding by managing their portfolios more conservatively to avoid volatility that would require them to price fund shares at something other than $1.000. It is possible that managers would be able to avoid this volatility for quite some time, even with a floating NAV.167 Although a floating NAV with ‘‘basis point’’ rounding may discourage risk taking in funds, a floating NAV with ‘‘10 basis point’’ rounding may mask small deviations in the market￾based value of the fund’s portfolio securities. We seek comment on this aspect of our proposal.

• What level of precision in
  calculating a fund’s share price would best convey to investors that floating NAV funds are different from stable price funds? Is ‘‘basis point’’ rounding too precise? Would ‘‘10 basis point rounding’’ ($1.000 for a fund with a $1.00 target share price) provide sufficient price transparency? Or another measure?
• Would requiring funds to price
  their shares at $1.0000 per share effectively alter investor expectations regarding a fund’s NAV gains and losses? Would this in turn make investors less likely to redeem heavily when faced with potential or actual losses?
• Would ‘‘basis point’’ rounding
  better reflect gains and losses? Would it help eliminate incentives for investors to redeem shares ahead of other investors when prices are less than $1.0000?
• Should we require that all money
  market funds price their shares at $1.0000, including those funds that currently price their shares at an initial value other than $1.00? Do commenters agree that, regardless of a fund’s initial share price, under our proposal all money market funds would be required to price fund shares to an equivalent level of precision (e.g., ‘‘basis point’’ rounding)?
• What would be the cost of
  implementing ‘‘basis point’’ rounding? Would funds require corporate actions or shareholder approval to price fund shares at $1.0000? What operational changes and related costs would be involved?

3. Exemption to the Floating NAV
   Requirement for Government Money Market Funds We are proposing an exemption to the floating NAV requirement for government money market funds– money market funds that maintain at least 80% of their total assets in cash, government securities, or repurchase agreements that are collateralized fully.168 We believe that a government money market fund that maintains 80% of its total assets in cash and government securities fits within the typical risk profile of government money market funds as understood by investors, and is the portfolio holdings test used today for determining the accuracy of a fund’s name.169 Under the proposal, government money market funds would not be subject to the basis point rounding aspect of the floating NAV requirement and instead would be permitted to use the penny rounding method of pricing fund shares to maintain a stable price.170 As discussed above, government money market funds face different redemption pressures and have different risk characteristics than other money market funds because of their unique portfolio composition.171 The securities primarily held by government money market funds typically have even a lower credit default risk than commercial paper and are highly liquid in even the most stressful market scenario.172 The primary risk that these funds bear is interest rate risk; that is, the risk that changes in interest rates result in a change in the market value of portfolio securities. Even the interest rate risk of government money market funds, however, is generally mitigated because they typically hold assets that have short maturities and hold those assets to maturity.173 Nonetheless, it is possible that a government money market fund could undergo such stress that it results in a significant decline in a fund’s shadow price. Government money market funds may invest up to 20% of their portfolio in non-government securities, and a credit event in that 20% portion of the portfolio or a shift in interest rates could trigger a drop in the shadow price, thereby creating incentives for shareholders to redeem shares ahead of other investors.

174Many commenters have agreed with this position, suggesting that a floating NAV proposal should exempt government money market funds. See, e.g., Comment Letter of The Dreyfus Corporation (Feb. 11, 2013) (available in File No. FSOC–2012–0003) (‘‘Dreyfus FSOC Comment Letter’’); Comment Letter of Northern Trust (Feb. 14, 2013) (available in File No. FSOC–2012–0003) (‘‘Northern Trust FSOC Comment Letter’’); ICI Jan. 24 FSOC Comment Letter, supra note 25. 175See RSFI Study, supra note 21, at 12–13 (examining the change in daily assets of different types of money market funds and highlighting abnormally large inflows into institutional and retail government funds during September 2008). 176See, e.g., Comment Letter of Allegheny Conference on Community Development (Jan. 4,
2013) (available in File No. FSOC–2012–0003)
(‘‘Many nonprofit institutions are required, by law or by investment policy, to invest cash only in products offering a stable value’’); Comment Letter of New Jersey Association of Counties (Dec. 21,
2012) (available in File No. FSOC–2012–0003) (‘‘We
thus strongly support maintaining the ability of money market funds to offer a stable $1.00 per￾share value’’). 177Rule 2a–7 currently requires a money market fund’s board of directors to review the amount of deviation between the fund’s market-based NAV per share and the fund’s amortized cost per share ‘‘periodically.’’ Rule 2a–7(c)(8)(ii)(A)(2). 178Section 2(a)(16) of the Investment Company Act. 179See, e.g., RSFI Study, supra note 21; Schwab FSOC Comment Letter, supra note 171 (‘‘There may be slightly higher risk in municipal money market funds, but these funds tend to be more liquid than most prime funds.’’). 180Based on iMoneyNet data. 181We note that there are some tax-exempt money market funds that self-classify as institutional funds to private reporting services such as iMoneyNet. We understand that these funds’ shareholder base typically is comprised of omnibus accounts, with underlying individual investors. Despite these risks, we believe that requiring government money market funds to float their NAV may be unnecessary to achieve policy goals.174 As discussed below, shifting to a floating NAV could impose potentially significant costs on both a fund and its investors. In light of the evidence of investor behavior during previous crises, it does not appear that government money market funds are as susceptible to the risks of mass investor redemptions as other money market funds.175 Investors have frequently noted the benefits of having a stable money market fund option, and exempting government money market funds from a floating NAV would allow us to preserve this option at a minimal risk.176 On balance, we believe the benefits of retaining a stable share price money market fund option and the relative safety in a government money market fund’s 80% bucket appropriately counterbalances the risks associated with the 20% portion of a government money market fund’s portfolio that may be invested in securities other than cash, government securities, or repurchase agreements. Under the proposal, funds taking advantage of the government fund exemption (as well as funds using the retail exemption discussed in the next
section) would no longer be permitted
to use the amortized cost method of valuation to facilitate a stable NAV, but would continue to be able to use the penny rounding method of pricing. While today virtually all money market funds use both amortized cost valuation and penny rounding pricing together to maintain a stable value, either method alone effectively provides the same 50 basis points of deviation from a fund’s shadow price before the fund must ‘‘break the buck’’ and re-price its shares. Accordingly, today the principal benefit from money market funds being able to use amortized cost valuation in addition to basis point rounding is that it alleviates the burden of the money market fund having to value each portfolio security each day using market factors.177 However, as described in
section III.F.3 below, we are proposing
that all money market funds be required to disclose on a daily basis their share price with portfolios valued using market factors and applying basis point rounding. As a result, money market funds—including those exempt from the floating NAV requirement—would have to value their portfolio assets using market factors instead of amortized cost each day. Accordingly, in line with this increased transparency on the valuation of money market funds’ portfolios, and in light of the fact that this increased transparency renders penny rounding alone an equal method of achieving price stability in money market funds, we are proposing that the government exemption permit penny rounding pricing alone and not also amortized cost valuation for all portfolio securities. The government money market fund exemption to the floating NAV requirement would not be limited solely to Treasury money market funds, but also would extend to money market funds that invest at least 80% of their portfolio in cash, ‘‘government securities’’ as defined in section 2(a)(16) of the Act, and repurchase agreements collateralized with government securities. Allowable securities would include securities issued by government-sponsored entities such as the Federal Home Loan Banks, government repurchase agreements, and those issued by other ‘‘instrumentalities’’ of the U.S. government.178 It would exclude, however, securities issued by state and municipal governments, which do not generally share the same credit and liquidity traits as U.S. government securities.179 Today, government money market funds hold approximately $910 billion in assets, or around 40% of all money market fund assets.180 Fund groups that wish to focus on offering stable price products could offer government and retail money market funds. We also note that our proposed retail money market fund exemption discussed in the next
section would likely cover most
municipal (or tax-exempt) funds, because the tax advantages that these funds offer are only enjoyed by individuals and thus most of these funds could continue to offer a stable share price.181 Similarly, investors who prefer a stable price fund or are unable to invest in a floating NAV fund could choose to invest in government money market funds. These investors could continue to use these money market funds as a cash management tool without incurring any costs or other effects associated with floating NAV investment vehicles. We request comment on this aspect of our proposal.

• Do commenters agree with our
  assumption that money market funds with at least 80% of their total assets in cash, government securities, and government repos are unlikely to suffer losses due to credit quality problems correct? Is our assumption that they are unlikely to be subject to significant shareholder redemptions during a financial crisis correct?
• Should government money market
  funds be exempt from the floating NAV requirement? Why or why not? Are there other risks, such as interest rate or liquidity risks, about which we should be concerned if we adopt this proposed exemption to the floating NAV requirement? If so, what are they and how should they be addressed?
• Would the costs imposed on
  government money market funds if we required them to price at a floating NAV be different from the costs discussed below?
• Are the proposed criteria for
  qualifying for the government money market funds exemption to the floating NAV requirement appropriate? Should government money market funds be required to hold more or fewer than 80% of total assets in cash, government securities, and government repos? If so, what should it be and why?
• What kinds of risks are created by
  exempting government money market funds from a floating NAV requirement where the funds are permitted to maintain 20% of their portfolio in securities other than cash, government securities, and government repos? Should there be additional limits or

182Much like under the government fund proposal, funds that take advantage of the retail exemption would not be able to use the amortized cost method of valuation to facilitate a stable NAV for the same reasons as discussed in section III.A.3 above. 183See, e.g., Comment Letter of United Services Automobile Association (Feb. 15. 2013) (available in File No. FSOC–2012–0003) (‘‘USAA FSOC Comment Letter’’) (‘‘Retail MMFs do not need additional or more stringent regulation to prevent runs because retail investors are inherently (and historically) less likely to cause runs.’’). 184Based on iMoneyNet data. Of these assets, approximately $497 billion are held by prime money market funds and another $198 billion are in government funds. Because we are proposing to exempt government funds from the floating NAV requirement, the proposed retail exemption would only be relevant to the investors holding the $497 billion in retail prime funds. 185See RSFI Study, supra note 21, at 8. We note that the RSFI Study used a definition of retail fund based on fund self-classification, which does not entirely correspond with the definition of retail fund that we are proposing today. 186Based on iMoneyNet data. iMoneyNet classifies retail and institutional money market funds according to who is eligible to purchase fund shares, minimum initial investment amount in the fund, and to whom the fund is marketed. However, as discussed infra, there is currently no regulatory distinction that reliably distinguishes these types of investors, and the iMoneyNet method uses a different method of classification than the method we are proposing. 187Based on iMoneyNet data. Retail money market funds suffered net redemptions of less than 1% between June 14, 2011 and July 5, 2011, and only 27 retail money market funds had redemptions in excess of 5% during that period (and of these funds only 7 had redemptions in excess of 10% during this period), far fewer redemptions than those incurred by institutional funds. 188See, e.g., RSFI Study, supra note 21, at 8; Cross Section, supra note 60, at 9 (noting that institutional prime money market funds suffered net redemptions of $410 billion (or 30% of assets under management) in the four weeks beginning September 10, 2008, based on iMoneyNet data, while retail prime money market funds suffered net redemptions of $40 billion (or 5% of assets under management) during this same time period); Kacperczyk & Schnabl, supra note 60, at 31; Wermers Study, supra note 64. 189See Comment Letter of Reich & Tang (Feb. 14,
2013) (available in File No. FSOC–2012–0003)
(‘‘Reich & Tang FSOC Comment Letter’’) (‘‘As a general rule, retail investors’ use of money market funds tends to be stable and countercyclical. . . . This is in direct contrast to the general behavior of institutional investors.’’). 190See Comment Letter of John M. Winters (Dec. 18, 2012) (available in File No. FSOC–2012–0003) (‘‘Winters FSOC Comment Letter’’) (‘‘Retail MMFs and institutional government MMFs do not have a liquidity problem due to the nature of the investor type or portfolio securities. . . .’’). 191See, e.g., USAA FSOC Comment Letter, supra note 183 (‘‘Bifurcation would allow retail MMFs to continue to play the same vital role they do today, provide retail investors with professional investment management services, portfolio diversification and liquidity, while also acting as a key provider of financing in the broader capital markets’’); Reich & Tang FSOC Comment Letter, supra note 189 (‘‘A departure of this nature would diminish and endanger the benefits [of MMFs] to retail investors and cause these same individuals to seek potentially less appropriate or riskier alternatives.’’). See also infra section III.E. requirements on the 20%? Would investors have incentives to redeem shares ahead of other investors if they see a material downgrade in securities held in the 20% basket? Would such an incentive create a significant risk of runs?

• Is penny rounding sufficient to
  allow government money market funds to maintain a stable price? Should we also permit these funds to use amortized cost valuation? If so, why? Should we permit money market funds to continue using amortized cost valuation for certain types of securities, such as government securities? Why?
• If the Commission does not adopt
  this exemption, how many investors in government money market funds might reallocate assets to non-government money market fund alternatives? How many assets in government money market funds might be reallocated to alternatives? To what non-government money market fund alternatives are these investors likely to reallocate their investments?
• Should we provide other
  exemptions to the floating NAV requirement based on the characteristics of a fund’s portfolio assets, such as funds that hold heightened daily or weekly liquid assets? If so, why and what threshold should we use?
• Should money market funds that
  invest primarily in municipal securities be exempted from the floating NAV requirement? Why or why not? To what extent would such funds expect to qualify for the retail exemption?

4. Exemption to the Floating NAV
   Requirement for Retail Money Market Funds a. Overview We are also proposing to exempt money market funds that are limited to retail investors from our floating NAV proposal by allowing them to use the penny rounding method of pricing instead of basis point rounding.182 Under this proposal, retail funds would still generally be required to value portfolio securities using market-based factors rather than amortized cost. As discussed in detail below, retail investors historically have behaved differently from institutional investors in a crisis, being much less likely to make large redemptions quickly in response to the first sign of market stress. Thus, prime money market funds that are limited to retail investors in general have not been subject to the same pressures as institutional or mixed funds.183 Under the proposed exemption, we would define a retail fund as a money market fund that does not permit a shareholder to redeem more than $1 million in a single business day. We would permit retail funds to continue to maintain a stable price. As of February 28, 2013, funds that self-report as retail money market funds currently hold nearly $695 billion in assets, which is approximately 26% of all assets held in money market funds.184 As noted above in section II, during the 2007–2008 financial crisis, institutional prime money market funds had substantially greater redemptions than retail prime money market funds.185 For example, approximately 4–5% of prime retail money market funds had outflows of greater than 5% on each of September 17, 18, and 19, 2008, compared to 22–30% of prime institutional money market funds.186 Similarly, in late June 2011, institutional prime money market funds experienced heightened redemptions in response to concerns about their potential exposure to the Eurozone debt crisis, whereas retail prime money market funds generally did not experience a similar increase.187 Studies of money market fund redemption patterns in times of market stress also have noted this difference.188 As discussed above, institutional shareholders tend to respond more quickly than retail shareholders to potential market stresses because generally they have greater capital at risk and may be better informed about the fund through sophisticated tools to monitor and analyze the portfolio holdings of the funds in which they invest. Given the tendency of retail investors to continue to hold money market fund shares in times of market stress, it appears to be unnecessary to impose a floating NAV requirement on retail funds to address the risk that a fund would be unable to manage heavy redemptions in times of crisis.189 We understand that funds designed for retail investors generally do not have a concentrated shareholder base and are therefore less likely to experience large and unexpected redemptions that would put a strain on the fund’s liquidity.190 Some commenters have therefore suggested providing an exemption for retail funds to preserve the
   current benefits of money market funds for these investors, and as a consequence, reduce the macroeconomic effects that may be associated with a floating NAV requirement.191 A retail exemption may also reduce the operational burdens of implementing a floating NAV, because retail funds and their intermediaries may not need to undertake the operational costs of transitioning

192See, e.g., Comment Letter of Invesco Ltd. (Feb. 15, 2013) (available in File No. FSOC–2012–0003) (‘‘Invesco FSOC Comment Letter’’) (‘‘While we acknowledge that the disruptions experienced by MMFs during the 2008 financial crisis were largely attributable to prime MMF redemptions by large investors, we believe that efforts to characterize MMFs or their investors as either ‘‘institutional’’ or ‘‘retail’’ are misplaced and impractical due to the difficulty of establishing a litmus test that can be used consistently to identify those investors most likely to trigger a MMF run.’’); Comment Letter of Federated Investors, Inc. (Feb. 15. 2013) (available in File No. FSOC–2012–0003) (‘‘Federated Investors Feb. 15 FSOC Comment Letter’’). 193 In 2009, we proposed to define a retail money market fund as a money market fund that was not an institutional fund, and to define an institutional fund as a money market fund whose board of directors, considering a number of factors, determines that is ‘‘intended to be offered to institutional investors.’’ See 2009 Proposing Release, supra note 31, at section II.C.2. 194 Id. at n.185 and accompanying text. 195See, e.g., Comment Letter of Invesco Aim Advisors, Inc. (Sept. 4, 2009) (available in File No. S7–11–09) (‘‘Invesco 2009 Comment Letter’’); Comment Letter of Federated Investors, Inc. (Sept. 8, 2009) (available in File No. S7–11–09). 196See, e.g., Comment Letter of HSBC Global Asset Management Ltd (Feb. 15, 2013) (available in File No. FSOC–2012–0003) (‘‘HSBC FSOC Comment Letter’’) (‘‘Whilst the credit crisis of 2008 is an important data point to compare investor behavior, there are other data points in history that show that retail investors do ‘‘run’’ from investments (banks, other types of mutual fund) during times of market crisis.’’). 197See, e.g., Cross Section, supra note 60, at 25– 26 (finding that net redemptions from retail prime money market funds in September 2008 indicates that higher risk money market funds did have greater net outflows but only late in the run and that outflows from retail money market funds peaked later than those from institutional funds); Wermers Study, supra note 64, at 3 (analysis of money market fund redemption data from the 2007–2008 financial crisis showed that ‘‘prime institutional funds exhibited much larger persistence in outflows than retail funds, although retail investors also exhibited some run-like behavior.’’). 198See, e.g., Federated Investors Feb 15 FSOC Comment Letter, supra note 192 (‘‘The oft-repeated point that some funds labeled ‘‘institutional’’ experienced higher redemptions than some funds labeled ‘‘retail’’ during the financial crisis is not sufficient. Many so-called institutional funds experienced the same or even lower levels of redemptions as so-called [retail money market] funds during the period of high redemptions during the financial crisis, and many funds included both retail and institutional investors.’’). 199See supra section II.D.2 for a
discussion of how these enhanced liquidity requirements were more effective in providing stability in the face of the slower pace of redemptions in institutional prime money market funds in June and July of 2011 in response to the Eurozone debt crisis compared with the very rapid heavy redemptions that occurred in September 2008. But see RSFI study, supra at note 21, at 37 (noting that The Reserve Primary Fund would have broken the buck even in the presence of the 2010 liquidity requirements). 200See Dreyfus FSOC Comment Letter, supra note 174 (‘‘Thus while it can be expected that different kinds of prime money market funds may experience different levels of redemption activity, it may not be the case that different kinds of prime money market funds have different credit risk profiles.’’). 201See infra section III.E. systems or managing potential tax and accounting issues associated with a floating NAV. However, other commenters have opposed a retail exemption, citing the difficulty of distinguishing retail and institutional investors, operational issues, and other concerns.192 In 2009, similar considerations led us to propose lower requirements for the amount of daily and weekly liquid assets that retail money market funds would need to hold compared with institutional funds.193 We noted that retail prime money market funds experienced significantly fewer outflows when compared with institutional prime money market funds in the fall of 2008.194 Although we have not adopted that proposal, in part because we recognize significant difficulties in distinguishing retail from institutional funds for purposes of that reform, we continue to consider whether retail and institutional money market funds should be subject to different requirements. It is important to note that some commenters on our 2009 money market fund reforms proposal suggested that not all retail and institutional shareholders behave the same way as their peers.195 Also, although retail shareholders during recent financial crises have not redeemed from money market funds in large numbers in response to market stress, this does not necessarily mean that in the future they will not eventually exhibit increased redemption activity if stress on one or more money market funds persists.196 Empirical analyses of retail money market fund redemptions during the 2007–2008 financial crisis show that at least some retail investors eventually began redeeming shares.197 The introduction of the Treasury Temporary Guarantee Program on September 19, 2008 (a few days after institutional prime money market funds experienced heavy redemptions) may have prevented shareholder redemptions from accelerating in retail money market funds. Commenters on the FSOC Proposed Recommendations also have questioned whether the behavior of retail investors during the 2008 crisis should be regarded as definitive.198 The evidence, however, suggests that retail investors tend to redeem shares slowly in times of fund and
market stress or do not redeem shares at all. As indicated in the RSFI study, such lower redemptions may be more readily managed without adverse effects on the fund, in part because of the Commission’s enhanced liquidity requirements adopted in 2010.199 However, we recognize that by providing a retail exemption to the floating NAV, we would be leaving in place for those investors the existing incentive to redeem that can result from the use of a stable price, and some retail investors could potentially benefit from redeeming shares ahead of other retail investors in times of fund and market stress.200 The retail exemption would take the same form as the government exemption in allowing these money market funds to price using penny rounding instead of basis point rounding. For the reasons described in section III.A.3 above, we do not believe that allowing continued use of amortized cost valuation for all securities in these funds’ portfolios is appropriate given that these funds will be required to value their securities using market factors on a daily basis due to new Web site disclosure requirements described in section III.F.3 and given that penny rounding otherwise achieves the same level of price stability. We request comment on whether we should provide a retail money market fund exemption to the floating NAV.

• Are we correct in our
  understanding that retail investors are less likely to redeem money market fund shares in times of market stress than institutional investors? Or are they just slower to participate in heavy redemptions?
• Does the evidence showing that
  retail investors behave differently than institutional investors justify a retail exemption? Is this difference in behavior likely to continue in the future?
• Would a retail exemption reduce
  the operational effects of implementing the floating NAV requirement, such as systems changes and tax and accounting issues? If so, to what extent and how?
• If the Commission does not adopt
  an exemption to the floating NAV requirement for retail funds, how many investors in retail prime money market funds might reallocate assets to non￾prime money market fund alternatives? How many assets in retail prime money market funds might be reallocated to alternatives? To what non-prime money market alternatives are retail investors likely to reallocate their investments? 201
• Are we correct that retail investors
  would prefer an exemption from the floating NAV requirement? Would they instead prefer to invest in floating NAV funds? If so, why?
• Is penny rounding sufficient to
  allow retail money market funds to maintain a stable price? Should we also permit these funds to use amortized cost valuation? If so, why?
• Should we consider requiring retail
  funds that rely on an exemption from

202Several of the largest prime money market funds have both institutional and retail share classes. For example, see Vanguard Money Market Reserves, Vanguard Prime Money Market Fund Investor Shares (VMMXX), Registration Statement (Form N–1A) (Dec. 28, 2012); Vanguard Money Market Reserves, Vanguard Prime Money Market Fund Institutional Shares (VMRXX), Registration Statement (Form N–1A) (Dec. 28, 2012); J.P. Morgan Money Market Funds, JPMorgan Prime Money Market Fund Institutional Class Shares (JINXX), Registration Statement (Form N–1A) (July 1, 2012); J.P. Morgan Money Market Funds, JPMorgan Prime Money Market Fund Morgan Class Shares (VMVXX), Registration Statement (Form N–1A) (July 1, 2012). 203Alternatively, funds might choose to be treated as institutional (and not eligible for the proposed retail exemption to the floating NAV requirement). 204See Comment Letter of BlackRock, Inc. (Dec. 13, 2012) (available in File No. FSOC–2012–0003) (‘‘BlackRock FSOC Comment Letter’’) (‘‘A two￾tiered approach to MMFs based on a distinction between ‘‘retail’’ and ‘‘institutional’’ funds would be difficult to implement and may lead to gaming behavior by investors.’’); HSBC FSOC Comment Letter, supra note 196 (‘‘There are also practical challenges such as defining and identifying different types of investors and preventing the ‘‘gaming’’ of any regulation.’’). 205Commenters have suggested a number of ways to distinguish retail funds from institutional funds. See, e.g., Comment Letter of Fidelity Investments, Comments on Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, (Jan. 24, 2013), available at http://www.sec.gov/ comments/mms-response/mms-response.shtml (‘‘Fidelity RSFI Comment Letter’’); Schwab FSOC Comment Letter, supra note 171. All of these methods involve some degree of subjectivity and risk of over or under inclusion. 206We proposed but did not adopt a requirement that a money market fund’s board determine at least once each calendar year whether the fund is an institutional fund based on the nature of the record owner of the fund’s shares, minimum initial investment requirements, and cash flows from purchases and redemptions. See 2009 Proposing Release, supra note 31, at nn.195–197 and accompanying text. 207See 2010 Adopting Release, supra note 92, at nn.220–228 and accompanying text. Many commenters also expressed concern with requiring fund boards to make such a determination. See 2010 Adopting Release, supra note 92, at n.222 and accompanying text. See also section III.A.4.b of this Release. 208For example, one commenter suggested that we treat as institutional a fund that has any class that offers same-day liquidity to shareholders. Comment Letter of Fidelity Investments (Aug. 24,
2009) (available in File No. S7–11–09) (‘‘Fidelity
2009 Comment Letter’’). We expressed concern regarding this proposal and whether institutional investors would be willing to migrate to funds that offer next-day liquidity to avoid the more restrictive requirements. See 2010 Adopting Release, supra note 92. We expressed similar concerns about others’ suggestion that retail funds be distinguished based on minimum initial account sizes or maximum expense ratios. See, e.g., Comment Letter of HighMark Capital Management, Inc. (Sept. 8,
2009) (available in File No. S7–11–09); Comment
Letter of T. Rowe Price Associates, Inc. (Sept. 8,
2009) (available in File No. S7–11–09) (‘‘T. Rowe
Price 2009 Comment Letter’’).
209See, e.g., Fidelity RSFI Comment Letter, supra note 205; Schwab FSOC Comment Letter, supra note 171. 210See proposed (FNAV) rule 2a–7(c)(3). 211The proposed retail exemption would provide exemptive relief from the Investment Company Act and its rules to permit a retail money market fund to restrict daily redemptions as provided for in the proposed rule. See proposed (FNAV) rule 2a– 7(c)(3)(iii). 212See USAA FSOC Comment Letter, supra note 183 (‘‘This approach would reduce large money movement from retail MMFs in any given day, and therefore retail MMFs would be less likely to experience large scale runs resulting from a lack of liquidity.’’). 213See id. (noting that if the Commission were to define a fund as retail through a daily redemption limitation approach ‘‘[l]arge individual investors and institutions will self-select into institutional MMFs because retail MMFs will not meet their operational needs.’’). the floating NAV requirement to be subject to the liquidity fees and gates requirement described in section III.B? b. Operation of the Retail Fund Exemption The operational challenges of implementing an exemption for retail investor funds are numerous and complex. Currently, many money market funds are owned by both retail and institutional investors, although many are separated into retail and institutional share classes.202 With the retail exemption to the floating NAV requirement, funds with separate share classes for different types of investors (as well as funds that mix different types of investors together) that wish to offer a stable price would need to reorganize, offering separate money market funds to retail and institutional investors.203 We recognize that any distinction could result in ‘‘gaming behavior’’ whereby investors having the general attributes of an institution might attempt to fit within the confines of whatever retail exemption we craft.204 It can be difficult to distinguish objectively between retail and institutional money market funds, given that funds generally self-report this designation, there are no clear or consistent criteria for classifying funds and there is no common regulatory or industry definition of a retail investor or a retail money market fund.205 Many of the issues that we discuss below regarding distinguishing between types of investors were raised by our 2009 proposed money market fund reforms in which we proposed to establish different liquidity requirements for institutional and retail money market funds.206 Many commenters then asserted that distinguishing between retail and institutional money market funds would be difficult given the extent to which shares of money market funds are held by investors through omnibus accounts and other financial intermediaries.207 Some commenters at the time, however, suggested possible approaches we might take.208 We have since received more comments suggesting other methods for distinguishing between investor types.209 The daily redemption limit method
we are proposing today is an objective criterion intended to encourage self-identification of retail investors, because we understand that institutional investors generally would not be able to tolerate such redemption limits and they would accordingly self-select into institutional money market funds designed for them, while we anticipate that the limit would not constrain how most retail investors typically use money market funds. We also discuss several alternate methods we could use to make such a distinction below.
i. Daily Redemption Limit
We are proposing to define a retail money market fund as a money market fund that restricts a shareholder of record from redeeming more than $1,000,000 in any one business day.210 We believe that this approach would be relatively simple to implement, since it would only require a retail money market fund to establish a one-time, across-the-board redemption policy,211 and unlike other approaches discussed below, it would not depend on a fund’s ability to monitor the dollar amounts invested in shareholders’ accounts, shareholder concentrations, or other shareholder characteristics. A daily redemption limitation approach also should reduce the risk that a retail fund will experience heavier redemption requests than it can effectively manage in a crisis, because it will limit the total amount of redemptions a fund can experience in a single day, allowing the fund time to better predict and manage its liquidity.212 A redemption limitation approach to defining retail funds should also lead institutions to self-select into institutional floating money market funds, since retail money market funds with redemption limitations would typically not meet their operational needs.213 This incentive to self-select may help mitigate (but cannot eliminate) ‘‘gaming’’ by investors with institutional characteristics who otherwise might be tempted to try and invest in stable price retail funds, compared to the other methods of distinguishing investors discussed below. Even if an institutional investor purchased shares in a stable price fund, the institutional investor would be subject to the $1 million daily redemption limit. Retail investors rarely need the ability to redeem such a significant amount on a daily basis, and if they do anticipate needing to make

214The staff understands that for at least one large fund group, significantly less than 1% of the number of redemption transactions in money market funds intended for retail investors exceed $1,000,000, and that more than 97% of retail transactions were under $25,000. Nonetheless, the fund group received redemption request exceeding $250,000 from some retail investors on a daily basis. 215See USAA FSOC Comment Letter, supra note 183 (suggesting that a $250,000 cap on daily redemptions is a natural dollar limit because it is consistent with rule 18f–1 (exemption for mutual funds that allows funds to commit to pay certain redemptions in cash, rather than in-kind) and the current FDIC account guarantee limit). 216Prospectus disclosure regarding any restrictions on redemptions is currently required by Form N–1A, and we do not believe that any amendments to the current disclosure requirements would be necessary to require additional fund disclosure regarding the daily redemption restrictions of the proposed retail exemption. See Item 6 and Item 11(c)(1) of Form N–1A. large redemptions quickly, they would be able to choose to invest in a government money market fund, a floating NAV fund, or plan to make several redemptions over time. Applying the daily redemption limitation method to omnibus accounts may pose difficulties. In order for the fund to impose its redemption limit policies on the underlying shareholders, intermediaries with omnibus accounts would need to provide some form of transparency regarding underlying shareholders, such as account sizes of underlying shareholders (showing that each was below the $1 million redemption limit). Alternatively, the fund could arrange with the intermediary to carry out the fund’s policies and impose the redemption limitation, or else impose redemption limits on the omnibus account as a whole. We discuss omnibus account issues further below. We have selected $1,000,000 as the appropriate daily redemption threshold because we expect that such a daily limit is high enough that it should continue to make money market funds a viable and desirable cash management tool for retail investors,214 but is low enough that it should not suit the operational needs of institutions. We recognize that typical retail investors rarely make redemptions that approach $1,000,000 in a single day. Nonetheless, retail investors’ net worth and investment choices can differ significantly, and they may on occasion engage in large transactions. For example, a retail investor may make large redemption requests when closing out their account, rebalancing their investment portfolio, paying their tax bills, or making a large purchase such as the down payment on a house. In selecting the appropriate redemption limit, we sought to find a threshold that is low enough that institutions would self-select out of retail funds, but high enough that it would not impose unnecessary burdens on retail investors, even when they engage in atypical
redemptions. One commenter suggested a lower redemption threshold of $250,000,215 but we are concerned that such a threshold may be too low to meet the cash management needs of retail investors that engage in occasional large transactions. We also considered a higher threshold, such as a $5,000,000 daily redemption limit instead, but are concerned that such a higher limit might not provide sufficient limitation on heightened redemptions in times of stress. As mentioned previously, setting an appropriate redemption threshold for retail money market funds is complicated by the fact that retail investors may, however, on occasion need to redeem relatively large amounts from a money market fund, for example, in connection with the purchase of a home, and that some institutions may have small enough cash balances that they may find that a $1,000,000 daily redemption threshold still suits their operational needs. A retail fund’s prospectus and advertising materials would need to provide information to shareholders about daily redemption limitations to shareholders.216 This should provide sufficient information to potential investors, both retail and institutional, to allow them to make informed decisions about whether investing in the fund would be appropriate. Any money market fund that takes advantage of the retail exemption would also need to effectively describe that it is intended for retail investors. Retail investors who may need to make large (i.e., in excess of $1,000,000) immediate redemptions would thus know that they should not invest in a retail money market fund with daily redemption limitations, and that they should instead use an alternate cash management tool. Alternatively, since it is likely that retail investors would have advance notice of the need to redeem in excess of the fund’s limits, they could manage the redemption request over a period of several days. We request comment on our proposed method of distinguishing between retail and institutional money market funds based on a daily redemption limitation of $1,000,000.

• Would a daily redemption limit
  effectively distinguish retail from institutional money market funds? Are we correct in assuming that institutional investors would self-select out of retail funds with such redemption limits? Would a daily redemption limit help reduce the risk that a fund might not be able to manage heavy shareholder redemptions in times of stress? Would this method of distinguishing between retail and institutional money market funds appropriately reflect the relative risks faced by these two types of funds?
• If we classify funds as retail or
  institutional based on an investor’s permitted daily redemptions, should we limit a retail fund investor’s daily redemptions to $1,000,000, or some other dollar amount such as $250,000 or $5,000,000? Should we provide a means to increase the dollar amount limit to keep pace with inflation? If so, what method should we use?
• How large are institutional
  investors’ typical account balances and daily redemptions? Would institutional investors be willing to break large investments into smaller pieces so they can spread them across multiple retail funds?
• Are current disclosure requirements
  sufficient to inform current and potential shareholders of the operations and risks of redemption limitations? Should we consider additional disclosure requirements? If so, what kinds of disclosures should be required?
• We ask commenters to provide
  empirical justification for any comments on a redemption limitation approach to distinguishing retail and institutional money market funds. We also request that commenters with access to shareholder redemption data provide us with detailed information about the size of individual redemptions in normal market periods but especially in September 2008 and summer 2011.
• In particular, we request that
  commenters submit data on the size and frequency of retail and institutional redemptions in money market funds today, including breakdowns of the typical number and dollar volume of transactions in funds intended for retail and institutional shareholders. We also request empirical data on the size and frequency of retail investors outlier redemption activity, such as when closing out their accounts or making other atypical transactions.
• Should the exemption have a
  weekly redemption limit as an alternative to, or in addition to, the daily redemption limit? If so, what should that limit be? We have discussed above why we believe a daily redemption limit may effectively distinguish between retail and institutional investors and may also serve to help a retail fund manage the redemption requests it receives. In some cases, retail investors may still want to

217See 2010 Adopting Release, supra note 92, at nn.240–243 and accompanying text; rule 2a– 7(c)(5)(ii). 218Based on a review of Form N–MFP filings, we understand that as of the end of February 2013, 51% of tax-exempt funds maintain daily liquid assets in excess of 10%, and that another 29% maintain daily liquid assets of between 5% and 10% of their portfolios. The average daily liquid assets held across all tax-exempt funds was approximately 9.9% of their total portfolios. 219See Item 6 and Item 11(c)(1) of Form N–1A. redeem more than $1 million in a single day. To help accommodate such requests, but at the same time allow a retail fund to effectively manage its redemptions, a retail exemption also could include a provision permitting an investor to redeem in excess of the fund’s daily redemption limit, provided the investor gives advance notice of their intent to redeem in excess of the limit. Permitting higher redemptions with advance notice may serve the interests of retail investors, while also giving a fund manager sufficient time to prepare to meet the redemption request without adverse consequences to the fund. We request comment on whether we should include a provision allowing retail funds to permit redemption requests in excess of their daily limit if the investor provides advance notice.

• Should we include a provision
  permitting retail investors to redeem more than the daily redemption limit if they gave advance notice? How frequently are retail investors likely to need to redeem more than the daily redemption limit, and also know that they would need to make such a redemption in advance? Would such an advance notice provision encourage ‘‘gaming behavior,’’ for example if an institution invested in a retail fund and gave notice that every Friday it would redeem a large position to make payroll? Should we be concerned with such ‘‘gaming behavior’’ provided that the fund was given sufficient notice that it could effectively manage the redemptions?
• If we were to include an advance
  notice provision, what should the terms be? Should a retail investor be permitted to redeem any amount provided that they gave sufficient notice? A limited amount, such as $5 or $10 million? How much advance notice would be required, 2 days, 5 days, more or less? Should the amount that an investor be permitted to redeem be tied to the amount of advance notice given? For example, should an investor be permitted to redeem $3 million in a single day if they give 3 days’ notice, but $10 million in a single day if they gave 10 days’ notice?
• Should an advance notice provision
  include requirements regarding the method of how the notice is submitted to the fund, or for fund recordkeeping of the notices it receives? Should such a provision include requirements on intermediary communications, (for example, if the notice is provided to the intermediary rather than the fund, should we require that the advance notice clock begin counting once the fund receives the notice, not when it is given to the intermediary) or should it leave such details to be worked out between the parties?
• What operational costs would be
  associated with providing such an advance notice provision? Would funds be able to effectively communicate to investors the terms of such an advance notice provision? We note that most money market funds that invest in municipal securities (tax-exempt funds) are intended for retail investors, because the tax advantages of those securities are only applicable to individual investors, and accordingly, a retail exemption would likely result in most such funds seeking to qualify for the proposed exemption. Our 2010 reforms exempted tax-exempt funds from the requirement to maintain 10% daily liquid assets because, at the time, we understood that the supply of tax-exempt securities with daily demand features was extremely limited.217 Because tax-exempt money market funds are not required to maintain 10% daily liquid assets, these funds may be less liquid than other retail money market funds, which could raise concerns that tax-exempt retail funds might not be able to manage even the lower level of redemptions expected in a retail fund. Based on information received through Form N–MFP, we now understand that many tax-exempt funds can and do maintain more than 10% of their portfolio in daily liquid assets, and thus complying with a 10% daily liquid asset requirement may be feasible for these funds.218 We request comment on whether we should require tax-exempt funds that wish to take advantage of the proposed retail exemption to also meet the 10% daily liquid asset requirements.
• Would tax-exempt funds that rely
  on the proposed retail exemption be able to manage redemptions in time of stress without such a daily liquid asset requirement? What level of daily liquid assets do tax-exempt money market funds typically maintain today? Should we require tax-exempt money market funds to meet the daily liquid asset requirement if they are to rely on the proposed retail exemption to the floating NAV? There are different ways a money market fund could comply with the exemption’s daily redemption limitation if a shareholder seeks to redeem more than $1 million on any given day notwithstanding the fund’s policy not to honor such requests. The fund could treat the entire order as not in ‘‘good order’’ and reject the order in its entirety. Alternatively, the fund could treat the order as a request to redeem $1 million and reject the remainder of the order (or treat it as if it were received on the next business day). Any of those approaches would allow the money market fund to meet the daily redemption limitation and neither would provide an incentive for a shareholder to submit a redemption request in excess of $1 million on any one day. A fund would also need to disclose how it handles such excessive redemption requests in its prospectus.219 We request comment on these approaches.
• Should we specify in rule 2a–7 the
  way that a money market fund must comply with the exemption’s daily redemption limitation? Is either of the ways we discuss above easier or less costly to implement than the other?
• Are there any other approaches,
  other than the ones discussed above, that funds may use to meet the daily redemption limitation? If so, what are the benefits and costs of those alternatives?
  ii. Omnibus Account Issues
  Today, most money market funds do not have the ability to look through omnibus accounts to determine the characteristics and redemption patterns of their underlying investors. An omnibus account may consist of holdings of thousands of small investors in retirement plans or brokerage accounts, just one or a few institutional accounts, or a mix of the two. Omnibus accounts typically aggregate all the customer orders they receive each day, net purchases and redemptions, and they often present a single buy and single sell order to the fund. Because the omnibus account holder is the shareholder of record, to qualify as a retail fund under a direct application of our daily redemptions limitation proposal, a fund would be required to restrict daily redemptions by omnibus accounts to no more than $1,000,000. Because omnibus accounts can represent hundreds or thousands of beneficial owners and their transactions, they would often have daily activity that exceeds this limit. This combined activity would result in omnibus accounts often having daily redemptions that exceed the limit even though no one beneficial owner’s

220See, e.g., Invesco FSOC Comment Letter, supra note 192 (‘‘These [omnibus] accounts, due to their size, might well be regarded as ‘institutional’ despite the fact that the aggregate of assets belong largely to investors who would be considered ‘retail’ if they invested in the MMF directly.’’). 221Omnibus account holder would be defined in the proposed rule as ‘‘a broker, dealer, bank, or other person that holds securities issued by the fund in nominee name.’’ See proposed (FNAV) rule 2a–7(c)(3) (ii). 222See proposed (FNAV) rule 2a–7(c)(3) (ii). 223See id. 224For purposes of imposing redemption limitations on beneficial owners, we would expect that funds seek to ensure as part of their policies and procedures that an intermediary would make reasonable efforts consistent with applicable regulatory requirements to aggregate multiple accounts held with it that are owned by a single beneficial owner. We would not expect that a fund would seek to ensure that an intermediary reasonably be able to identify that a single beneficial owner owns fund shares through multiple accounts if the shareholder has an account with the intermediary, and also owns shares through another intermediary that does not already share account information with the first intermediary. 225See proposed (FNAV) rule 2a–7(c)(3)(ii). 226Under rule 38a–1, funds are required to have policies and procedures reasonably designed to prevent violation of the federal securities laws by the fund and certain service providers. 227See proposed (FNAV) rule 2a–7(c)(3)(ii). transaction exceeds the limit.220 Accordingly, to implement a retail exemption, our proposal needs to also address retail investors that purchase money market shares through omnibus accounts. To address this issue, the proposed retail exemption would also permit a fund to allow a shareholder of record to redeem more than $1,000,000 in a single day, provided that the shareholder of record is an ‘‘omnibus account holder’’ 221 that similarly restricts each beneficial owner in the omnibus account to no more than $1,000,000 in daily redemptions.222 Under the proposed exemption, a fund would not be required to impose its redemption limits on an omnibus account holder, provided that the fund has policies and procedures reasonably designed to allow the conclusion that the omnibus account holder does not permit any beneficial owner from ‘‘directly or indirectly’’ redeeming more than $1,000,000 in a single day.223 The restriction on ‘‘direct or indirect’’ redemptions is designed to manage issues related to ‘‘chains of intermediaries,’’ such as when an investor purchases fund shares through one intermediary, for example, an introducing broker or retirement plan, which then purchases the fund shares through a second intermediary, such as a clearing broker.224 The proposed exemption would require that a retail fund’s policies and procedures be reasonably designed to allow the conclusion that the fund’s redemption limit is applied to
beneficial owners all the way down any chain of intermediaries. If a fund cannot reasonably conclude that such policies are enforced by intermediaries at each step of the chain, then the fund must apply its redemption limit at the aggregate omnibus account holder level (or rely on a cooperating intermediary to apply the fund’s redemption limits to any uncooperative intermediaries further down the chain). Accordingly, to redeem more than $1,000,000 daily, a fund’s policies and procedures must be designed to conclude that an omnibus account holder that is the shareholder of record with the fund reasonably concludes that all beneficial owners in the omnibus account, even if invested through another intermediary, comply with the redemption limit. If the fund cannot reasonably conclude that intermediaries that have omnibus accounts with it also do not permit beneficial owners to redeem more than $1,000,000 in a single day, the fund’s policies must be reasonably designed to allow the conclusion that the omnibus account holder applies the fund’s redemption limit to the other intermediaries’ transactions on an aggregate level.225 We note that the challenges of managing implementation of fund policies through omnibus accounts are not unique to a retail exemption. For example, funds frequently rely on intermediaries to assess, collect, and remit redemption fees charged pursuant to rule 22c–2 on beneficial owners that invest through omnibus accounts. Funds and intermediaries face similar issues when managing compliance with other fund policies, such as account size limits, breakpoints, rights of accumulation, and contingent deferred sales charges.226 Service providers also offer services designed to facilitate compliance and evaluation of intermediary activities. The proposed rule would not require retail money market funds to enter into explicit agreements or contracts with omnibus account holders at any stage in the chain, but would instead allow funds to manage these relations in whatever way that best suits their circumstances. We would expect that in some cases, funds may enter into agreements with omnibus account holders to reasonably conclude that their policies are complied with. In other cases, funds may have sufficient transparency into the activity of omnibus account holders, or use other verification methods (such as certifications), that funds could reasonably conclude that their policies are being followed without an explicit agreement. If a fund could not verify or reasonably conclude that an omnibus account holder is applying the redemption limit to underlying beneficial owner transactions, we would expect that a fund would treat that omnibus account holder like any other shareholder of record, and impose the $1,000,000 daily redemption limit on that omnibus account. Retail money market funds will need to monitor compliance and implement policies and procedures to address the implications of potential exceptions, for example, if an
intermediary improperly permitted a redemption in excess of the fund’s limits. Finally, the rule would also prohibit a fund from allowing an omnibus account holder to redeem more than $1,000,000 for its own account in a single day.227 This restriction is intended to prevent an omnibus account holder from exceeding the fund’s redemption limits under the exemption when trading for its own account. As proposed, the omnibus account holder provision does not provide for any different treatment of intermediaries based on their characteristics and instead applies the redemption limits equally to all beneficial owners. However, in some circumstances such treatment may not be consistent with the intent of the exemption. For example, an intermediary with investment discretion, such as a defined-contribution pension plan that allows the plan sponsor to remove a money market fund from its offerings, could unilaterally liquidate in one day a quantity of fund shares that greatly exceeds the fund’s redemption limit, even if no one beneficial owner had an account balance that exceeds the limit. Intermediaries might also pose different risks, for example, the risks associated with a sweep account might be different than the risks posed by a retirement plan. Also, certain intermediaries may not be able to offer funds with redemption restrictions to investors, even if the underlying beneficial owners are retail investors. We understand that identical treatment of intermediaries under the proposal may not precisely reflect the risks of intermediaries with different characteristics, but recognize that this is a cost of our attempt to keep the retail exemption simple to implement. A shareholder may own fund shares through multiple accounts, either directly with a fund, or through an intermediary. In some cases, such as when one account is held directly with

228See id.. An intermediary would be the shareholder of record for the omnibus accounts they hold. 229We note that we do not expect funds to collapse such accounts, but rather match such accounts where there is reasonably available identifying information on hand at the fund or its transfer agent that the accounts have the same record owner. 230Similar issues may arise if a shareholder holds an account jointly with another person, such as a spouse. A fund’s policies and procedures should establish methods of managing redemptions from joint accounts. 231A variation on this approach might prohibit further investment in a retail fund at the end of a calendar quarter if the average account size exceeds a threshold dollar amount during the quarter. 232 If a fund were part of a fund group that does not include an affiliated institutional fund, the fund would not allow further investments from an investor whose account balance reaches (or, if the account receives dividends or otherwise increases in value, exceeds) the threshold amount. 233We also expect that there may be significant differences in costs depending on how such an exemption was structured, and that it could be significantly less costly to test whether an investor investing through an omnibus account has exceeded a maximum account balance periodically rather than on a trade-by-trade basis. See also infra
section III.A.4.d for a discussion of operational
costs of the retail exemption. a fund and another account is held through an intermediary, the fund would not be able to identify that the same shareholder has multiple accounts with the fund, and may not be able to effectively restrict that shareholder from redeeming fund shares from those accounts, that in aggregate, may exceed the proposed daily redemption limit. The proposed retail exemption would not restrict such redemptions, because the shareholder with multiple accounts would not be a ‘‘shareholder of record’’ for all of the accounts.228 In other cases, a fund may be able to identify that a shareholder holds multiple accounts with the fund, such as if a shareholder owns fund shares in an account held directly with the fund, and also owns shares through an individual retirement account (‘‘IRA’’) held with the fund. In those cases, the shareholder with multiple accounts would be the shareholder of record for both accounts, and the fund should be able to identify the shareholder as such.229 If a fund receives redemption orders exceeding the $1,000,000 limit from a shareholder of record through multiple accounts in a single day, the fund would need to aggregate the redemption requests from all accounts held by that shareholder of record, and impose the daily redemption limit on the shareholder of record’s total redemptions, not just on an account-by-account basis.230 We request comment on the proposed treatment of omnibus account holders under the retail exemption to the floating NAV alternative.

• Does our proposed treatment of
  omnibus accounts under the retail exemption appropriately address the operation of such accounts? What types of policies and procedures would funds develop to confirm that omnibus account holders are able to reasonably prevent beneficial owners that invest through the account from violating a retail money market fund’s redemption limit policies and procedures?
• The proposed rule does not require
  funds to enter into agreements with omnibus account holders, nor does it prescribe any other mechanism for requiring a fund to verify that its redemption limits are effectively enforced. Should we require such agreements? What difficulties would arise in implementing such agreements? Instead of agreements, should we consider prescribing some other type of verification or compliance procedure to prevent a fund’s limit from being breached, such as certifications from omnibus account holders?
• Should the rule require a fund to
  obtain periodic certifications regarding the redemptions of beneficial owners in an omnibus account? If so, should we require a specific periodicity of certifications, such as every month, or every quarter?
• Should we differentiate between
  intermediaries that invest through omnibus accounts? For example, should we require that an intermediary that has investment discretion over a number of beneficial owners’ accounts be treated as a single beneficial owner for purposes of the daily redemption limit? Should we treat certain intermediaries differently than others, perhaps allowing higher or unlimited redemptions for investors who invest through certain types of intermediaries such as retirement plans? What operational difficulties would arise if we were to provide for such differential treatment of intermediaries?
• Can funds accurately identify
  multiple accounts in a fund that are owned by a single shareholder of record? If not, what costs would be incurred in building such systems? How should the redemption limit apply to accounts that are owned by multiple investors? Should we be concerned about investors opening accounts through multiple intermediaries and multiple accounts in an attempt to circumvent the daily redemption limits? As discussed above, we understand that today many money market funds are unable to determine the characteristics or redemption patterns of their shareholders that invest through omnibus accounts. This lack of transparency can not only hinder a fund from effectively applying a retail exemption but can also lead to difficulties in managing the liquidity levels of a fund’s portfolio, if a fund cannot effectively anticipate when it is likely to receive significant shareholder redemptions through examination of its shareholder base. We request comment on whether we should consider requiring additional transparency into money market fund omnibus accounts to enable funds to understand better their respective shareholder base and relevant redemption patterns.
• Should we consider any other
  methods of generally providing more transparency into omnibus accounts for money market funds so that funds could better manage their portfolios in light of their respective shareholder base? If so, what methods should we consider?
  c. Consideration of Other Distinguishing
  Methods
  As discussed above, as part of the retail exemption that we are proposing today, we are proposing a method of distinguishing between retail and institutional money market funds based on daily redemption limits. This is not the only method by which we could attempt to distinguish types of funds. Below we discuss several alternate methods of making such a distinction, and request comment on whether we should adopt one of these methods instead.
  i. Maximum Account Balance
  A different method of distinguishing retail funds would be to define a retail fund as a fund that does not permit account balances of more than a certain size. For example, we could define a fund as retail if the fund does not permit investors to maintain accounts with a balance that exceeds $250,000, $1,000,000, $5,000,000, or some other amount.231 If an investor’s account balance were to exceed the threshold dollar amount, the fund could automatically direct additional investments to shares of a government money market fund or a fund subject to the floating NAV requirement.232 Such an approach would require a retail fund to update the disclosure in its prospectus and advertising materials to inform investors how their investments would be handled in such circumstances. Much like the redemption limitation method, omnibus accounts may pose difficulties that would need to be addressed through certifications, transparency, or some other manner.233 A maximum account balance approach may also create operational issues in other ways, such

234See BlackRock FSOC Comment Letter, supra note 204; Federated Investors Feb. 15 FSOC Comment Letter, supra note 192. 235See Fidelity RSFI Comment Letter, supra note
205. This commenter suggested that the test would
apply regardless of whether underlying shareholders are individuals or institutions. 236See Schwab FSOC Comment Letter, supra note 171. 237See supra note 235. 238See, e.g., Dreyfus FSOC Comment Letter, supra note 174 (noting that sweep accounts behaved more like retail accounts rather than institutional ones during the 2008 financial crisis). 239See Invesco FSOC Comment Letter, supra note 192 (‘‘Proposals to designate as ‘‘institutional’’ any account holding more than a given percentage of a MMF would provide an unfair competitive advantage to larger funds, which could continue to classify larger investors as ‘‘retail.’’). 240See Schwab FSOC Comment Letter, supra note 171 (discussing issues related to temporary changes in ownership percentages that may cause violations of such a concentration test). as managing what happens if a buy and hold investor’s account exceeded the limits due to appreciation in value. Determining the proper maximum account balance that would effectively distinguish between retail and institutional investors may also prove difficult. Defining a retail fund based on the maximum permitted account balance would be relatively simple to explain to investors through disclosure in the fund’s prospectus and advertising materials. This approach could, however, disadvantage funds that do not have an affiliated government or institutional money market fund into which investors’ ‘‘spillover’’ investments in excess of the maximum amount could be directed and could encourage ‘‘gaming behavior,’’ if institutional investors were to open multiple accounts through different intermediaries with balances under the maximum amount in order to evade any maximum investment limit we might set.234 We request comment on the approach of distinguishing between retail and institutional money market funds based on investors’ account balances:

• If we were to classify funds as retail
  or institutional based on an investor’s account balance, what maximum account size would appropriately distinguish a retail account from an institutional account: $250,000, $1,000,000, $5,000,000, or some other dollar amount? Would this method of distinguishing between retail and institutional money market funds appropriately reflect the relative risks faced by these two types of funds? How would funds or other parties, such as intermediaries and omnibus accountholders, be able to enforce account balance limitations?
• Would shareholders with
  institutional characteristics be likely to open multiple retail money market fund accounts under the maximum amount, for example by going through intermediaries, to circumvent the account size requirement, and if so, would retail funds be subject to greater risk during periods of stress? What disclosure would be necessary to inform current and potential shareholders of the operations and risks of account balance limitations?
• We ask commenters to provide
  empirical justification for any comments on an account balance approach to distinguishing retail and institutional money market funds. We also request information on composition and distribution of individual account sizes to assist the Commission in considering this approach.
  ii. Shareholder Concentration
  Another approach to distinguishing retail and institutional money market funds might be to base the distinction on the fund’s shareholder concentration characteristics. Under this approach, a fund would be able to qualify for a retail exemption if the fund’s largest shareholders owned less than a certain percentage of the fund. This type of ‘‘concentration’’ method of distinguishing funds would be a test for identifying funds whose shareholders are more concentrated, and thus have a limited number of shareholders whose redemption choices could affect the fund more significantly during periods of stress. A heavily concentrated fund may indicate that the fund has a smaller number of large shareholders, who are likely institutions. In addition, funds whose shareholders are less concentrated, and thereby that are less subject to heavy redemption pressure from a limited number of investors, may be able to withstand stress more effectively and thus could maintain a stable price. Commenters have suggested several methods for defining the appropriate concentration level for a fund. One test for determining if a fund is institutional might be whether the top 20 shareholders own more than 15% of the fund’s assets,235 or the top 100 shareholders own more than 25% of fund assets, or some other similar measure. Another method to test concentration might be to define a fund as institutional if any shareholder owns more than 0.1% of the fund,236 or 1% of the fund, or some other percentage. Distinguishing between retail and institutional money market funds based on shareholder concentration could more accurately reflect the relative risks that funds face than distinguishing retail and institutional money market funds based on the maximum balance of shareholders’ accounts, since an individual shareholder’s account value does not necessarily reflect the risks of concentrated heavy redemptions. However it may be less accurate at distinguishing types of investors (and at reducing the risks of heavy redemptions associated with certain types of investors) than the redemption limitation discussed above, because the redemption limitation would likely cause investors to self-select into the appropriate fund. One benefit of the concentration method of distinguishing retail funds is that it may lessen operational issues related to omnibus accounts. If funds were required to count an intermediary with omnibus accounts as one shareholder for concentration purposes (e.g., like any other shareholder), there may be no need for transparency into omnibus accounts.237 However, if we did not require such treatment of omnibus accounts, this concentration method would raise the same issues associated with managing omnibus accounts as the other methods discussed above. This concentration method of distinguishing retail funds would also pose a number of difficulties in implementation and operation. For example, it may be over-inclusive and a fund may be wrongly classified as an
  institutional money market fund if many of its large shareholders of record are intermediaries or sweep accounts,238 even though the underlying beneficial owners may be retail investors. The method may also create difficulties for funds that have limited assets or investors (for example, new funds with only a few investors), because those small and start-up funds may have a concentrated investor base even though their investors may be primarily retail.239 Similarly, this method may not effectively distinguish retail and institutional money market funds if the fund is so large that even institutional accounts do not trigger the concentration limits. An institutional fund that is not heavily concentrated may be subject to the same risks as a more concentrated fund, because institutional investors tend to be more sensitive to changing market conditions. Finally, this method could create significant operational issues for funds if shareholder concentration levels were to change temporarily, or to fluctuate periodically.240 For example, if we were to provide a retail exemption that

241Some institutional money market funds do not offer same-day settlement. See, e.g., Money Market Obligations Trust, Federated New York Municipal Cash Trust (FNTXX), Registration Statement (Form N–1A) (Feb. 28, 2013) (stating that redemption proceeds normally are wired or mailed within one business day after receiving a request in proper form). Some retail money market funds do offer same-day settlement. See, e.g., Dreyfus 100% U.S. Treasury Money Market Fund (DUSXX), Registration Statement (Form N–1A) (May 1, 2012) (stating that if a redemption request is received in proper form by 3:00 p.m., Eastern time, the proceeds of the redemption, if transfer by wire is requested, ordinarily will be transmitted on the same day). 242Fund groups with large percentages of retail investors, and in particular, direct investors, may be better positioned to satisfy growing demand if we were to adopt the proposed retail exemption to our floating NAV proposal. See Invesco FSOC Comment Letter, supra note 192 (‘‘Imposing a distinction between ‘retail’ versus ‘institutional’ funds would therefore unduly favor those MMF complexes with a preponderance of direct individual investors or affiliated omnibus account platforms over those with a more diverse investor basis and those with using unaffiliated intermediaries.’’). depended on a fund’s top 20 investors not owning more than 15% of the fund, this would require a fund to constantly monitor the size of its investor base and reject investments that would push the fund over the concentration limit in real time. Constant monitoring and order rejection may be costly and difficult to implement, not only for the fund but also for the affected shareholders who may have their purchase orders rejected unexpectedly by the fund. Shareholders may also have issues understanding whether a fund is institutional or retail, and because concentration may frequently change, it may be difficult to provide clear guidelines regarding whether a shareholder could or could not invest in a fund. We request comment on the approach of distinguishing between retail and institutional money market funds based on shareholder concentration:

• If we classify funds as retail or
  institutional based on shareholder concentration, what thresholds should we use? Would criteria such as whether the top 20 investors make up more than 15% of the fund, or some other threshold, effectively distinguish between types of funds? Would such a concentration test pose operational difficulties? How would funds enforce such limits? How should funds treat omnibus accounts if they were to use such a test?
• Would investors who are likely to
  redeem shares when market-based valuations fall below the stable price per share be willing and able to spread their investment across enough funds to avoid being too large in any one of them?
• Would shareholder concentration
  limits result in further consolidation in the industry, as funds seek to grow in order to accommodate large investors?
• We ask commenters to provide
  empirical justification for any comments on a shareholder concentration approach to distinguishing retail and institutional money market funds.
  iii. Shareholder Characteristics
  Money market funds could also look at certain characteristics of the investors, such as whether they use a social security number or a taxpayer identification number to register their accounts or whether they demand same￾day settlement, to distinguish between retail and institutional money market funds. Such a characteristics test could be used either alone, or in combination with one of the other methods discussed above to distinguish retail funds. However, this approach also has significant drawbacks. While institutional money market funds primarily offer same-day settlement and retail money market funds primarily do not, this is not always the case.241 Likewise, social security numbers do not necessarily correlate to an individual, and taxpayer identification numbers do not necessarily correlate to a business. For instance, many businesses are operated as pass-through entities for tax purposes. In addition, funds may not be aware of whether their investors have a SSN or a TIN if the investments are held through an omnibus account. The Commission requests comment on shareholder characteristics that could effectively distinguish between types of investors, as well as other methods of distinguishing between retail and institutional money market funds.
• What types of shareholder
  characteristics would effectively distinguish between types of investors? Social security numbers and/or taxpayer identification numbers? Whether the fund provides same-day settlement? Some other characteristic(s)?
• Besides the approaches discussed
  above, are there other ways we could effectively distinguish retail from institutional money market funds? Should we combine any of these approaches? Should we adopt more than one of these methods of distinguishing retail funds, so that a fund could use the method that is lowest cost and best fits their investor base?
• We ask commenters to provide
  empirical justification for any comments on a shareholder characteristics approach to distinguishing retail and institutional money market funds. d. Economic Effects of the Proposed Retail Exemption In addition to the costs and benefits of a retail exemption discussed above, implementing any retail exemption to the floating NAV requirement may have effects on efficiency, competition, and capital formation. A retail exemption to the floating NAV requirement could make retail money market funds more attractive to investors than floating NAV funds without a retail exemption, assuming that retail investors prefer such funds. If so, we anticipate a retail exemption could reduce the impact we expect on the number of funds and assets under management, discussed in
  section III.E below. However, these
  positive effects on capital formation could be reversed to the extent that the costs funds incur in implementing a retail exemption are passed on to shareholders, or shareholders give up potentially higher yields. As discussed above, a retail exemption to the floating NAV requirement could involve operational costs, with the extent of those costs likely being higher for funds sold primarily through intermediaries than for funds sold directly to investors. These operational costs, depending on their magnitude, might affect capital formation and also competition (depending on the different ability of funds to absorb these costs). A retail exemption to the floating NAV requirement could have negative effects on competition by benefitting fund groups with large percentages of retail investors, especially where those retail investors invest directly in the funds rather than through intermediaries, relative to other funds.242 A retail exemption could have a negative effect on competition to the extent that it favors fund groups that already offer separate retail and institutional money market funds and thus might not need to reorganize an existing money market fund into two separate funds to implement the exemption. On the other hand, as discussed above, we believe that the majority of money market funds currently are owned by both retail and institutional investors (although many funds are separated into retail and institutional classes), and therefore relatively few funds would benefit from this competitive advantage. Fund groups that can offer multiple retail funds will have a competitive advantage over those that cannot if investors with large liquidity needs are willing to spread their investments across multiple retail funds to avoid the redemption threshold.

243The costs estimated in this section would be spread amongst money market funds, intermediaries, and money market fund service providers (e.g., transfer agents). For ease of reference, we refer only to money market funds and intermediaries in our discussion of these costs. As with other costs we estimate in this Release, our staff has estimated the costs that a single affected entity would incur. We anticipate, however, that many money market funds and intermediaries may not bear the estimated costs on an individual basis. The costs of systems modifications, for example, likely would be allocated among the multiple users of the systems, such as money market fund members of a fund group, money market funds that use the same transfer agent, and intermediaries that use systems purchased from the same third party. Accordingly, we expect that the cost for many individual entities may be less than the estimated costs. 244We are using the term ‘‘point estimate’’ to indicate a specific single estimate as opposed to a range of estimates. 245Staff estimates that these costs would be attributable to the following activities: (i) Planning, coding, testing, and installing system modifications; (ii) drafting, integrating, and implementing related procedures and controls; and (iii) preparing training materials and administering training sessions for staff in affected areas. Our staff’s estimates of these operational and related costs, and those discussed Continued A retail exemption may promote efficiency by tying the floating NAV requirement to the shareholders that are most likely to redeem from a fund in response to deviations between its stable share price and market-based NAV per share. However, to the extent that a retail exemption fails to distinguish effectively institutional from retail shareholders, it may have negative effects on efficiency by permitting ‘‘gaming behavior’’ by shareholders with institutional characteristics who nonetheless invest in retail funds. It may also negatively affect fund efficiency to the extent that, to take advantage of a retail exemption, a fund that currently separates institutional and retail investors through different classes instead would need to create separate and distinct funds, which may be less efficient. The costs of such a re￾organization are discussed in this Release below. We request comment on the effects of a retail exemption to the floating NAV proposed on efficiency, competition, and capital formation.

• Would implementing a retail
  exemption have an effect on efficiency, competition, or capital formation? Which methods of distinguishing retail and institutional investors discussed above, if any, would result in the most positive effects on efficiency, competition, and capital formation?
• Would the floating NAV proposal
  have less of a negative impact on capital formation with a retail exemption than without? Would it provide competitive advantages to fund groups that have large percentages of retail investors, especially where those retail investors invest directly in the funds rather than through intermediaries, relative to other funds that have lower percentages of retail investors?
• Would a retail exemption better
  promote efficiency by tying the floating NAV requirement to institutional shareholders instead of retail shareholders? Why or why not? The qualitative costs and benefits of any retail exemption to the floating NAV proposal are discussed above. Because we do not know how attractive such funds would be to retail investors, we cannot quantify these qualitative benefits or costs. However, we can quantify the operational costs that money market funds, intermediaries, and money market fund service providers might incur in implementing and administering the retail exemption to the floating NAV requirement that we are proposing today.243 Although we do not have the information necessary to provide a point estimate 244 of the potential costs associated with a retail exemption, our staff has estimated the ranges of hours and costs that may be required to perform activities typically involved in making systems modifications, implementing fund policies and procedures, and performing related activities. These estimates include one￾time and ongoing costs to establish separate funds if necessary, modify systems and related procedures and controls, update disclosure in a fund’s prospectus and advertising materials to reflect any investment or redemption restrictions associated with the retail exemption, as well as ongoing operational costs. All estimates are based on the staff’s experience and discussions with industry representatives. We first discuss the different categories of operational costs that might be incurred in implementing a retail exemption, and then we provide a total cost estimate that captures all of the categories of costs discussed below. We expect that only funds that determine that the benefits of taking advantage of the proposed retail exemption would be justified by the costs would take advantage of it and bear these costs. Otherwise, they would incur the costs of implementing a floating NAV generally. Many money market funds are currently owned by both retail and institutional investors, although they are often separated into retail and institutional share classes. A fund relying on the proposed retail exemption would need to be structured to accept only retail investors as determined by the daily redemption limit, and thus any money market fund that currently has both retail and institutional shareholders would need to be reorganized into separate retail and institutional money market funds. One-time costs associated with this reorganization would include costs incurred by the fund’s counsel to draft appropriate organizational documents and costs incurred by the fund’s board of directors to approve such documents. One-time costs also would include the costs to update the fund’s registration statement and any relevant contracts or agreements to reflect the reorganization, as well as costs to update prospectuses and to inform shareholders of the reorganization. Funds and intermediaries may also incur one-time costs in training staff to
  understand the operation of the fund and effectively implement the redemption restrictions. The daily redemption limitation method of distinguishing retail and institutional investors that we are proposing today would also require funds to have policies and procedures reasonably designed to allow the conclusion that omnibus account holders apply the fund’s redemption limits to beneficial owners invested through the omnibus accounts. Adopting such policies and procedures and building systems to implement them would also involve one-time costs for funds and intermediaries. Funds could either conclude that their policies are enforced by obtaining information regarding underlying investors in omnibus accounts (transparency), or use some other sort of method to reasonably verify that omnibus account holders are implementing the fund’s redemption policies, such as entering into an agreement or getting certifications from the omnibus account holder. In preparing the following cost estimates, the staff assumed that funds would generally rely on financial intermediaries to implement redemption policies without undergoing the costs of entering into an agreement, because funds and intermediaries would typically take the approach that is the least expensive. However, some funds may undertake the costs of obtaining an explicit agreement despite the expense. Our staff estimates that the one-time costs necessary to implement the retail exemption to the floating NAV proposal, including the various organizational, operational, training, and other costs discussed above, would range from $1,000,000 to $1,500,000 for each fund that chooses to take advantage of the retail exemption.245

throughout this Release, are based on, among other things, staff experience implementing, or overseeing the implementation of, systems modifications and related work at mutual fund complexes, and included analyses of wage information from SIFMA’s Management & Professional Earnings in the Securities Industry 2012, see infra note 996, for the various types of professionals staff estimates would be involved in performing the activities associated with our proposals. The actual costs associated with each of these activities would depend on a number of factors, including variations in the functionality, sophistication, and level of automation of existing systems and related procedures and controls, and the complexity of the operating environment in which these systems operate. Our staff’s estimates generally are based on the use of internal resources because we believe that a money market fund (or other affected entity) would engage third-party service providers only if the external costs were comparable, or less than, the estimated internal costs. The total operational costs discussed here include the costs that are ‘‘collections of information’’ that are discussed in
section IV of this Release.
246We recognize that adding new capabilities or capacity to a system (including modifications to related procedures and controls and related training) will entail ongoing annual maintenance costs and understand that those costs generally are estimated as a percentage of the initial costs of building or modifying a system. 247Absent a Commission exemption, section 17(a)(2) of the Act prohibits any affiliated person or promoter of or principal underwriter for a fund (or any affiliated person of such a person), acting as principal, from knowingly purchasing securities from the fund. For convenience, in this Release, we refer to all of the persons who would otherwise be prohibited by section 17(a)(2) from purchasing securities of a money market fund as ‘‘affiliated persons.’’ ‘‘Affiliated person’’ is defined in section 2(a)(3) of the Act. Rule 17a–9, as adopted in 1996, provides an exemption from section 17(a) of the Act to permit affiliated persons of a money market fund to purchase a security from a money market fund that is no longer an eligible security (as defined in rule 2a–7), provided that the purchase price is (i) paid in cash; and (ii) equals the greater of amortized cost of the security or its market price (in each case including accrued interest). See Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar.28, 1996)] (the ‘‘1996 Adopting Release’’). As part of the 2010 money market fund reforms (discussed in supra section II.D.1), we expanded the exemptive relief in rule 17a–9 to permit affiliates to purchase from a money market fund (i) a portfolio security that has defaulted, but that continues to be an eligible security (subject to the purchase conditions described); and (ii) any other portfolio security (subject to the purchase conditions described above), for any reason, provided the affiliated person remits to the fund any profit it realizes from the later sale of the security (‘‘clawback provision’’). See rule 17a–9(a), (b). 248Commenters have noted the importance of sponsor support under rule 17a–9 as a tool that funds can use as a support mechanism. See, e.g., Comment Letter of U.S. Chamber of Commerce (Jan. 23, 2013) (available in File No. FSOC–2012–0003) (‘‘U.S. Chamber Jan. 23, 2013 FSOC Comment Letter’’), Federated Investors Alternative 1 FSOC Comment Letter, supra note 161. We are proposing amendments to require that money market funds disclose the circumstances under which a fund sponsor may offer any form of support to the fund (e.g., capital contributions, capital support agreements, letters of indemnity), any limits on such support, past instances of support provided to the fund, and public notification to the Commission regarding current instances of support provided. See infra section III.F for a more detailed discussion. Funds that choose to take advantage of the retail exemption would also incur ongoing costs. These ongoing costs would include the
costs of operating two separate funds (retail and institutional) instead of separate classes of a single fund, such as additional transfer agent, accounting, and other similar costs. Funds and intermediaries would also incur ongoing costs related to enforcing the daily redemption limitation on an ongoing basis and monitoring to conclude that the limits are being effectively enforced. Other ongoing costs may include systems maintenance, periodic review and updates of policies and procedures, and additional staff training. Accordingly, our staff estimates that money market funds and intermediaries administering a retail exemption likely would incur ongoing costs of 20%–30% of the one￾time costs, or between $200,000 and $450,000 per year.246

• Are the staff’s cost estimates too
  high or too low, and, if so, by what amount and why? Are there operational or other costs associated with segregating retail investors other than those discussed above?
• Do commenters believe that the
  proposed retail exemption would involve expenses beyond those estimated? To what extent would the costs vary depending on how a retail exemption is structured? Which of the staff’s assumptions would most significantly affect the costs? Has our staff identified the assumptions that most significantly influence the cost of a retail exemption?
• What kinds of ongoing activities
  would be required to administer the proposed retail exemption to the floating NAV requirement, and to what extent? Would it be less costly for some funds (e.g., those that are directly sold to investors) to make use of a retail investor exemption? If so, how much would those funds save?

5. Effect on Other Money Market Fund
   Exemptions a. Affiliate Purchases Rule 17a–9 provides an exemption from section 17(a) of the Act to permit affiliated persons of a money market fund to purchase portfolio securities from the fund under certain circumstances, and it is designed to provide a means for an affiliated person to provide liquidity to the fund and prevent it from breaking the buck.247 Under our floating NAV proposal, however, money market funds’ share prices would ‘‘float,’’ and funds thus could not ‘‘break the buck.’’ Notwithstanding the inability of funds to ‘‘break the buck’’ under our floating NAV proposal, for the reasons discussed below, we propose to retain rule 17a–9 with the amendments, discussed below, for all money market funds (including government and retail money market funds that would be exempt from our floating NAV proposal). Funds with a floating NAV would still be required to adhere to rule 2a–7’s risk-limiting conditions to reduce the likelihood that portfolio securities experience losses from credit events and interest rate changes. Even with a floating NAV and limited risk, as specified by the provisions of rule 2a– 7, money market funds face potential liquidity, credit and reputational issues in times of fund and market stress and the resultant incentives for shareholders to redeem shares. In normal market conditions, that shareholders may request immediate redemptions from a fund with a portfolio that does not hold securities that mature in the same time frame generally is no cause for concern because funds typically can sell portfolio securities to satisfy shareholder redemptions without negatively affecting prices. In times of crisis when the secondary markets for portfolio assets become illiquid, funds might be unable to sell sufficient assets without causing large price movements that affect not only the non-redeeming shareholders but also investors in other funds that hold similar assets. Therefore, to provide fund sponsors with flexibility to protect shareholder interests, we are proposing to allow fund sponsors to continue to support money market fund operations through, for example, affiliate purchases (in reliance on rule 17a–9), provided such support is thoroughly and consistently disclosed.248 As exists today, money market fund sponsors that have a greater capacity to support their funds may have a competitive advantage over other fund sponsors that do not. The value of this competitive advantage depends on the extent to which fund sponsors choose to support their funds and may be reduced by the proposed enhanced disclosure requirements discussed in this Release which may disincentivize fund sponsors from supporting their funds. The value of potential sponsor support also will depend on whether investors view support as good news (because, for example, the sponsor stands behind the fund) or bad news (because, for

249Rule 22e–3(a)(1). 250Rule 22e–3 was first adopted as an interim final temporary final shortly after the Temporary Guarantee Program was established. See Temporary Exemption for Liquidation of Certain Money Market Funds, Investment Company Act Release No. 28487 (Nov. 20, 2008) [73 FR 71919 (Nov. 26, 2008)] (establishing rule 22e–3T to facilitate compliance for those money market funds that elected to participate in the Temporary Guarantee Program and were therefore required to promptly suspend redemptions if the fund broke the buck). The temporary rule expired on expired October 18,
2009. Id. See also infra section II.C (discussing the
Temporary Guarantee Program). 251See 2010 Adopting Release, supra note 92, at
section II.H (noting that the rule is designed only
to facilitate the permanent termination of the fund in an orderly manner). See also rule 22e–3(a)(2) (requiring the fund’s board to irrevocably approve the fund’s liquidation). 252Rule 22e–3(a)(1). 253As discussed above, money market funds would continue to be permitted to use amortized cost to value portfolio securities with a remaining maturity of 60 days or less. 254See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; Comment Letter of Federated Investors, Inc. (Re: Alternative 2) (Jan. 25. 2013) (available in File No. FSOC–2012–0003) (‘‘Federated Alternative 2 FSOC Comment Letter’’). 255See proposed (FNAV) rule 22e–3(a) (requiring that the fund’s board, including a majority of directors who are not interested persons of the fund, irrevocably has approved the liquidation of the fund). 256See id. example, the sponsor does not adequately monitor the portfolio manager). The decision to leave rule 17a–9 in place should not, in our opinion, impose any additional costs on money market funds, their shareholders, or others, or change the effects on efficiency or capital formation. We recognize, however, that permitting sponsor support (through rule 17a–9 transactions) may allow money market fund sponsors to prevent their fund from deviating from its stable share price, potentially undercutting our goal to increase the transparency of money market fund risks. We request comment on retaining the rule 17a–9 exemption.

• Do commenters believe affiliated
  person support is important to funds, investors, or the securities markets even under our floating NAV proposal? Do commenters agree with our assumptions that liquidity concerns are likely to remain significant even with a floating NAV and that fund sponsors should continue to have this flexibility to protect shareholder interests? We note that rule 17a–9 was established and then expanded in 2010, in the context of stable values. If money market funds are required to float their NAVs, should we limit further the circumstances under which fund sponsors or advisers can use rule 17a–9? If so, how?
• Does permitting affiliated purchases
  for floating NAV money market funds reduce the transparency of fund risks that our floating NAV proposal is designed, in part, to achieve? If so, does the additional disclosure we are proposing mitigate such an effect? Are there additional ways we can mitigate such an effect?
• Should we allow only certain types
  of support or should we prohibit certain types of support? For example, should we allow sponsors to purchase under rule 17a–9 only liquidity-impaired assets, or should we prohibit sponsors from purchasing defaulted securities? Why or why not? If yes, what types of support should be permitted and what types should be prohibited? Why?
• Would the ability of fund sponsors
  to support the NAV of floating funds affect the way in which money market funds are structured and marketed? If so, how? Would it affect the competitive position of fund sponsors that are more or less likely to have available capital to support their funds?
• Do commenters agree that our
  proposed amendment would not impose additional costs on funds or shareholders or impact efficiency or capital formation?
• Instead of retaining 17a–9, should
  we instead repeal the rule and thereby prohibit certain types of sponsor support of money market funds? If so, why? b. Suspension of Redemptions Rule 22e–3 exempts money market funds from section 22(e) of the Act to permit them to suspend redemptions and postpone payment of redemption proceeds to facilitate an orderly liquidation of the fund.249 Rule 22e–3 replaced temporary rule 22e–3T.250 Rule 22e–3 is designed to allow funds to suspend redemptions before actually breaking the buck, reduce the vulnerability of investors to the harmful effects of heavy redemptions on funds, and minimize the potential for disruption to the securities markets.251 Rule 22e–3 currently requires that a fund’s board of directors, including a majority of disinterested directors, determine that the deviation between the fund’s amortized cost price per share and the market-based net asset value per share may result in material dilution or other unfair results before it suspends redemptions.252 We recognize that, under our floating NAV proposal, money market funds (including those exempt from the floating NAV requirement) generally would no longer be able to use amortized cost valuation for their portfolio holdings.253 Instead, government and retail money market funds would use the penny rounding method of pricing to maintain a stable share price and other money market funds would have a floating NAV per share. Accordingly, for all money market funds, the current threshold under rule 22e–3 for suspending redemptions would need modification to conform to the new regulatory regime. As discussed above, we recognize that our floating NAV proposal, in conjunction with our other proposals, may not be sufficient to eliminate the incentive for shareholders to redeem shares in times of fund and market stress. As such, floating NAV money market funds may still face liquidity issues that could force them to want to suspend redemptions and liquidate. Commenters have noted the benefits of rule 22e–3, including that the rule prevents a lengthy and disorderly liquidation process, like that experienced by the Reserve Primary Fund.254 Therefore, despite a floating NAV fund’s inability to break a buck, we believe the benefits of rule 22e–3 should be preserved. Accordingly, under our proposed amendment, all floating NAV money market funds would be permitted to suspend redemptions, when, among other requirements, the fund, at the end of a business day, has less than 15% of its total assets in weekly liquid assets.255 As discussed below in our discussion of the liquidity fees and gates alternative proposal, we believe that when a fund’s weekly liquid assets are at least 50% below the minimum required weekly liquidity (i.e., weekly liquid assets have fallen from 30% to 15%), the fund is under sufficient stress to warrant that the fund’s board be permitted to suspend redemptions in light of a decision to liquidate the fund (and therefore facilitate an orderly liquidation). Government money
  market funds and retail money market funds, which would be exempt from the floating NAV requirement, would be able to suspend redemptions and liquidate if either (1) the fund, at the end of a business day, has less than 15% of its total assets in weekly liquid assets or (2) the fund’s price per share as computed for purposes of distribution, redemption, and repurchase is no longer equal to its stable share price or the fund’s board (including a majority of disinterested directors) determines that such a change is likely to occur.256 This would allow those funds to suspend redemptions and liquidate if the fund came under liquidity stress or if the fund was about to ‘‘break the buck.’’ Because money market funds already comply with rule 22e–3, we do not believe that retaining the rule in the

257The Commission considered rule 22e–3’s costs, benefits, and effects on competition, efficiency, and capital formation, which this amendment would preserve, when it adopted the rule. See 2010 Adopting Release, supra note 92, at sections II.H, V, and VI. 258 In its proposed recommendation, the FSOC recognized the potential increased tax-compliance burdens associated with a floating NAV for both money market funds and shareholders. FSOC Proposed Recommendations, supra note 114, at 33– 34. 259See, e.g., Comment Letter of Investment Company Institute (Feb. 16, 2012) (available in File No. 4–619) (‘‘ICI Feb. 2012 PWG Comment Letter’’) (enclosing a submission by the Investment Company Institute Working Group on Money Market Fund Reform Standing Committee on Investment Management International Organization of Securities Commissions) (‘‘To be sure, investors already face these burdens [tracking purchases and sales for tax purposes] in connection with investments in long-term mutual funds. But most investors make fewer purchases and sales from long-term mutual funds because they are used for long-term saving, not cash management.’’). 260Regulations exclude sales of stable-value money market funds from this reporting obligation. See 26 CFR 1.6045–1(c)(3)(vi). 261The new reporting requirements (often referred to as ‘‘basis reporting’’) were instituted by
section 403 of the Energy Improvement and
Extension Act of 2008 (Division B of Pub. L. 110–
343) (codified at 26 U.S.C. 6045(g), 6045A, and
6045B); see also 26 CFR 1.6045–1; Internal Revenue Service Form 1099–B. 262See 26 CFR 1.6045–1(c)(3). 263See supra note 260. 264For 2012, the IRS allowed certain taxpayers to include summary totals in their Federal income tax returns, adding ‘‘Available upon request’’ where transaction details might otherwise have been required. See 2012 Instructions for Form 8949— Sales and Other Dispositions of Capital Assets, p. 3, col. 1, ‘‘Exception 2,’’ available at http:// www.irs.gov/pub/irs-pdf/i8949.pdf. context of our floating NAV proposal would impose any additional costs on money market funds, their shareholders, or others, nor have any effects on competition, efficiency, or capital formation.257 We request comment on this proposed amendment.

• Do commenters believe that the
  ability to suspend redemptions (under the circumstances we propose) would be important to floating NAV funds, their investors, and the securities markets?
• Would this ability be important to
  a retail or government money market fund even though we are proposing to exempt these funds from the floating NAV requirement, in part, because they are less likely to face heavy redemptions in times of stress?
• Is it appropriate to allow a money
  market fund to suspend redemptions and liquidate if its level of weekly liquid assets falls below 15% of its total assets? Is there a different threshold based on daily or weekly assets that would better protect money market fund shareholders? What is that threshold, and why is it better? Is there a threshold based on different factors that would better protect money market fund shareholders? What are those factors, and why are they better? If so, is such suspension then appropriate only in connection with liquidation, or should it be broader?
• Is our conclusion correct that it will
  impose no costs nor have any effects on competition, efficiency, or capital formation?

6. Tax and Accounting Implications of
   Floating NAV Money Market Funds a. Tax Implications Money market funds’ ability to maintain a stable value per share simplifies tax compliance for their shareholders. Today, purchases and sales of money market fund shares at a stable $1.00 share price generate no gains or losses, and money market fund shareholders therefore generally need not track the timing and price of purchase and sale transactions for capital gains or losses.
   i. Realized Gains and Losses
   If we were to require some money market funds to use floating NAVs, taxable investors in those money market funds, like taxable investors in other types of mutual funds, would experience gains and losses. Shareholders in floating NAV money market funds, therefore, could owe tax on any gains on sales of their money market fund shares, could have tax benefits from any losses, and would have to determine those amounts.258 Because it is not possible to predict the timing of shareholders’ future transactions and the amount of NAV fluctuations, we are not able to estimate the amount of any increase or decrease in shareholders’ tax burdens. But, given the relatively small fluctuations in value that we anticipate would occur in floating NAV money market funds and our proposed exemption of certain funds from the floating NAV requirement, any changes in tax burdens likely would be minimal. Commenters also have asserted that taxable investors in floating NAV money market funds, like taxable investors in other types of mutual funds, would be required to track the timing and price of purchase and sale transactions to determine the amounts of gains and losses realized.259 For mutual funds other than stable-value money market funds, tax rules now generally require the funds or intermediaries to report to the IRS and the shareholders certain information about sales of shares, including sale dates and gross proceeds.260 If the shares sold were acquired after January 1, 2012, the fund or intermediary must also report cost basis and whether any gain or loss is long or short term.261 These new basis reporting requirements and the pre-2012 reporting requirements are collectively referred to as ‘‘information reporting.’’ Mutual funds and intermediaries, however, are not currently required to make reports to certain shareholders (including most institutional investors). The regulations call these shareholders ‘‘exempt recipients.’’ 262 We understand, based on discussions by our staff with staff at the Treasury Department and the IRS, that, by operation of the current tax regulations, if our floating NAV proposal is adopted, money market funds that float their NAV per share would no longer be excluded from the information reporting requirements currently applicable to mutual funds and intermediaries.263 Because retail money market funds would not be required to use floating NAVs, the vast majority of floating NAV money market fund shareholders are expected to be exempt recipients (with respect to which information reporting is not required). Such exempt recipients would thus be required to track gains and losses, similar to the current treatment of exempt recipient holders of other mutual fund shares. If there are any money market fund shareholders for which information reporting is made, those shareholders would be able to make use of such reports in determining and reporting their tax liability. We also understand that the Treasury Department and the IRS are
   considering alternatives for modifying forms and guidance (1) to include net information reporting by the funds of realized gains and losses for sales of all mutual fund shares; and (2) to allow summary income tax reporting by shareholders.264 We anticipate that these modifications, if effected, could reduce burdens and costs to shareholders when reporting annual realized gains or losses from transactions in a floating NAV money market fund. We recognize that if these modifications are not made, the tax reporting effects of a floating NAV could be quite burdensome for money market fund investors that typically engage in frequent transactions. Regardless of the applicability of net information reporting or of summary income tax reporting, however, all shareholders of floating NAV money market funds would be required to recognize and report taxable gains and losses with respect to redemptions of fund shares, which does not occur today

265Money market funds also would incur costs in gathering and transmitting this information to money market fund shareholders that they would not incur absent our proposal, but these costs are discussed in the operational costs discussed below. 266See 26 U.S.C. 1091. 267 Id. 268These operational costs are discussed in infra
section III.A.7.
269 In addition, some corporate investors may perceive cash and cash equivalents on a company’s balance sheet as a measure of financial strength. 270See Financial Accounting Standards Board Accounting Standards Codification (‘‘FASB ASC’’) paragraph 305–10–20. 271 Id. 272See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25. 273See RSFI Study, supra note 21. with respect to shares of stable-value money market funds.265 We request comment on the burdens of tax compliance for money market fund shareholders (the impact on funds is discussed in the operational costs
section below).

• If any shareholders of a floating
  NAV money market fund are not exempt recipients (and thus receive the information reporting that other non￾exempt-recipient shareholders of other mutual funds currently receive), how difficult would it be for those shareholders to use that information to determine and report taxable gains and losses? Would it be any more difficult for floating NAV money market fund shareholders than other mutual fund shareholders? What kinds of costs, by type and amount, would be involved?
• In the case of floating NAV fund
  shareholders that are exempt recipients (which are not required recipients of information reporting), what types and amounts of costs would those shareholders incur to track their share purchases and sales and report any taxable gains or losses?
• As discussed above, mutual funds
  and intermediaries are not required to provide information reporting for exempt recipients, including virtually all institutional investors. Do mutual funds and intermediaries provide this information to shareholders even if tax law does not require them to do so? If not, would money market funds and intermediaries be able to use their existing systems and processes to access this information if investors request it as a result of our floating NAV proposal? Would doing so involve systems modifications or other costs in addition to those we estimate in section III.A.7, below? Would institutions or other exempt recipients find it useful or more efficient to receive this information from funds rather than to develop it themselves?
• Would exempt-recipient investors
  continue to invest in floating NAV funds if there continues to be no information reporting with respect to them?
• Would exempt-recipient investors
  invest in floating NAV money market funds if there is no administrative relief related to summary reporting of capital gains and losses, as discussed above? What would be the effect on the utility of floating NAV money market funds if the anticipated administrative relief is not provided? Would investors be able to use floating NAV money market funds in the same way or for the same purposes absent the anticipated administrative relief?
  ii. Wash Sales
  In addition to the tax obligations that may arise through daily fluctuations in purchase and redemption prices of floating NAV money market funds (discussed above), special ‘‘wash sale’’ rules apply when shareholders sell securities at a loss and, within 30 days before or after the sale, buy substantially identical securities.266 Generally, if a shareholder incurs a loss from a wash sale, the loss cannot be deducted, and instead must be added to the basis of the new, substantially identical securities, which effectively postpones the loss deduction until the shareholder recognizes gain or loss on the new securities.267 Because many money market fund investors automatically reinvest their dividends (which are often paid monthly), virtually all redemptions by these investors would be within 30 days of a dividend reinvestment (i.e., purchase). Under the wash sale rules, the losses realized in those redemptions would be disallowed in whole or in part until an investor disposed of the replacement shares (or longer, if that disposition is also a wash sale). We understand that the Treasury Department and IRS are actively considering administrative relief under which redemptions of floating NAV money market fund shares that generate losses below a de minimis threshold would not be subject to the wash sale rules. We recognize, however, that money market funds would still incur operational costs to establish systems with the capability of identifying wash sale transactions, assessing whether they meet the de minimis criterion, and adjusting shareholder basis as needed when they do not.268 We request comment on the tax implications related to our floating NAV proposal.
• Would investors continue to invest
  in floating NAV money market funds absent administrative relief from the Treasury Department and IRS relating to wash sales? What would be the effect on the utility of floating NAV money market funds if the anticipated administrative relief is not provided? Would investors be able to use floating NAV money market funds in the same way or for the same purposes absent the anticipated administrative relief? b. Accounting Implications If we were to adopt our floating NAV proposal, some money market fund shareholders may question whether they would be able to treat their fund shares as ‘‘cash equivalents’’ on their balance sheets. We understand that classifying money market fund investments as cash equivalents is important because, among other things, investors may have debt covenants that mandate certain levels of cash and cash equivalents.269 Current U.S. GAAP defines cash equivalents as ‘‘short-term, highly liquid investments that are readily convertible to known amounts of cash and that are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.’’ 270 In addition, U.S. GAAP includes an investment in a money market fund as an example of a cash equivalent.271 Notwithstanding, some shareholders may be concerned given this guidance came before money market funds using floating NAVs.272 Except as noted below, the Commission believes that an investment in a money market fund with a floating NAV would meet the definition of a ‘‘cash equivalent.’’ We believe the adoption of floating NAV alone would not preclude shareholders from classifying their investments in money market funds as cash equivalents because fluctuations in the amount of cash received upon redemption would likely be insignificant and would be consistent with the concept of a ‘known’ amount of cash. The RSFI Study supports our belief by noting that floating NAV money market funds are not likely to experience significant fluctuations in value.273 The floating NAV requirement is also not expected to change the risk profile of money market fund portfolio investments. Rule 2a–7’s risk-limiting conditions should result in fluctuations in value from changes in interest rates and credit risk being insignificant. As is the case today with stable share price money market funds, events may occur that give rise to credit and liquidity issues for money market funds and shareholders would need to reassess if their investments continue to meet the definition of a cash equivalent. For example, during the financial crisis,

274See FASB ASC paragraph 320–10–25–1. 275LGIPs tend to emulate typical money market funds by maintaining a stable NAV per share through investments in short-term securities. See infra III.E.1, Table 2, note N. 276See, e.g., U.S. Chamber of Commerce Letter to the Hon. Elisse Walter (Feb. 13, 2013), available at http://www.centerforcapitalmarkets.com/wp￾content/uploads/2010/04/2013-2.13-Floating-NAV￾Qs-Letter.pdf. See also, e.g., Virginia’s Local Government Investment Pool Act, which sets certain prudential investment standards but leaves it to the state treasury board to formulate specific investment policies for Virginia’s LGIP. See Va. Code Ann. § 2.2–4605(A)(3). Accordingly, the treasury board instituted a policy of managing Virginia’s LGIP in accordance with ‘‘certain risk limiting provisions to maintain a stable net asset value at $1.00 per share’’ and ‘‘GASB ‘2a–7 like’ requirements.’’ Virginia LGIP’s Investment Circular, June 30, 2012, available at http:// www.trs.virginia.gov/cash/lgip.aspx. Not all LGIPs are currently managed to maintain a stable NAV, however, see infra section III.E.1, Table 2, note N. 277See GASB, Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (Mar. 1997). 278See, e.g., Comment Letter of American Public Power Assoc., et al., File No. FSOC–2012–0003 (Feb. 13, 2013) (‘‘If the SEC rules are changed to adopt a daily floating NAV, states would have to alter their own statutes in order to comply, as many state statues cite rule 2a–7 as the model for their management of the LGIPs’’). 279See rule 2a–7(c)(13). See also 2010 Adopting Release, supra note 92, at nn.362–363. 280See, e.g., 2010 Adopting Release, supra note 92, at nn.362–363. Examples of intermediaries that offer money market funds to their customers include broker-dealers, portals, bank trust departments, insurance companies, and retirement plan administrators. See Investment Company Institute, Operational Impacts of Proposed Redemption Restrictions on Money Market Funds, at 13 (2012), available at http://www.ici.org/pdf/ ppr_12_operational_mmf.pdf (‘‘ICI Operational Impacts Study’’). 281See, e.g., Comment Letter of the Investment Company Institute (Sept. 8, 2009) (available in File No. S7–11–09) (‘‘ICI 2009 Comment Letter’’) (describing the modifications that would be necessary if the Commission adopted the requirement, currently reflected in rule 2a–7(c)(13), that money market funds (or their transfer agents) have the capacity to transact at a floating NAV, to:
(i) Fund transfer agent recordkeeping systems (e.g., special same-day settlement processes and systems, customized transmissions, and reporting mechanisms associated with same-day settlement systems and proprietary systems used for next-day settlement); (ii) a number of essential ancillary systems and related processes (e.g., systems changes for reconciliation and control functions, transactions accepted via the Internet and by phone, modifying related shareholder disclosures and phone scripts, education and training for transfer agent employees and changes to the systems used by fund accountants that transmit net asset value data to fund transfer agents); and (iii) sub-transfer agent/recordkeeping arrangements (explaining that similar modifications likely would be needed at various intermediaries). 282Even though a fund complex’s transfer agent system is the primary recordkeeping system, there are a number of additional subsystems and ancillary systems that overlay, integrate with, or feed to or from a fund’s primary transfer agent system, incorporate custom development, and may be proprietary or vendor dependent (e.g., print vendors to produce trade confirmations). See ICI Operational Impacts Study at 20, supra note 280. The systems of sub-transfer agents and other parties may also require modifications related to our floating NAV proposal. certain money market funds experienced unexpected declines in the fair value of their investments due to deterioration in the creditworthiness of their assets and as a result, portfolios of money market funds became less liquid. Investors in these money market funds would have needed to determine whether their investments continued to meet the definition of a cash equivalent. If events occur that cause shareholders in floating NAV money market funds to determine their shares are not cash equivalents, the shares would need to be classified as investments, and shareholders would have to treat them either as trading securities or available￾for-sale securities.274 Do commenters believe using a floating NAV would preclude money market funds from being classified as cash equivalents under GAAP?

• Would shareholders be less likely to
  invest in floating NAV money market funds if the shares held were classified for financial statement purposes as an ‘‘investment’’ rather than ‘‘cash and cash equivalent?’’
• Are there any other accounting￾related costs or burdens that money
  market fund shareholders would incur if we require money market funds to use floating NAVs?
  c. Implications for Local Government
  Investment Pools
  We also recognize that many states have established local government investment pools (‘‘LGIPs’’), money market fund-like investment pools that invest in short-term securities,275 that are required by law or investment policies to maintain a stable NAV per share.276 The Government Accounting Standards Board (‘‘GASB’’) states that LGIPs that are operated in a manner consistent with rule 2a–7 (i.e., a ‘‘2a7- like pool’’) may use amortized cost to value securities (and presumably, facilitate maintaining a stable NAV per share).277 Our floating NAV proposal, if adopted, may have implications for LGIPs. In order to continue to manage LGIPs, state statutes and policies may need to be amended to permit the operation of investment pools that adhere to rule 2a–7 as we propose to amend it.278 Because we are unable to predict how various state legislatures and other market participants will react to our floating NAV proposal, we do not have the information necessary to provide a reasonable estimate of the impact on LGIPs or the potential effects on efficiency, competition, and capital formation. We note, however, that it is possible that states could amend their statutes or policies to permit the operation of LGIPs that comply with rule 2a–7 as we propose to amend it. We request comment on this aspect of our proposal.
• Would our floating NAV proposal
  affect LGIPs as described above? Are there other ways in which LGIPs would be affected? If so, please describe.
• Are there other costs that we have
  not considered?
• How do commenters think states
  and other market participants would react to our floating NAV proposal? Do commenters believe that states would amend their statutes or policies to permit LGIPs to have a floating NAV per share provided the fund complies with rule 2a–7, as we propose to amend it? If so, what types and amounts of costs would states incur? If not, would there be any effect on efficiency, competition, or capital formation?

7. Operational Implications of Floating
   NAV Money Market Funds
   Money market funds (or their transfer agents) are required under rule 2a–7 to have the capacity to redeem and sell fund shares at prices based on the funds’ current net asset value per share pursuant to rule 22c–1 rather than $1.00, i.e., to transact at the fund’s floating NAV.279 Intermediaries, although not subject to rule 2a–7, typically have separate obligations to investors with regard to the distribution of proceeds received in connection with investments made or assets held on behalf of investors.280 Prior to adopting these amendments to rule 2a–7, the ICI submitted a comment letter detailing the modifications that would be required to permit funds to transact at the fund’s floating NAV.281 Accordingly, we expect that money market funds and transfer agents already have laid the foundation required to use floating NAVs. We recognize, however, that funds, transfer agents, intermediaries, and others in the distribution chain may not currently have the capacity to process transactions at floating NAVs constantly, as would be required under our proposal.282 Accordingly, we expect that sub-transfer agents, fund accounting departments, custodians, intermediaries, and others in the distribution chain would need to develop and overlay additional controls and procedures on top of existing systems in order to implement a floating NAV on a continual basis. In each case, the controls and procedures for the accounting systems at these entities would have to be modified to permit those systems to calculate a money

283See, e.g., ICI Operational Impacts Study at 37, supra note 280 (noting that the modifications necessary to transact at a floating NAV would ‘‘require in some cases minor and other instances major modifications—depending on the complexity of the systems and the types of intermediaries and investors’’ involved). 284See, e.g., id. at 41 (reporting that half of the respondents in its survey reported that their transfer agent systems ‘‘already had the capability to process money market trades’’ at a floating value, while the other respondents would need to modify their transfer agent systems to comply with the requirement to have the capacity to transact at a floating NAV). 285Staff estimates that these costs would be attributable to the following activities: (i) Drafting, integrating, and implementing procedures and controls; (ii) preparation of training materials; and (iii) training. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 286As noted throughout this Release, we recognize that adding new capabilities or capacity to a system (including modifications to related procedures and controls) will entail ongoing annual maintenance costs and understand that those costs generally are estimated as a percentage of initial costs of building or expanding a system. 287Staff expects these costs would include software programming modifications, as well as personnel costs that would include training and scripts for telephone representatives to enable them to respond to investor inquiries. market fund’s floating NAV each business day and to communicate that value to others in the distribution chain on a permanent basis. In addition, we understand that, under our floating NAV proposal, money market funds and other recordkeepers would incur additional costs to track portfolio security gains and losses, provide ‘‘basis reporting,’’ and monitor for potential wash-sale transactions, as discussed above in section III.A.6. We believe, however, that funds, in many cases, should be able to leverage existing systems that track this information for other mutual funds. We understand that the costs to modify a particular entity’s existing controls and procedures would vary depending on the capacity, function and level of automation of the accounting systems to which the controls and procedures relate and the complexity of those systems’ operating environments.283 Procedures and controls that support systems that operate in highly automated operating environments would likely be less costly to modify while those that support complex operations with multiple fund types or limited automation or both would be more costly to change.284 Because each system’s capabilities and functions are different, an entity would likely have to perform an in-depth analysis of our proposed rules to calculate the costs of modifications required for its own system. While we do not have the information necessary to provide a point
estimate of the potential costs of modifying procedures and controls, we expect that each entity would bear one￾time costs to modify existing procedures and controls in the functional areas that are likely to be impacted by our proposal. Our staff has estimated that the one-time costs of implementation for an affected entity would range from $1.2 million (for entities requiring less extensive modifications) to $2.3 million (for entities requiring more extensive modifications).285 Staff also estimates that the annual costs to keep procedures and controls current and to provide continuing training would range from 5% to 15% of the one-time costs.286 We anticipate, however, that many money market funds, transfer agents, custodians, and intermediaries in the distribution chain may not bear the estimated costs on an individual basis and therefore experience economies of scale. For example, the costs would likely be allocated among the multiple users of affected systems, such as money market funds that are members of a fund group, money market funds that use the same transfer agent or custodian, and intermediaries that use systems purchased from the same third party. Accordingly, we expect that the cost for many individual entities that would have to process transactions at floating NAVs may be less than the estimated costs. We request comment on this analysis and our range of estimated costs to money market funds, transfer agents, custodians, and intermediaries.

• To what extent would transfer
  agents, fund accounting departments, custodians, and intermediaries need to develop and implement additional controls and procedures or modify existing ones under our floating NAV proposal?
• To what extent do intermediaries,
  as a result of their separate obligations to investors regarding distribution of proceeds, have the capacity to process (on a continual basis) transactions at a fund’s floating NAV?
• Do money market funds and others
  expect they would incur costs in addition to those we estimate above or that they would incur different costs? If so, what are these costs?
• Would the costs incurred by money
  market funds and others in the distribution chain discussed above be passed on to retail (and other) investors in the form of higher fees?
• If a number of money market funds
  already report daily shadow prices using ‘‘basis point’’ rounding, are there additional operational costs that funds would incur to price their shares to four decimal places? If so, please describe. Are there means by which these operational costs can be reduced while still providing sufficient price transparency?
• Do all funds have the ready
  capability to price their shares to four decimal places? For those funds that do so already, we seek comment on the costs involved in developing this capability. For funds that do not have the capability, what types and amounts of costs would be incurred?
• What type of ongoing maintenance
  and training would be necessary, and to what extent? Do commenters agree that such costs would likely range between 5% and 15% of one-time costs? If not, is there a more accurate way to estimate these costs?
• To what extent would money
  market funds or others experience economies of scale?
• We request that intermediaries and
  others provide data to support the costs they expect they would incur and an explanation of the work they have already undertaken as a result of rule 2a–7’s current requirement that money market funds (or their transfer agents) have the capacity to transact at a floating NAV. In addition, funds would incur costs to communicate with shareholders the change to a floating NAV per share. Although funds (and their intermediaries that provide information to beneficial owners) already have the means to provide shareholders the values of their money market fund holdings, our staff anticipates that they would incur additional costs associated with programs and systems modifications necessary to provide shareholders with access to that information online, through automated phone systems, and on shareholder statements under our floating NAV proposal and to explain to shareholders that the value of their money market funds shares will fluctuate.287 Our staff anticipates that these communication costs would vary among funds (or their transfer agents) and fund intermediaries depending on the current capabilities of the entity’s Web site, automated or manned phone systems, systems for processing shareholder statements, and the number of investors. We believe that money market funds themselves would need to perform an in-depth analysis of our proposed rules in order to estimate the necessary systems modifications. While we do not have the information necessary to provide a point estimate of the potential costs of systems modifications, our staff

288Staff estimates that these costs would be attributable to the following activities: (i) Project assessment and development; (ii) project implementation and testing; and (iii) written and telephone communication. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 289As noted throughout this Release, we recognize that adding new capabilities or capacity to a system will entail ongoing annual maintenance costs and understand that those costs generally are estimated as a percentage of initial costs of building or expanding a system. 290See, e.g., Federated Investors Alternative 1 FSOC Comment Letter, supra note 161; Comment Letter of Steve Fancher, et al. (Jan. 22, 2013) (available in File No. FSOC–2012–0003); Comment Letter of Steve Morgan, et al. (Jan. 22, 2013) (available in File No. FSOC–2012–0003) (‘‘Steve Morgan FSOC Comment Letter’’); Comment Letter of Edward Jones (Feb. 15, 2013) (available in File No. FSOC–2012–0003) (‘‘Edward Jones FSOC Comment Letter’’) (citing cash management benefits for individual investors in particular); Comment Letter of T. Rowe Price (Jan. 30, 2013) (available in File No. FSOC–2012–0003) (‘‘T. Rowe Price FSOC Comment Letter’’). 291See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 (noting how same-day settlement is vitally important to many investors and describing how such same-day settlement is facilitated by a stable NAV). We note, however, that not all money market fund transactions settle on the same day. See, e.g., ICI 2009 Comment Letter, supra note 281 (describing the systems and processes involved to permit same-day settlement and those involved for next-day settlement). 292See, e.g., Comment Letter of John D. Hawke (Dec. 15, 2011) (available in File No. 4–619) (‘‘Hawke Dec 2011 PWG Comment Letter’’) (identifying various types of systems, including among others trust accounting systems at bank trust departments; corporate payroll processing systems and processing systems used to manage corporations’ cash balances; processing systems used by federal, state, and local governments to manage their cash balances; and municipal bond trustee cash management systems). 293Hawke Dec 2011 PWG Comment Letter, supra note 292 (‘‘The net result of a floating NAV would be to make Money Funds not useful to hold the large, short-term cash balances used in these automated transaction processing systems across a wide variety of businesses and applications.’’); Comment Letter of Cachematrix Holdings LLC (Dec. 12, 2011) (available in File No. 4–619) (‘‘Cachematrix PWG Comment Letter’’) (‘‘A stable share price is critical to same-day and next-day processing, shortened settlement times, float management, and mitigation of counterparty risk among firms.’’); Comment Letter of State Street Global Advisors (Sept. 8, 2009) (available in File No. S7–11–09) (‘‘[T]he stable NAV simplifies transaction settlement, which permits money market funds to offer shareholders same day
settlement options, as well as ATM access, check writing, and ACH/FedWire transfers.’’). 294See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note 292 (stating that ‘‘[m]anual processing [required to reconcile the day-to-day fluctuations in the value of money market funds with a floating NAV] would mean more staffing requirement, more costs associated with staffing the function, and errors and delays in completing the process’’ and that reprogramming systems would ‘‘take many years and hundreds of millions of dollars to complete across a wide range of businesses and applications for which stable value money funds currently are used to hold short-term liquidity’’); Cachematrix PWG Comment Letter, supra note 293 (‘‘[A]n entire industry has programmed accounting, trading and settlement systems based on a stable share price. The cost for each bank to retool their sub-accounting systems to accommodate a fluctuating NAV could be in the millions of dollars. This does not take into account the costs that each bank would then pass on to the thousands of corporations that use money market trading systems.’’). 295See, e.g., Comment Letter of Fidelity Investments (Feb. 14, 2013) (available in File No. FSOC–2012–0003) (‘‘Fidelity FSOC Comment Letter’’). ([B]roker-dealers offer clients a variety of features that are available generally only to accounts with a stable NAV, including ATM access, check writing, and ACH and Fedwire transfers. A floating NAV would force MMFs that offer same day settlement on shares redeemed through wire transfers to shift to next day settlement or require fund advisers to modify their systems to accommodate floating NAV MMFs.’’); Edward Jones FSOC Comment Letter, supra note 290; ICI Feb 2012 PWG Comment Letter, supra note 259 (‘‘[E]limination of the stable NAV for money market funds would likely force brokers and fund sponsors to consider how or whether they could continue to provide such services to money market fund investors.’’). 296See, e.g., Hawke Dec 2011 PWG Comment Letter, supra note 292 (‘‘Both parties would carry the unsettled transaction as an open position for one extra day and each party would be exposed for that time to the risk that its counterparty would default during the extra day, or that the bank holding the cash overnight (or over the weekend) would fail. For a bank involved in making a has estimated that the costs for a fund (or its transfer agent) or intermediary that may be required to perform these activities would range from $230,000 to $490,000.288 Staff also estimates that funds (or their transfer agents) and their intermediaries would have ongoing costs to maintain automated phone systems and systems for processing shareholder statements, and to explain to shareholders that the value of their money market fund shares will fluctuate, and that these costs would range from 5% to 15% of the one-time costs.289 We request comment on this aspect of our proposal.

• Do commenters agree with our
  estimated range of costs to funds (or their transfer agents) and fund intermediaries to communicate with shareholders the change to a floating NAV per share? If not, we request detailed estimates of the types and amounts of costs. Money market funds’ ability to maintain a stable value also facilitates the funds’ role as a cash management vehicle and provides other operational efficiencies for their shareholders.290 Money market fund shareholders generally are able to transact in fund shares at a stable value known in advance. This permits money market fund transactions to settle on the same day that an investor places a purchase or sell order, and allows a shareholder to determine the exact value of his or her money market fund shares (absent a liquidation event) at any time.291 These features have made money market funds an important component of systems for processing and settling various types of transactions.292 Commenters have asserted that money market funds with floating NAVs would be incompatible with these systems because, among other things, transactions in shares of these money market funds, like other types of mutual fund transactions, would generally not settle on the same day that an order is placed, and the value of the shares of these money market funds could not be determined precisely before that day’s NAV had been calculated.293 Requiring money market funds to use floating NAVs, the commenters assert, would require money market fund shareholders and service providers to reprogram their systems or manually reconcile transactions, increasing staffing costs.294 Others have asserted that similar considerations could affect features that are particularly appealing to retail investors, such as ATM access, check writing, electronic check payment processing services and products, and U.S. Fedwire transfers.295 We note that we are proposing an exemption for retail funds which we expect would significantly alleviate any such concerns about the costs of altering those features, because funds that take advantage of the retail exemption would be able to maintain a stable price, and accordingly, such features would be unaffected. Nonetheless, not all funds with these features may choose to take advantage of the proposed retail exemption, and therefore, some funds may need to make additional modifications to continue offering these features. We have included estimates of the costs to make such modifications below. We seek comment on the extent to which these features may be affected by our proposal and the proposed retail exemption.
• Would money market funds and
  financial intermediaries continue to provide the retail-focused services discussed above if we were to require money market funds to use floating NAVs? If not, why not?
• Would investors reduce or
  eliminate their money market fund investments if these services were no longer available or if the cost of these services increases? Commenters also assert that requiring money market funds to use floating NAVs would extend the settlement cycle from same-day settlement to next￾day settlement, which would expose parties to transactions to increased risk (e.g., during a day in which a transaction to be paid by proceeds from a sale of money market fund shares is still open, one party to the transaction could default).296 But a money market

payment in anticipation of an incoming funds transfer as part of these processing systems, this change from same-day to next-day processing of money fund redemptions would turn intra-day overdrafts into overnight overdrafts, resulting in much greater default and funding risks to the bank. This extra day’s float would mean more risk in the system and a larger average float balance that each party must carry and finance.’’); Cachematrix PWG Comment Letter, supra note 293 (‘‘A stable share price is critical to same-day and next-day processing, shortened settlement times, float management, and mitigation of counterparty risk among firms.’’). 297See, e.g., the prospectus for the DWS Variable NAV Money Fund, dated December 1, 2011, available at http://www.sec.gov/Archives/edgar/ data/863209/000008805311001627/nb120111ict￾vnm.txt (‘‘If the fund receives a sell request prior to the 4:00 p.m. Eastern time cut-off, the proceeds will normally be wired on the same day. However, the shares sold will not earn that day’s dividend.’’); prospectus for the Northern Funds, dated December 7, 2012, available at http://www.sec.gov/Archives/ edgar/data/916620/000119312512495705/ d449473d485apos.htm (‘‘Redemption proceeds normally will be sent or credited on the next Business Day or, if you are redeeming your shares through an authorized intermediary, up to three Business Days, following the Business Day on which such redemption request is received in good order by the deadline noted above, unless payment in immediately available funds on the same Business Day is requested.’’). 298We understand that pricing vendors may not provide continual pricing throughout the day. Instead, money market funds could establish periodic times at which the fund would price its shares. 299Some money market fund shareholders do not use systems and would not use them under this proposal (e.g., many retail investors), and these shareholders of course would not incur any systems modifications costs. 300Staff estimates that these costs would be attributable to the following activities: (i) Planning, coding, testing, and installing system modifications; (ii) drafting, integrating, implementing procedures and controls; (iii) preparation of training materials; and (iv) training. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 301 Id. 302See supra note 286. fund with a floating NAV could still offer same-day settlement. The fund could price its shares each day and provide redemption proceeds that evening. Indeed, we are aware of two floating NAV money market funds that normally operate this way.297 Alternatively, funds could price their shares periodically (e.g., at noon and 4 p.m. each day) to provide same-day settlement.298 We recognize that pricing services may incur operational costs to modify their systems (and pass these costs along to funds) to provide pricing multiple times each day and seek comment on the nature and amounts of
these costs.

• Do commenters expect to incur the
  types of costs described above (e.g., increased staffing costs to manually reconcile transactions)? Are there additional costs we have not identified?
• What kinds of costs, specifically, do
  commenters expect to incur? What kinds of employee costs would be involved?
• Would an extended settlement
  cycle impose costs on money market fund investors? If so, what kinds of costs and how much?
• Would money market funds extend
  the settlement cycle or would they exercise either of those other options?
• Would exercising either of the two
  options discussed above impose costs on money market funds? If so, how much? Are there options that we have not identified that money market funds could use to provide same-day settlement?
• Would extending the settlement
  cycle cause investors to leave or not invest in money market funds?
• Do commenters agree that a delay in
  settlement for some money market fund transactions could expose parties to the transactions to increased counterparty risk? To what extent would this occur, and how does the nature of this risk differ from counterparty risk that arises in other aspects of a money market fund shareholder’s business?
• Do commenters agree that money
  market funds generally could still offer same-day settlement if required to use a floating NAV?
• Do fund pricing services have the
  capacity to provide pricing multiple times each day? If not, what types and amounts of costs would pricing services incur to develop this capacity? Would pricing services pass these costs down to funds?
• Are the money market funds that
  currently same-day settle with a floating NAV representative of what a broader industry of floating NAV money market funds could achieve? Are there additional costs or complications in conducting such same-day settlement for larger funds than smaller funds? In addition to money market funds and other entities in the distribution chain, each money market fund shareholder would also likely be required to perform an in-depth analysis of our floating NAV proposal and its own existing systems, procedures, and controls to estimate the systems modifications it would be required to undertake. Because of this, and the variation in systems currently used by institutional money market fund shareholders, we do not have the information necessary to provide a point estimate of the potential costs of systems modifications. Nevertheless, our staff has attempted to describe the types of activities typically involved in making systems modifications and estimated a range of hours and costs that may be required to perform these activities. In addition, the Commission requests from commenters information regarding the potential costs of system modifications for money market fund shareholders. Our staff has prepared ranges of estimated costs, taking into account variations in the functionality, sophistication, and level of automation of money market fund shareholders’ existing systems and related procedures and controls, and the complexity of the operating environment in which these systems operate.299 In deriving its estimates, our staff considered the need to modify systems and related procedures and controls related to recordkeeping, accounting, trading, cash management, and bank reconciliations, and to provide training concerning these modifications. Staff estimates that a shareholder whose systems (including related procedures and controls) would require less extensive or labor-intensive modifications would incur one-time costs ranging from $123,000 to $253,000.300 Staff estimates that a shareholder whose systems (including related procedures and controls) would require more extensive or labor￾intensive modifications would incur one-time costs ranging from $1.4 million to $2.9 million.301 In addition, staff estimates the annual maintenance costs to these systems and procedures and controls, and the costs to provide continuing training, would range from 5% to 15% of the one-time implementation costs.302 We request comment on our analysis and the nature and extent of the costs money market fund shareholders anticipate they would incur as a result of our floating NAV proposal.
• Are shareholder systems in fact
  unable to accommodate a floating NAV, even if the NAV typically fluctuates very little (a fraction of a penny) on a day-to-day basis?
• If shareholder systems are unable to
  accommodate a floating NAV, what kinds of programming costs would shareholders incur in reprogramming the systems and how do they compare to our staff’s estimates above?
• Do shareholders have other systems
  they use to manage their investments that fluctuate in value? If so, could these systems be used for money market funds? If not, why not?
• How much would it cost to adapt
  existing shareholder systems (currently used to accommodate investments that fluctuate in value) to accommodate money market funds with floating NAVs and how do these costs compare to our staff’s estimates above?

303Rule 482 applies to advertisements or other sales materials with respect to securities of an investment company registered under the Investment Company Act that is selling or proposing to sell its securities pursuant to a registration statement that has been filed under the Investment Company Act. See rule 482(a). This rule describes the information that is required to be included in an advertisement, including a disclosure statement that must be used on money market fund advertisements. See rule 482(b). Our proposal would also affect fund supplemental sales literature (i.e., sales literature that is preceded or accompanied by a statutory prospectus). Rule 34b–1 under the Investment Company Act prescribes the requirements for supplemental sales literature. Because rule 34b–1(a) cross-references the requirements of rule 482(b)(4), any changes made to that provision will affect the requirements for fund supplemental sales literature. 304See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)] (‘‘Summary Prospectus Adopting Release’’) at paragraph preceding section III (adopting rules permitting the use of a summary prospectus, which is designed to provide key information that is important to an informed investment decision). 305See supra note 303. Rule 482(b)(4) (which currently requires a money market fund to include the following disclosure statement on its advertisements and sales materials: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund). 306See infra note 607 and accompanying text (discussing the extent to which discretionary sponsor support has the potential to confuse money market fund investors); supra note 141 and accompanying text (noting that survey data shows that some investors are unsure about the amount of risk in money market funds and the likelihood of government assistance if losses occur). 307See proposed (FNAV) rule 482(b)(4)(i). If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, the fund would be permitted to omit the last bulleted sentence from the disclosure statement for the term of the agreement. See Note to paragraph (b)(4), proposed (FNAV) rule 482(b)(4). 308See proposed (FNAV) Item 4(b)(1)(ii)(A) of Form N–1A. Item 4(b)(1)(ii) currently requires a money market fund to include the following statement in its prospectus: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. 309See Item 4(b)(1)(ii) of Form N–1A; proposed (FNAV) Item 4(b)(1)(ii)(A) of Form N–1A. 310See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)] (release amending disclosure) (‘‘Registration Statement Adopting Release’’); Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 18005 (Feb. 20, 1990) [56 FR 8113 (Feb. 27, 1991)] (adopting release); Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 17589 (July 17, 1990) [55 FR 30239 (July 25, 1990)] (‘‘1990 Proposing Release’’). 311See supra sections III.A.3 and III.A.4 and proposed (FNAV) rules 2a–7(c)(2) and (c)(3). 312See supra notes 305–306 and accompanying text.
8. Disclosure Regarding Floating NAV
We are proposing disclosure-related amendments to rule 482 under the Securities Act 303 and Form N–1A in connection with the floating NAV alternative. We anticipate that the proposed rule and form amendments would provide current and prospective shareholders with information regarding the operations and risks of this reform alternative. In keeping with the enhanced disclosure framework we adopted in 2009,304 the proposed amendments are intended to provide a layered approach to disclosure in which key information about the proposed new features of money market funds would be provided in the summary section of the statutory prospectus (and, accordingly, in any summary prospectus, if used) with more detailed information provided elsewhere in the statutory prospectus and in the statement of additional information (‘‘SAI’’). a. Disclosure Statement The move to a floating NAV would be designed to change the investment expectations and behavior of money market fund investors. As a measure to achieve this change, we propose to require that each money market fund, other than a government or retail fund, include a bulleted statement disclosing the particular risks associated with investing in a floating NAV money market fund on any advertisement or sales material that it disseminates (including on the fund Web site). We also propose to include wording designed to inform investors about the primary risks of investing in money market funds generally in this bulleted disclosure statement. While money market funds are currently required to include a similar disclosure statement on their advertisements and sales materials,305 we propose amending this disclosure statement to emphasize that money market fund sponsors are not obligated to provide financial support, and that money market funds may not be an appropriate investment option for investors who cannot tolerate losses.306 Specifically, we would require floating NAV money market funds to include the following bulleted disclosure statement on their advertisements and sales materials:

• You could lose money by investing
  in the Fund.
• You should not invest in the Fund
  if you require your investment to maintain a stable value.
• The value of shares of the Fund will
  increase and decrease as a result of changes in the value of the securities in which the Fund invests. The value of the securities in which the Fund invests may in turn be affected by many factors, including interest rate changes and defaults or changes in the credit quality of a security’s issuer.
• 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.307 We also propose to require a substantially similar bulleted disclosure statement in the summary section of the statutory prospectus (and, accordingly, in any summary prospectus, if used).308 With respect to money market funds that are not government or retail funds, we propose to remove current requirements that money market funds state that they seek to preserve the value of shareholder investments at $1.00 per share.309 This disclosure, which was adopted to inform investors in money market funds that a stable net asset value does not indicate that the fund will be able to maintain a stable NAV,310 will not be relevant once funds are required to ‘‘float’’ their net asset value. As discussed above, the floating NAV proposal would provide exemptions to the floating NAV requirement for government and retail money market funds.311 Accordingly, the proposed amendments to rule 482 and Form N– 1A would require government and retail money market funds to include a bulleted disclosure statement on the fund’s advertisements and sales materials and in the summary section of the fund’s statutory prospectus (and, accordingly, in any summary prospectus, if used) that does not discuss the risks of a floating NAV, but that would be designed to inform investors about the risks of investing in money market funds generally.312 We propose to require each government and retail fund to include the following bulleted disclosure statement in the summary section of its statutory prospectus (and, accordingly, in any summary prospectus, if used), and on any advertisement or sales material that it disseminates (including on the fund Web site):
• You could lose money by investing
  in the Fund.
• The Fund seeks to preserve the
  value of your investment at $1.00 per

313See proposed (FNAV) rule 482(b)(4)(ii) and proposed (FNAV) item 4(b)(1)(ii)(B) of Form N–1A; see also supra notes 305 and 308 (discussing the current corresponding disclosure requirements for money market funds). If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, the fund would be permitted to omit the last bulleted sentence from the disclosure statement that appears on a fund advertisement or fund sales material, for the term of the agreement. See Note to paragraph (b)(4), proposed (FNAV) rule 482(b)(4). Likewise, if an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, and the term of the agreement will extend for at least one year following the effective date of the fund’s registration statement, the fund would be permitted to omit the last bulleted sentence from the disclosure statement that appears on the fund’s registration statement. See Instruction to proposed (FNAV) item 4(b)(1)(ii) of Form N–1A. 314See supra section II.B.3. 315See Fidelity FSOC Comment Letter, supra note 295 (finding, from its study, that 81% of its retail money market fund investors understood that securities held by these funds have some small day￾to-day fluctuations). However, the study did not address the extent to which these investors understood that these fluctuations could impact the value of their shares of money market funds, rather than the value of the underlying portfolio securities. 316See Study Regarding Financial Literacy Among Investors, a study by staff of the U.S. Securities and Exchange Commission (Aug. 2012), available at http://www.sec.gov/news/studies/2012/ 917-financial-literacy-study-part1.pdf, at vi. 317See Molly Mercer et al., Worthless Warnings? Testing the Effectiveness of Disclaimers in Mutual Fund Advertisements, 7 J. Empirical Legal Stud. 429 (2010) (evaluating the usefulness of legends in mutual fund advertisements regarding performance advertising). 318See supra notes 305 and 308. 319 In the questions that follow, we use the term ‘‘disclosure statement’’ to mean the new disclosure statement that we propose to require floating NAV funds to incorporate into their prospectuses and advertisements and sales materials or, alternatively and as appropriate, the new disclosure statement that we propose to require government or retail funds to incorporate into their prospectuses and advertisements and sales materials. share, but cannot guarantee such stability.

• 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.313 The proposed disclosure statements are intended to be one measure to change the investment expectations and, therefore, the behavior of money market fund investors. The risk-limiting conditions of rule 2a–7 and past experiences of money market fund investors have created expectations of a stable, cash-equivalent investment. As discussed above, one reason for such expectation may have been the role of sponsor support in maintaining a stable net asset value for money market funds.314 In addition, we are concerned that investors, under the floating NAV proposal, will not be fully aware that the value of their money market fund shares will increase and decrease as a result of the changes in the value of the underlying portfolio securities.315 In proposing the disclosure statement, we have taken into consideration investor preferences for clear, concise, and understandable language.316 We also considered whether language that was stronger in conveying potential risks associated with money market funds would be effective for investors.317 In addition, we considered whether the proposed disclosure statement should be limited to only money market fund advertisements and sales materials, as discussed above. Although we acknowledge that the summary section of the prospectus must contain a discussion of key risk factors associated with a floating NAV money market fund, we believe that the importance of the disclosure statement merits its placement in both locations, similar to how the current money market fund legend is required in both money market fund advertisements and sales materials and the summary section of the prospectus.318 We request comment on the disclosure statements 319 proposed to be required on any money market fund advertisements or sales materials, as well as in the summary section of a fund’s statutory prospectus (and, accordingly, in any summary prospectus, if used).
• Would the disclosure statement
  proposed to be used by floating NAV funds adequately alert investors to the risks of investing in a floating NAV fund, and would investors understand the meaning of each part of the proposed disclosure statement? Will investors be fully aware that the value of their money market fund shares will increase and decrease as a result of the changes in the value of the underlying portfolio securities? If not, how should the proposed disclosure statement be amended?
• Would the disclosure statement
  proposed to be used by government and retail money market funds, which are not subject to the floating NAV requirement, adequately alert investors to the risks of investing in those types of funds, and would investors understand the meaning of each part of the proposed disclosure statement? If not, how should the proposed disclosure statement be amended?
• Would different shareholder groups
  or different types of funds benefit from different disclosure statements? For example, should retail and institutional investors receive different disclosure statements, or should funds that offer cash management features such as check writing provide different disclosure statements from funds that do not? Why or why not? If yes, how should the disclosure statement be tailored to different shareholder groups and fund types?
• Will the proposed disclosure
  statement respond effectively to investor preferences for clear, concise, and understandable language?
• Would the following variations on
  the proposed disclosure statement be any more or less useful in alerting shareholders to the risks of investing in a floating NAV fund (as applicable) and/ or the risks of investing in money market funds generally? Æ Removing or amending the following bullet point in the proposed disclosure statement: ‘‘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.’’ Æ Removing or amending the following bullet point in the proposed disclosure statement: ‘‘The value of the securities in which the Fund invests may in turn be affected by many factors, including interest rate changes and defaults or changes in the credit quality of a security’s issuer.’’ Æ Amending the final bullet point in the proposed disclosure statement to read: ‘‘Your investment in the Fund therefore may experience losses.’’ Æ Amending the final bullet point in the proposed disclosure statement to read: ‘‘Your investment in the Fund therefore may experience gains or losses.’’
• Would investors benefit from
  requiring the proposed disclosure statement also to be included on the front cover page of a money market fund’s prospectus (and on the cover
  page or beginning of any summary
  prospectus, if used)?
• Would investors benefit from any
  additional types of disclosure in the summary section of the statutory prospectus or on the prospectus’ cover
  page? If so, what else should be
  included?
• Should we provide any instruction
  or guidance in order to highlight the proposed disclosure statement on fund advertisements and sales materials (including the fund’s Web site) and/or lead investors efficiently to the

320Such instruction or guidance would supplement current requirements for the presentation of the disclosure statement required by rule 482(b)(4). See supra note 305; rule 482(b)(5). 321Prospectus disclosure regarding the tax consequences of these activities is currently required by Form N–1A. See Item 11(f) of Form N– 1A. 322See supra section III.A.6 (discussing the tax and economic implications of floating NAV money market funds). 323See Item 11(f) of Form N–1A. 324We expect that a money market fund would include this disclosure (as appropriate) in response to, for example, Item 11(‘‘Shareholder Information’’) and Item 23 (‘‘Purchase, Redemption, and Pricing of Shares’’) of Form N–1A. 325See infra section III.N.1. 326See 17 CFR 230.497. 327See infra section III.N. 328See rule 2a–7(b)(3) (setting forth the conditions for a fund to use a name that suggests that it is a money market fund or the equivalent, including using terms such as ‘‘cash,’’ ‘‘liquid,’’ ‘‘money,’’ ‘‘ready assets,’’ or similar terms in a fund’s name). disclosure statement? 320 For example, with respect to the fund’s Web site, should we instruct that the proposed disclosure statement be posted on the fund’s home page or be accessible in no more than two clicks from the fund’s home page? b. Disclosure of Tax Consequences and Effects on Fund Operations The proposed requirement that money market funds transition to a floating NAV would entail certain additional tax- and operations-related disclosure, which disclosure requirements would not necessitate rule and form amendments.321 As discussed above, if we were to require certain money market funds to use a floating NAV, taxable investors in money market funds, like taxable investors in other types of mutual funds, may experience taxable gains and losses.322 Currently, funds are required to describe in their prospectuses the tax consequences to shareholders of buying, holding, exchanging, and selling the fund’s shares.323 Accordingly, we expect that, pursuant to current disclosure requirements, floating NAV money market funds would include disclosure in their prospectuses about the tax consequences to shareholders of buying, holding, exchanging, and selling the shares of the floating NAV fund. In addition, we expect that a floating NAV money market fund would update its prospectus and SAI disclosure regarding the purchase, redemption, and pricing of fund shares, to reflect any procedural changes resulting from the fund’s use of a floating NAV.324 As discussed below, if we were to adopt the floating NAV alternative, the compliance date would be 2 years after the effective date of the adoption with respect to any amendments specifically related to the floating NAV proposal, including related amendments to disclosure requirements.325 We request comment on the disclosure that we expect floating NAV money market funds would include in their prospectuses about the tax consequences to shareholders of buying, holding, exchanging, and
selling the shares of the fund, as well as the effects (if any) on fund operations resulting from the transition to a floating NAV.

• Should Form N–1A or its
  instructions be amended to more explicitly require any of the disclosure we discuss above, or any additional disclosure, to be included in a fund’s prospectus and/or SAI?
• Is there any additional information
  about a floating NAV fund’s operations that shareholders should be aware of that is not discussed above? If so, would such additional information already be covered under existing Form N–1A requirements, or would we need to make any amendments to the form or its instructions?
  c. Disclosure of Transition to Floating
  NAV
  A fund must update its registration statement to reflect any material changes by means of a post-effective amendment or a prospectus supplement (or ‘‘sticker’’) pursuant to rule 497 under the Securities Act.326 We would expect that, to meet this requirement, at the time that a stable NAV money market fund transitions to a floating NAV (or adopts a floating NAV in the course of a merger or other reorganization),327 it would update its registration statement to include relevant related disclosure, as discussed in this section of the Release, by means of a post-effective amendment or a prospectus supplement. We request comment on this requirement.
• Besides requiring a fund that
  transitions to a floating NAV to update its registration statement by filing a post-effective amendment or prospectus supplement, should we also require that, when a fund transitions to a floating NAV, it must notify shareholders individually about the risks and operational effects of a floating NAV on the fund, such as a separate mailing or email notice? Would shareholders be more likely to understand and appreciate these risks and operational effects (disclosure of which would be included in the fund’s registration statement, as discussed above) if they were to receive such individual notification? If so, what information should this individual notification include? What would be an appropriate time frame for this notification? How would such notification be accomplished, and what costs would be incurred in providing such notification? d. Request for Comment on Money Market Fund Names As discussed above, our floating NAV proposal would provide exemptions to the floating NAV requirements for government money market funds and retail money market funds. We request comment on whether we should require new terminology in money market fund names 328 to reduce the risk of investor confusion that might result from permitting some types of funds to maintain a stable price, while requiring others types of funds to use a floating NAV.
• Given that, under our floating NAV
  proposal, some funds’ share prices would increase and decrease as a result of changes in the value of the securities in which the fund invests, should we require new terminology in money market fund names to reduce any risk of investor confusion that might result from both stable price money market funds and floating NAV money market funds using the same term ‘‘money market fund’’ in their names? For example, should we require money market funds to use either the term ‘‘stable money market fund’’ or ‘‘floating money market fund,’’ as appropriate, in their names? Why or why not? e. Economic Analysis The floating NAV proposal makes significant changes to the nature of money market funds as an investment vehicle. The proposed disclosure requirements in this section are intended to communicate to shareholders the nature of the risks that follow from the floating NAV proposal. In section III.E, we discussed how the floating NAV proposal might affect shareholders’ use of money market funds and the resulting effects on the short-term financing markets. The factors and uncertain effects of those factors discussed in that section would influence any estimate of the incremental effects that the proposed disclosure requirements might have on either shareholders or the short-term financing markets. However, we believe that the proposed disclosure will better inform shareholders about the changes, which should result in shareholders making investment decisions that better match their investment preferences. We expect that this will have similar effects on efficiency, competition, and capital formation as those that are outlined in

329Likewise, uncertainty regarding how the proposed disclosure may affect different investors’ behavior would make it difficult for the SEC staff to measure the quantitative benefits of the proposed requirements. With respect to the proposed disclosure statement, there are many possible permutations on specific wording that would convey the specific concerns identified in this Release, and the breadth of these permutations makes it difficult for SEC staff to test how investors would respond to each wording variation. 330Staff estimates that these costs would be attributable to amending the fund’s disclosure statement and updating the fund’s advertising and sales materials. See supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). The costs associated with these activities are all paperwork-related costs and are discussed in more detail in infra section IV.A.7. We expect the new required disclosure would add minimal length to the current required prospectus disclosure, and thus would not increase the number of pages in, or change the printing costs of, a fund’s prospectus. Based on conversations with fund representatives, the Commission understands that, in general, unless the page count of a prospectus is changed by at least four pages, printing costs would remain the same. 331PWG Report, supra note 111, at 22. Other commenters have voiced additional concern that redemptions as a result of the transition to a floating NAV could be destabilizing to the financial markets. See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; Comment Letter from American Association of State Colleges and Universities (Jan. 21, 2011) (available in File No. 4– 619). 332Comment Letter of Thrivent Mutual Funds (Jan. 10, 2011) (available in File No. 4–619) (‘‘Any change [to a floating NAV] could be implemented with sufficient advanced notice to allow institutional investors to modify their investment guidelines to permit investment in a floating NAV fund, where appropriate. A mass exodus assumes that investors have a clear alternative, which they do not, and come to the same conclusion in tandem, which is improbable given the lack of clear alternatives.’’); Richmond Fed PWG Comment Letter, supra note 139 (‘‘If informed well ahead of a change [to a floating NAV], investors are more likely to move gradually, mitigating the disruption.’’). In addition, a relatively long compliance period would provide money market funds sufficient time to modify and/or establish the systems necessary to transact permanently at a floating NAV. 333 In its proposal, FSOC suggested a transition period of 5 years. FSOC Proposed Recommendations, supra note 114, at 31. 334See FSOC Proposed Recommendations, supra note 114, at 31 (‘‘To reduce potential disruptions and facilitate the transition to a floating NAV for investors and issuers, existing MMFs could be grandfathered and allowed to maintain a stable NAV for a phase-out period, potentially
lasting five years. Instead of requiring these grandfathered funds to transition to a floating NAV immediately, the SEC would prohibit any new share purchases in the grandfathered stable-NAV MMFs after a Continued
section III.E rather than introduce new
effects. We further believe that the effects of the proposed disclosure requirements will be small relative to the effects of the floating NAV proposal. The Commission staff cannot estimate the quantitative benefits of these proposed requirements at this time because of uncertainty about how increased transparency may affect different investors’ understanding of the risks associated with money market funds.329 We request additional data from commenters below to enable us to effectively calculate these effects. We anticipate that all money market funds would incur costs to update their registration statements, as well as their advertising and sales materials (including the fund Web site), to include the proposed disclosure statement, and that floating NAV funds additionally would incur costs to update their registration statements to incorporate tax- and operations-related disclosure relating to the use of a floating NAV. We expect these costs generally would be incurred on a one￾time basis. Our staff estimates that the average costs for a floating NAV money market fund to comply with these proposed disclosure amendments would be approximately $1,480 and that the compliance costs for a government or retail money market fund would be approximately $592.330 Each money market fund in a fund group might not incur these costs individually. We request comment on this economic analysis:

• Are any of the proposed disclosure
  requirements unduly burdensome, or would they impose any unnecessary costs?
• We request comment on the staff’s
  estimates of the operational costs associated with the proposed disclosure requirements.
• We request comment on our
  analysis of potential effects of these proposed disclosure requirements on efficiency, competition, and capital formation.

9. Transition
   The PWG Report suggests that a transition to a floating NAV could itself result in significant redemptions.331 Money market fund investors could seek to redeem shares ahead of other investors to avoid realizing losses when their money market funds switch to a floating NAV. Investors may anticipate their funds’ NAVs per share being less than $1.00 when the switch occurs or they may fear their funds might incur liquidity costs from heavy redemptions resulting from the behavior of other investors. To avoid large numbers of preemptive redemptions by shareholders and allow sufficient time for funds and intermediaries to cost-effectively adapt to the new requirements, we propose to delay compliance with this aspect of the proposed rules for a period of 2 years from the effective date of our proposed rulemaking. Accordingly, money market funds subject to our floating NAV proposal could continue to price their shares as they do today for up to 2 years following this date. On or before the compliance date, all stable value money market funds not exempted from the floating NAV proposal would convert to a floating NAV. However, we note that, under our floating NAV proposal, investors who prefer a stable price product also could invest in a government or retail money market fund. We request comment on the proposed transition. If we were to adopt the floating NAV proposal, money market funds and their shareholders would have 2 years to understand the implications of and implement our reform. We believe this would benefit money market funds and their shareholders by allowing money market funds to make this transition at the optimal time and potentially not at the same time as all other money market funds (which may be more likely to have a disruptive effect on the short￾term financing markets, and thus not be perceived as optimal by funds). It would also provide time for investors such as corporate treasurers to modify their investment guidelines or seek changes to any statutory or regulatory constraints to which they are subject to permit them to invest in a floating NAV money market fund or other investments as appropriate. Giving fund shareholders ample time to dispose of their investments in an orderly fashion also should benefit money market funds and their other shareholders because it would give funds additional time to respond appropriately to the level and timing of redemption requests.332 We recognize, however, that shareholders might still preemptively redeem shares at or near the time that the money market fund converts from a stable value to a floating NAV if they believe that the market value of their shares will be less than $1.00. We expect, however, that money market fund sponsors would use the relatively long compliance period to select an appropriate conversion date that would minimize this risk. We therefore expect that providing shareholders, funds, and others a relatively long time to assess the effects of the regulatory change if adopted
   would mitigate the risk that the transition to a floating NAV, itself, could prompt significant redemptions.333 We considered an even longer transition period, including the 5-year period in FSOC’s proposed floating NAV recommendation.334 FSOC’s

predetermined date, and any new investments would have to be made in floating-NAV MMFs.’’). 335See BlackRock FSOC Comment Letter, supra note 204 (‘‘We agree that a transition period is extremely important to avoid market disruption. Assuming existing funds are grandfathered as CNAV funds and no new shares are purchased, a transition period of two years from the effective date of a new rule should suffice.’’); HSBC FSOC Comment Letter, supra note 196 (‘‘[W]e believe a 2– 3 year transition period should be sufficient for the industry, investors and regulators to prepare for any required changes to products, systems etc.’’). But see U.S. Chamber Jan. 23, 2013 FSOC Comment Letter, supra note 248 (suggesting a transition period of up to 5 years could be necessary). 336We would not require, but would permit, government funds to impose fees and gates, as discussed below. Unlike under the floating NAV alternative, we are not proposing to exempt retail funds from our fees and gates proposal. See infra
section III.B.5 of this Release. 337See section III.A.3 and III.A.4 of this Release.
proposed recommendation, however, would have required money market funds to re-price their shares at $100 per share, and would have grandfathered existing money market funds (which could continue to maintain a stable value) but required investments after a specified date to be made in floating NAV money market funds. Money market fund sponsors therefore would have had to take a corporate action to re-price their shares and, if they chose to rely on the grandfathering, to form new floating NAV money market funds to accept new investments after the specified date. Money market funds and others in the distribution chain may be better able to implement basis point rounding as we propose, and therefore may not need a 5-year transition period. Indeed, some commenters on FSOC’s proposed recommendation, which could require a longer transition period than our proposal, supported a 2-year transition period.335 We request comment on our proposed compliance date.

• Would our proposed transition
  period mitigate operational or significant redemption risks that could result from requiring money market funds to use floating NAVs?
• If not, how much time would be
  sufficient to allow money market fund shareholders that do not wish to remain in a money market fund with a floating NAV to identify alternatives without posing operational or significant redemption risk?
• Do commenters agree that a
  compliance period of 2 years is sufficient to address operational issues associated with converting funds to floating NAVs? Should the compliance period be shorter or longer? Why? Would a 5-year transition period, consistent with FSOC’s proposed floating NAV recommendation, be more appropriate?
• Do fund sponsors anticipate
  converting (at an appropriate time) existing stable value money market funds to floating NAV funds or would sponsors establish new funds? If sponsors expect to establish new funds, are there costs other than those we describe below (related to a potential grandfathering provision)?
• Are there other measures we could
  take that would minimize the risks that could arise from investors seeking preemptively to redeem their shares in advance of a fund’s adoption of a floating NAV?
• Should we provide a grandfathering
  provision, in addition to, or in lieu of, a relatively long compliance date? If we adopted a grandfathering provision, how long should the grandfathering period last? Would a grandfathering provision better achieve our objective of facilitating an orderly transition? B. Standby Liquidity Fees and Gates As an alternative to the floating NAV proposal discussed above, we are proposing to continue to allow money market funds to transact at a stable share price under normal conditions but to (1) require money market funds to institute a liquidity fee in certain circumstances and (2) permit money market funds to impose a gate in certain circumstances. In particular, this fees and gates alternative proposal would require that if a money market fund’s weekly liquid assets fell below 15% of its total assets (the ‘‘liquidity threshold’’), the fund must impose a liquidity fee of 2% on all redemptions unless the board of directors of the fund (including a majority of its independent directors) determines that imposing such a fee would not be in the best interest of the fund. The board may also determine that a lower fee would be in the best interest of the fund.336 We also are proposing that when a money market fund’s weekly liquid assets fall below 15% of total assets, the money market fund board would also have the ability to impose a temporary suspension of redemptions (also referred to as a ‘‘gate’’) for a limited period of time if the board determines that doing so is in the fund’s best interest. Such a gate could be imposed, for example, if the liquidity fees were not proving sufficient in slowing redemptions to a manageable level. Under this option, rule 2a–7 would continue to permit money market funds to use the penny rounding method of pricing so long as the funds complied with the conditions of the rule, but would not permit use of the amortized cost method of valuation. We would eliminate the use of the amortized cost method of valuation for money market funds under the fees and gates alternative for the same reasons we are proposing to do so under the retail and government exemptions to the floating NAV alternative.337 We do not believe that allowing continued use of amortized cost valuation for all securities in money market funds’ portfolios is appropriate given that these funds will already be valuing their securities using market factors on a daily basis due to new Web site disclosure requirements and given that penny rounding otherwise achieves the same level of price stability. As previously discussed, the financial crisis of 2007–2008 exposed contagion effects from heavy redemptions in money market funds that had significant impacts on investors, funds, and the markets. We have designed the fees and gates alternative to address certain of these issues. Although it is impossible to know what exactly would have happened if money market funds had operated with fees and gates at that time, we expect that if money market funds were armed with
  such tools, they would have been able to better manage the heavy redemptions that occurred and to limit the spread of contagion, regardless of the reason for the redemptions. During the crisis, some investors redeemed at the first sign of market stress, and could do so without bearing any costs even if their actions imposed costs on the fund and the remaining shareholders. As discussed in greater detail below, if money market funds had imposed liquidity fees during the crisis, it could have resulted in those investors re-assessing their redemption decisions because they would have been required to pay for the costs of their redemptions. Based on the level of redemption activity that occurred during the crisis, we expect that many money market funds would have faced liquidity pressures sufficient to cross the liquidity thresholds we are proposing today that would trigger the use of fees and gates. If funds therefore had imposed fees, this might have caused some investors to choose not to redeem because the direct costs of the liquidity fee may have been more tangible than the uncertain possibility of potential future losses. In addition, funds that imposed fees would likely have been able to better manage the impact of the redemptions that investors submitted, and any contagion effects may have been limited, because the fees would have helped offset the costs of the liquidity provided to redeeming

338See infra nn 361 and 362 and accompanying text. 339See RSFI Study, supra note 21, at 2–4. 340See id. at 7–14; Qi Chen et al., Payoff Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows, 97 J. Fin. Econ. 239–262 (2010). Prime money market funds can be particularly susceptible to redemptions in a flight to quality, liquidity or transparency because they hold similar portfolios and thus can present a correlated risk of loss of quality or loss of liquidity (and particularly when the financial system is strained because most of their non-governmental assets are short-term debt obligations of large banks.) See infra section III.J. See also Harvard Business School FSOC Comment Letter, supra note 24; Angel FSOC Comment Letter, supra note 60. 341See, e.g., Comment Letter of Americans for Financial Reform (Feb. 20, 2012) (available in File No. FSOC–2012–0003); BlackRock FSOC Comment Letter, supra note 204; Philip E. Strahan & Basak Tanyeri, Once Burned, Twice Shy: Money Market Fund Responses to a Systemic Liquidity Shock, Boston College Working Paper (July 2012) (finding that in response to the September 2008 run on money market funds, the funds first responded by selling their safest and most liquid holdings). See also Stephan Jank & Michael Wedow, Sturm und Drang in Money Market Funds: When Money Market Funds Cease to be Narrow, Deutsche Bundesbank Discussion Paper No. 20/2008 (finding that German money market funds enhanced their yield by investing in less liquid securities in the lead up to the 2007–2008 subprime crisis, but then experienced runs during the crisis, while more liquid money market funds functioned as a safe haven). We note that other mutual funds also may tend to deplete their most liquid assets first to meet redemptions, but the incentive to redeem because of the potential for declining fund liquidity may be stronger in money market funds because of their use as a cash management vehicle and the resulting heightened sensitivity to potential losses. 342See Comment Letter of J.P. Morgan Asset Management (Jan. 14, 2013) (available in File No. FSOC–2012–0003) (‘‘J.P. Morgan FSOC Comment Letter’’) (‘‘the standby character of [fees and gates] proposals appropriately balances the goal of allowing MMFs to operate normally when not under stress, yet promote stability, flexibility and reasonable fairness when stressed.’’); Comment Letter of Wells Fargo Funds Management, LLC (Jan. 17, 2013) (available in File No. FSOC–2012–0003) (‘‘Wells Fargo FSOC Comment Letter’’) (stating that standby fees and gates are narrowly tailored, ‘‘imposed to address [run risk] while preserving money market funds’ key attributes’’). 343HSBC Global Asset Management, Liquidity Fees; a proposal to reform money market funds (Nov. 3, 2011) (‘‘HSBC 2011 Liquidity Fees Paper’’). 344Section III.B.3 infra discusses the rationale for the exemptions from the Investment Company Act and related rules proposed to permit money market funds to impose standby liquidity fees and gates. 345There are limited exceptions specified in
section 22(e) of the Act in which a money market
fund (and any other mutual fund) may suspend redemptions, such as (i) for any period (A) during which the New York Stock Exchange is closed other than customary week-end and holiday closings or (B) during which trading on the New York Stock Exchange is restricted, or (ii) during any period in which an emergency exists as a result of which (A) disposal by the fund of securities owned by it is not reasonably practical or (B) it is not reasonably practical for the fund to determine the value of its net assets. The Commission also has granted orders in the past allowing funds to suspend redemptions. See, e.g., In the Matter of The Reserve Fund, Investment Company Act Release No. 28386 (Sept. 22, 2008) [73 FR 55572 (Sept. 25, 2008)] (order); Reserve Municipal Money-Market Trust, et al., Investment Company Act Release No. 28466 (Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order). shareholders, and any excess could have been used to repair the NAV of the fund, if necessary. Regardless of the incentives to redeem, a liquidity fee would make redeeming investors pay for the costs of liquidity and, even if investors redeem from a fund, gates can directly respond to a run by halting redemptions. If a fund had been able to impose a redemption gate at the time, it also would have been able to stop mounting redemptions and possibly generate additional internal liquidity in the fund while the gate was in place. However, fees and gates do not address all of the factors that may lead to heavy redemptions in money market funds.338 For example, they do not eliminate the incentive to redeem in times of stress to receive the $1.00 stable share price before the fund breaks the buck, or prevent investors from seeking to redeem to obtain higher quality securities, better liquidity, or increased transparency. Nonetheless, for the reasons discussed above, they provide tools that should serve to address many of the types of issues that arose during the crisis by allocating more explicitly the costs of liquidity and stopping runs. As discussed in section III.C, we also request comment on whether we should combine this option with our floating NAV alternative. This reform would be intended to achieve our goals of preserving the benefits of stable share price money market funds for the widest range of investors and the availability of short-term financing for issuers, while enhancing investor protection and risk transparency, making funds more resilient to mass redemptions, and improving money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions, as further discussed below.

1. Analysis of Certain Effects of
   Liquidity Fees and Gates
   As discussed in the RSFI Study and in section II above, shareholders may redeem money market fund shares for several reasons under stressed market conditions.339 One of these incentives relates to the current rounding convention in money market fund valuation and pricing that can allow early redeeming shareholders to redeem for $1.00 per share, even when the market-based NAV per share of the fund is lower than that price. As discussed in
   section III.A above, the floating NAV
   proposal is principally focused on mitigating this incentive by causing redeeming shareholders to receive the market value of redeemed shares. However, as the RSFI Study details, there are a variety of other factors that may motivate shareholders to redeem assets from money market funds in times of stress. Adverse economic events or financial market conditions can cause shareholders to engage in flights to quality, liquidity, or transparency (or combinations thereof).340 When money market funds may have to absorb, suddenly, high levels of redemptions that are expected to be in excess of the fund’s internal sources of liquidity, investors may expect that fund managers will deplete the fund’s most liquid assets first to meet redemptions and may have to sell securities at a loss (because of transitory liquidity costs) or even ‘‘fire sale’’ prices.341 Accordingly, shareholder redemptions during such periods can impose expected future liquidity costs on the money market fund that are not reflected in a $1.00 share price based on current amortized cost valuation. Because the circumstances under which liquidity becomes expensive historically have been infrequent, we expect that liquidity fees only will be imposed when the fund’s board of directors considers the fund’s liquidity costs to be at a premium and the liquidity fee, if imposed, will apply only to those shareholders who redeem and cause the fund to incur that cost. Under normal market conditions, fund shareholders would continue to enjoy unfettered liquidity for money market fund shares.342 As such, liquidity fees are designed to preserve the current benefits of principal stability, liquidity, and a market yield under most market conditions, but reduce the likelihood that ‘‘when markets are dislocated, costs that ought to be attributed to a redeeming shareholder are externalized on remaining shareholders and on the wider market.’’ 343 In addition to liquidity fees, our proposal also would allow money market funds to impose redemption gates after the liquidity threshold is reached. Our proposal on liquidity fees and gates, however, could affect shareholders by potentially limiting the full, unfettered redeemability of money market fund shares under certain conditions, a principle embodied in the Investment Company Act.344 Currently, a money market fund generally can suspend redemptions only 345 after obtaining an exemptive order from the Commission or in accordance with rule 22e–3, which requires the fund’s board of directors to determine that the fund is about to ‘‘break the buck’’

346Rule 22e–3(a)(1). 347See proposed (Fees & Gates) rule 2a–7(c)(2)(ii). 348See, e.g., Angel FSOC Comment Letter, supra note 60 (‘‘gates that limit MMMF redemptions to the natural maturity of the MMMF portfolios can prevent the forced selling of assets and transform a disorderly run into an orderly walk to quality’’); ICI Jan. 24 FSOC Comment Letter, supra note 25 (noting that a gate provides time for the fund to rebuild its liquidity as portfolio securities mature). 349Being able to impose a temporary suspension of redemptions to calm instances of heightened redemptions had been recommended by an industry report. ICI 2009 Report, supra note 56, at 85–89 (recommending that the Commission permit a fund’s directors to suspend temporarily the right of redemption if the board, including a majority of its independent directors, determines that the fund’s net asset value is ‘‘materially impaired’’). 350See, e.g., Comment Letter of Charles Schwab Investment Management, Inc. (Sept. 4, 2009) (available in File No. S7–11–09) (‘‘Schwab 2009 Comment Letter’’); Comment Letter of the Dreyfus Corporation (Sept. 8, 2009) (available in File No. S7–11–09) (‘‘Dreyfus 2009 Comment Letter’’); Comment Letter of Federated Investors, Inc. (Sept. 8, 2009) (available in File No. S7–11–09); T. Rowe Price 2009 Comment Letter, supra note 208. One commenter opposed the Commission permitting a temporary suspension of redemptions. See Comment Letter of Fund Democracy and the Consumer Federation of America (Sept. 8, 2009) (available in File No. S7–11–09) (stating that such a ‘‘free time-out provision would increase incentives to run for the exits before the fund is closed and virtually guarantee that, once the fund was reopened, a flood of redemptions will follow. The provision provides a potential escape valve that will reduce fund managers’ incentives to protect the fund’s NAV. The provision provides virtually no benefit to shareholders while serving primarily to protect fund managers’ interests.’’). 351See, e.g., Wells Fargo FSOC Comment Letter, supra note 342 (stating that a standby liquidity fee would ‘‘provide an affirmative reason for investors to avoid redeeming from a distressed fund’’ and ‘‘those who choose to redeem in spite of the liquidity fee will help to support the fund’s market￾based NAV and thus reduce or eliminate the potential harm associated with the timing of their redemptions to other remaining investors’’). 352See ICI Jan. 24 FSOC Comment Letter, supra note 25. 353We note that investors owning securities directly—as opposed to through a money market fund—naturally bear these liquidity costs. They bear these costs both because they bear any losses if they have to sell a security at a discount in times of stress to obtain their needed liquidity and because they directly bear the risk of a less liquid investment portfolio if they sell their most liquid holdings first to obtain needed liquidity. 354See RSFI Study, supra note 21, at 7–14 (discussing different
possible explanations for why shareholders may redeem from money market funds in times of stress). 355See, e.g., Daniel Kahneman, Thinking, Fast and Slow (2011), at 278–288. 356See proposed (Fees & Gates) rule 2a–7(c)(2). 357See, e.g., Comment Letter of UBS on the IOSCO Consultation Report on Money Market Fund Systemic Risk Analysis and Reform Options (May 25, 2012), available at http://www.iosco.org/library/ pubdocs/pdf/IOSCOPD392.pdf) (‘‘UBS IOSCO Comment Letter’’) (‘‘we are convinced that [partial (specifically, that the extent of deviation between the fund’s amortized cost price per share and its current market-based net asset value per share may result in material dilution or other unfair results to investors).346 Under our proposal, a money market fund board could decide to temporarily suspend redemptions once it had crossed the same thresholds that can trigger the imposition of a liquidity fee.347 The fund could use such a gate to assess the viability of the fund, to create a ‘‘circuit breaker’’ giving time for a market panic to subside, or to create ‘‘breathing room’’ to permit more fund assets to mature and provide internal liquidity to the fund.348 In the 2009 Proposing Release, we requested comment on whether we should include a provision in rule 22e–3 that would permit fund directors to temporarily suspend redemptions during certain exigent circumstances.349 Many commenters on our 2009 Proposing Release supported our permitting such a temporary suspension of redemptions.350 We are proposing a combination of liquidity fees and gates because we believe that liquidity fees and gates, while both aimed at helping funds better and more systematically manage high levels of redemptions, do so in different ways and thus with somewhat different tradeoffs. Liquidity fees are designed to reduce shareholders’ incentives to redeem when it is abnormally costly for the fund to provide liquidity by requiring redeeming shareholders to bear at least some of the liquidity costs of their redemption (rather than transferring those costs to remaining shareholders).351 To the extent that liquidity fees paid exceed such costs, they also can help increase the fund’s net asset value for remaining shareholders which would have a restorative effect if the fund has suffered a loss. As one commenter has said, a liquidity fee can ‘‘provide a strong disincentive for investors to make further redemptions by causing them to choose between paying a premium for current liquidity or delaying liquidity and benefitting from the fees paid by redeeming investors.’’ 352 This explicit pricing of liquidity costs in money market funds could offer significant benefits to such funds and the broader short-term financing market in times of potential stress by lessening both the frequency and effect of shareholder redemptions.353 Unlike liquidity fees, gates are designed to halt a run by stopping redemptions long enough to allow (1) fund managers time to assess the appropriate
strategy to meet redemptions, (2) liquidity buffers to grow organically as securities mature, and (3) shareholders to assess the level of liquidity in the fund and for any shareholder panic to subside. We also note that gates are the one regulatory reform discussed in this Release and the FSOC Proposed Recommendations that definitively stops a run on a fund (by blocking all redemptions). Fees and gates also may have different levels of effectiveness under different stress scenarios. For example, we expect that liquidity fees will be able to reduce the harm to non-redeeming shareholders and the broader markets when a fund faces heavy redemptions during periods in which its true liquidity costs are less than the fund’s imposed liquidity fee. Redemptions during this time will increase the value of the fund, which, in turn, will stabilize the fund to the extent remaining shareholders’ incentive to redeem shares is decreased. However, it is possible that liquidity fees might not be fully effective during periods of systemic crises because, for example, shareholders might choose to redeem from money market funds irrespective of the level of a fund’s true liquidity costs and imposition of the liquidity fee.354 In those cases, gates could function as useful circuit breakers, allowing the fund time to rebuild its own internal liquidity and shareholders to pause to reconsider whether a redemption is warranted. Finally, research in behavioral economics suggests that liquidity fees may be particularly effective in dampening a run because, when faced with two negative options, investors tend to prefer possible losses over certain losses, even when the amount of possible loss is significantly higher than the certain loss.355 Unlike gates, when a liquidity fee is imposed, investors would make an economic decision over whether to redeem. Therefore, under this behavioral economic theory, investors fearing that a money market fund may suffer losses may prefer to stay in the money market fund and avoid payment of the liquidity fee (despite the possibility that the fund might suffer a future loss) rather than redeem and lock in payment of the liquidity fee. We are proposing a combination of fees and gates, with a fee as the initial default but with an optional ability for a fund’s board to replace the fee with a gate, or impose a gate immediately, in each case as the board deems best for the fund.356 We are proposing this structure as the initial default (rather than imposing a gate as the default) because we believe that a fee has the potential to be less disruptive to fund shareholders and the short-term financing markets because a fee allows fund shareholders to continue to transact in times of stress (although at a cost).357 At the same time, if the board

single swinging pricing] is more efficient than gates as prices are more efficient signals of scarcity than quantitative rationing’’); Comment Letter of BNP Paribas on the IOSCO Consultation Report on Money Market Fund Systemic Risk Analysis and Reform Options (May 25, 2012), available at http:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD392.pdf (‘‘BNP Paribas IOSCO Comment Letter’’) (‘‘It would not make sense to restrict the redeemer willing to pay the price of liquidity.’’). 358See, e.g., BlackRock FSOC Comment Letter, supra note 204; J.P. Morgan FSOC Comment Letter, supra note 342; Northern Trust FSOC Comment Letter, supra note 174; Comment Letter of the Securities Industry and Financial Markets Association (‘‘SIFMA’’) (Jan. 14, 2013) (available in File No. FSOC–2012–0003) (‘‘SIFMA FSOC Comment Letter’’); Vanguard FSOC Comment Letter, supra note 172. See also David M. Geffen & Joseph R. Fleming, Dodd-Frank and Mutual Funds:
Alternative Approaches to Systemic Risk, Bloomberg Law Reports (Jan. 2011) (‘‘The alternative suggested here is that, during a period of illiquidity, as declared by a money market fund’s board (or, alternatively, the SEC or another designated federal regulator), a money market fund may impose a redemption fee on a large share redemption approximately equal to the cost imposed by the redeeming shareholder and other redeeming shareholders on the money market fund’s remaining shareholders. . . . The redemption fee causes the large redeeming shareholder to internalize the cost of the negative externality that the redemption otherwise would impose on non-redeeming shareholders.’’). But see, e.g., Comment Letter of the U.S. Chamber of Commerce on the IOSCO Consultation Report on Money Market Fund Systemic Risk Analysis and Reform Options (May 24, 2012), available at http:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD392.pdf (‘‘Imposing a liquidity fee is akin to implementing a variable NAV, and as such, would preclude a number of companies from investing in money market mutual funds. Although the liquidity fee may not be imposed until the fund’s portfolio falls below a specified threshold or when there is a high volume of redemptions, corporate treasurers have an obligation to ensure that ‘‘a dollar in will be a dollar out’’ and therefore, will not risk investing cash in an investment product that may not return 100 cents on the dollar.’’); Comment Letter of Federated Investors, Inc. on the IOSCO Consultation Report on Money Market Fund Systemic Risk Analysis and Reform Options (May 25, 2012) available at http:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD392.pdf (‘‘Federated IOSCO Comment Letter’’) (‘‘Federated believes that liquidity fees . . . are simply a different way to break the dollar . . . and would generate large preemptive redemptions from MMFs’’). 359Cf. G.W. Schwert & P.J. Seguin, Securities Transaction Taxes: An Overview of Costs, Benefits and Unresolved Questions, 49 Financial Analysts Journal 27 (1993); K.A. Froot & J. Campbell, International Experiences with Securities Transaction Taxes, in The Internationalization of Equity Markets (J. Frankel, ed., 1994), at 277–308. 360A Florida local government investment pool experienced a run in 2007 due to its holdings in SIV securities. The fund suspended redemptions and ultimately reopened but after the fund (and each shareholder’s interest) had been split into two separate funds: One holding the more illiquid securities previously held by the pool (called ‘‘Fund B’’) and one holding the remaining securities of the fund. Fund B reopened with a 2% redemption fee and did not generate a run upon its reopening. See David Evans and Darrell Preston, Florida Investment Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007); Helen Huntley, State Wants Fund Audit, Tampa Bay Times (Dec. 11, 2007). Some European enhanced cash funds also successfully used fees or gates during the financial crisis to
stem redemptions. See Elias Bengtsson, Shadow Banking and Financial Stability: European Money Market Funds in the Global Financial Crisis (2011) (‘‘Bengtsson’’), available at http:// papers.ssrn.com/sol3/ papers.cfm?abstract_id=1772746&download=yes; Julie Ansidei, et al., Money Market Funds in Europe and Financial Stability, European Systemic Risk Board Occasional Paper No. 1, at 36 (June 2012), available at http://www.esrb.europa.eu/pub/pdf/ occasional/20120622_occasional_paper.pdf. 361See, e.g., FSOC Proposed Recommendations, supra note 114, at 62–63; Harvard Business School FSOC Comment Letter, supra note 24 (‘‘news that one MMF has initiated redemption restrictions could set off a system-wide run by panic-stricken investors who are anxious to redeem their shares before other funds also initiate restrictions’’); Comment Letter of The Systemic Risk Council (Jan. 18, 2013) (available in File No. FSOC 2012–0003) (‘‘Systemic Risk Council FSOC Comment Letter’’) (stating that temporary gates or fees that come down in a crisis do not address the structural problem of the $1.00 NAV and would move up a run on money market funds). Empirical evidence in the equity and futures markets demonstrates that investors may trade in advance of circuit breakers being triggered so as to not be left in temporarily illiquid positions. Investors have been found to trade ahead of predictable market closings and price limit hits. Empirical studies document trading pressure before trading halts. See Y. Amihud & H. Mendelson, Trading Mechanisms and Stock Returns: An Empirical Investigation, 42 J. Fin. 533–553 (1987); Y. Amihud & H. Mendelson, Volatility, Efficiency and Trading: Evidence from the Japanese Stock Market, 46 J. Fin. 1765–1789 (1991); H.R. Stoll & R. E. Whaley, Stock Market Structure and Volatility, 3 Review of Financial Studies 37–71 (1990); M.S. Gerety & J.H. Mulherin, Trading Halts and Market Activity: An Analysis of Volume at the Open and the Close, 47 J. Fin. 1765–1784 (1992). Empirical studies show trading volume accelerates before a price limit hits. See Y. Du, et al., An Analysis of the Magnet Effect under Price Limits, 9 International Review of Fin. 83–110 (2009); G.J. Kuserk & P.R. Locke, Market Making With Price Limits, 16 J. Futures Markets 677–696 (1996). An experimental study finds that mandated market closures accelerate trading activity when an interruption is imminent. See L.F. Ackert, et al., An Experimental Study of Circuit Breakers: The Effects of Mandated Market Closures and Temporary Halts on Market Behavior, 4 J. Financial Markets 185–208 (2001). Empirical studies report trading volume increases following trading halts and price limit hits. See, e.g., S.A. Corwin & M.L. Lipson, Order Flow and Liquidity around NYSE Trading Halts, 55 J. Fin. 1771–1801 (2000); W.G. Christie, et al., Nasdaq Trading Halts: The Impact of Market Mechanisms on Prices, Trading Activity, and Execution Costs, 57 J. Fin. 1443–1478 (2002); and C.M.C. Lee, et al.,
Volume, Volatility, and New York Stock Exchange Trading Halts, 49 J. Fin. 183–213 (1994). See also K.A. Kim & S.G. Rhee, Price Limit Performance: Evidence from the Tokyo Stock Exchange, 52 J. Fin. 885–901 (1997). 362See A. Subrahmanyam, On Rules Versus Discretion in Procedures to Halt Trade, 47 J. Economics and Business 1–16 (1995); A. Subrahmanyam, The Ex-Ante Effects of Trade Halting Rules on Informed Trading Strategies and Market Liquidity, 6 Rev. Financial Economics 1–14 (1997). 363Theoretical models show investors may rationally follow others’ actions, even though these other investors’ decisions are not necessarily based on superior private information. See S. Bikhchandani, et al., A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades, 100 J. Pol. Econ. 992–1026 (1992); I. Welch, Sequential Sales, Learning, and Cascades, 47 J. Fin. 695–732 (1992). Experimental data demonstrates investors may overreact to uninformative trades. See C. Camerer & K. Weigelt, Information Mirages in Experimental Asset Markets, 64 J. Bus. 463–493 (1991). Price limits, which are loosely akin to trading suspensions, may help to protect markets from destabilizing trades. See F. Westerhoff, Speculative markets and the effectiveness of price limits, 28 J. Econ. Dynamics and Control 493–508 (2003). determines that a fee is insufficient to protect the interests of non-redeeming shareholders, it still has the option of imposing a gate (and perhaps later lifting the gate, but keeping in place the fee). Many participants in the money market fund industry have expressed support for imposing some form of a liquidity fee or gate on redeeming money market fund investors when the fund comes under stress as a way of reducing, in a targeted fashion, the fund’s susceptibility to heavy redemptions.358 Liquidity fees and gates are known to be able to reduce incentives to redeem,359 and they have been used successfully in the past by certain non-money market fund cash management pools to stem redemptions during times of stress.360 We recognize that the prospect of a fund imposing a liquidity fee or gate could raise a concern that shareholders will engage in preemptive redemptions if they fear the imminent imposition of fees or gates (either because of the fund’s situation or because such redemption restrictions have been triggered in other money market funds).361 We expect the opportunity for preemptive redemptions will decrease as a result of the amount of discretion fund boards would have in imposing liquidity fees and gates, because shareholders would not be able to accurately predict when, and under what circumstances, fees and gates may be imposed.362 Shareholders also might rationally choose to follow other shareholders’ redemptions even when those other shareholders’ decisions are not necessarily based on superior private information.363 General stress in the short-term markets or fears of stress at a particular fund could trigger redemptions as
shareholders try to avoid the fee. While we acknowledge that liquidity fees may not always preclude redemptions, fees are designed so that as redemptions begin to increase, if liquidity costs exceed the prescribed threshold for imposing a fee and the fund imposes a fee, the run will be halted. The fees, once imposed, should both curtail the level of redemptions, and fees paid by those that do redeem should, at least partially, cover liquidity costs incurred by funds and may even potentially repair the NAV of any funds that have suffered losses. One

364See, e.g., HSBC EC Letter, supra note 156 (‘‘Some commentators have objected that a trigger￾based liquidity fee would cause investors to seek to redeem prior to the imposition of the fee. We disagree with this argument, which misunderstands the cause of investor redemptions. . . . A liquidity fee would be imposed as a consequence of investors’ loss of confidence/flight to quality. It could not, therefore, be the cause of investors’ loss of confidence/flight to quality.’’) (emphasis in original); J.P. Morgan FSOC Comment Letter, supra note 342 (standby liquidity fees ‘‘do not prevent an initial run, but they do provide a useful tool to slow a run after one has begun’’); SIFMA FSOC Comment Letter, supra note 358 (‘‘the operation of the proposed gate and liquidity fee themselves will stem any exodus and damper its effect’’); Wells Fargo FSOC Comment Letter, supra note 342 (‘‘To the extent that investor redemptions made for the purpose of avoiding a liquidity fee have the effect of accelerating a run . . . the redemption gate and liquidity fee apply an equally strong countermeasure. First, the redemption gate would halt the run, and second, the ensuing imposition of liquidity fees would either cause further redemption activity to cease or monetize further redemptions into transactions that are accretive, rather than dilutive, to a fund’s market-to-market NAV. The redemption gate and liquidity fee operate to effectively reverse and repair any accelerated redemption activity the existence of the liquidity fee might otherwise induce. Redemption gates and liquidity fee mechanisms applying to all other money market funds would also mitigate any contagion risk.’’). 365See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a standby liquidity fee along with daily disclosure of the fund’s liquidity levels ‘‘will serve as an effective tool to force investment advisors, particularly those managing funds with highly concentrated shareholder bases, to manage their funds with adequate liquidity to prevent the [standby liquidity fee] from ever being triggered’’). 366See, e.g., Vanguard FSOC Comment Letter, supra note 172 (a standby liquidity fee ‘‘will encourage advisors and investors to self-police to avoid triggering the fee’’). 367See, e.g., HSBC 2011 Liquidity Fees Letter, supra note 343 (a liquidity fee ‘‘will result in more effective pricing of risk (in this case, liquidity risk) . . . [and] act as a market-based mechanism for improving the robustness and fairness’’ of money market funds); BlackRock FSOC Comment Letter, supra note 204 (‘‘A fund manager will focus on managing both assets and liabilities to avoid triggering a gate. On the liability side, a fund manager will be incented to know the underlying clients and model their behavior to anticipate cash flow needs under various scenarios. In the event a fund manager sees increased redemption behavior or sees reduced liquidity in the markets, the fund manager will be incented to address potential
problems as early as possible.’’) 368Section III.B.3 infra discusses the rationale for the exemptions from the Investment Company Act and related rules proposed to permit money market funds to impose standby liquidity fees and gates. 369See infra section III.E for a discussion of the potential effects on money market fund investments and capital formation as a result of this alternative, if adopted. See also Comment Letter of Fidelity (Feb. 3, 2012) (available in File No. 4–619) (finding in a survey of their retail money market fund customers that 43% would stop using a money market fund with a 1% non-refundable redemption fee charged if the fund’s NAV per share fell below $0.9975 and 27% would decrease their use of such a fund); Federated IOSCO Comment Letter, supra note 358 (stating that they anticipate ‘‘that many investors will choose not to invest in MMFs that are subject to liquidity fees, and will redeem existing investments in MMFs that impose a liquidity fee’’ but noting that ‘‘[s]hareholder attitudes to redemption fees on MMFs are untested’’). But see HSBC EC Letter, supra note 156 (‘‘A liquidity fee [triggered by a fall in the fund’s market-based NAV] should also be acceptable to investors, because it can be rationalized in terms of investor protection. (When we’ve presented the case for a liquidity fee in these terms to our investors, they have generally been receptive.)’’). circumstance under which liquidity fees would not self-correct is if the amount of the fee is less than or exactly equal to the fund’s realized liquidity costs. Gates would not be self-correcting in the event of realized portfolio losses, but they can help the fund preserve assets and generate more internal liquidity as assets mature. Some commenters have considered whether liquidity fees and gates might precipitate a run. For example, some commenters have expressed their view that a liquidity fee or gate would not accelerate a run, stating that such redemptions would likely trigger the fee or gate and that, once triggered, the fee or gate would then lessen or halt redemptions.364 Even if investors have an incentive to redeem, their redemptions eventually will cause a fee or gate to come down and halt the run. Under this proposal, money market funds would have the benefit of being able to use the penny rounding method of pricing for their portfolios. As discussed further below in section III.F.4 and III.F.5, they would also have to provide much fuller transparency of the market-based NAV per share of the funds and the marked-based value of the funds’ portfolio securities. This increased transparency is designed to allow better shareholder understanding of deviations between the fund’s value using market-based factors and its stable price. It also is aimed at helping investors better understand any risk involved in money market fund investments as a result of rule 2a–7’s rounding convention. However, retaining these valuation and pricing methods for money market
funds does not eliminate the ability of investors to redeem ahead of other investors from a money market fund that is about to ‘‘break the buck’’ and consequently may permit those early redeemers to receive $1.00 per share instead of its market value as discussed in section III.A above. Nevertheless, in times of fund or market stress the fund is likely to impose either liquidity fees or gates, which will limit the ability of redeeming shareholders to receive more than their pro-rata share of the market￾based value of the fund’s assets. Requiring that boards impose liquidity fees absent a finding that the fee is not in the best interest of the fund, and permitting them to impose gates once the fund has crossed certain thresholds could offer advantages to the fund in addition to better and more systematically managing liquidity and redemption activity. They could provide fund managers with a powerful incentive to carefully monitor shareholder concentration and shareholder flow to lessen the chance that the fund would have to impose liquidity fees or gates in times of market stress (because larger redemptions are more likely to cause the fund to breach the threshold). Such a requirement also could encourage portfolio managers to increase the level of daily and weekly liquid assets in the fund, as that would tend to lessen the likelihood of a liquidity fee or gate being imposed.365 Further, because our proposal provides the board discretion not to impose the liquidity fee (or to impose a lower liquidity fee) and gives boards the option to impose gates, the boards of directors can impose fees or gates when the board determines that it is in the best interest of the fund to do so. The prospect of facing fees and gates when a fund is under stress serves to make the risk of investing in a money market fund more transparent and to better inform and sensitize investors to the inherent risks of investing in money market funds. Fees and gates also could encourage shareholders to monitor and exert market discipline over the fund to reduce the likelihood that either the imposition of fees or gates will become necessary in that fund.366 An additional benefit to the board’s determination of liquidity fees and gates is that they create an incentive for money market fund managers to better and more systemically manage redemptions in all market conditions.367 Our proposal on liquidity fees and gates, however, could affect shareholders by potentially limiting the full, unfettered redeemability of money market fund shares under certain conditions, a principle embodied in the Investment Company Act.368 Thus, this alternative, if adopted, could result in some shareholders redeeming their money market fund shares and moving their assets to alternative products (or government money market funds) out of concern that the potential imposition of a liquidity fee or gate could make investment in a money market fund less attractive due to less certain liquidity.369 We also
recognize that the imposition of a gate may affect the efficiency of money market fund shareholders’ investment allocations and have corresponding impacts on capital formation if the redemption

370See section 22(e) of the Investment Company Act. 371See infra section III.F. 372See infra section III.F. restriction prevents shareholders from moving cash invested in money market funds to other investment alternatives that might be preferable at the time. We request comment on our discussion of the economic basis and tradeoffs for this alternative.

• Would our proposal on liquidity
  fees and gates achieve our goals of preserving the benefits of stable share price money market funds for the widest range of investors and the availability of short-term financing for issuers while enhancing investor protection and risk transparency, making funds more resilient to mass redemptions and improving money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions? Are there other benefits that we have not identified and discussed?
• Would a liquidity fee provide many
  of the same potential benefits as the proposed floating NAV? If not, what are the differences in potential benefits? Would it result in a more effective pricing of liquidity risk into the funds’ share prices and a fairer allocation of that cost among shareholders? Would a liquidity fee that potentially restores the fund’s shadow price reduce some remaining shareholders incentive to redeem?
• Would the prospect of a fee or gate
  encourage investors to limit their concentration in a particular fund? Would an appropriately structured threshold for liquidity fees and gates provide an incentive for fund managers to monitor shareholder concentration and flows as well as portfolio composition to minimize the possibility of a fund applying a fee or gate? Would it encourage better board monitoring of the fund? Would it encourage shareholders to monitor and exert appropriate discipline over the fund? Would shareholders underestimate whether a fee or gate would ever be imposed by the board? How would the prospect of a fee or gate affect shareholder behavior?
• How will the liquidity fees or gates
  affect the fund’s portfolio choices? Will it affect the way funds manage their weekly liquid assets?
• Funds currently have the ability to
  delay the payment of redemption proceeds for up to seven days.370 Are there considerations that make funds hesitant to impose this delay that would also make funds hesitant to impose fees or gates? What are those factors?
• Would the expected imposition of a
  liquidity fee or gate increase redemption activity as the fund’s liquidity levels near the threshold? Would the prospect of a liquidity fee or gate create an incentive to redeem during times of potential stress by shareholders fearing that such a fee or gate might be imposed, thus inciting a run? If so, do commenters agree that in such a case the redemptions would trigger a fee or gate and slow or halt redemptions? If not, are there ways in which we could modify our proposed threshold for liquidity fees and gates such that a run could not arise without triggering fees or gates? What information would be needed for investors to reliably predict that a fund is on the verge of imposing fees or gates? Would the necessary information be readily available under our proposal?
• Are some types of shareholders
  more likely than other types of shareholders to attempt to redeem in anticipation of the imposition of the fee or gate? Are there ways that we could reduce the risk of pre-emptive redemptions? Would imposition of a fee or gate as a practical matter lead to liquidation of that fund? If so, should this be a concern?
• Is penny rounding sufficient to
  allow government money market funds to maintain a stable price? Should we also permit these funds to use amortized cost valuation? If so, why?
• Should we prohibit advisers to
  money market funds from charging management fees while the fund is gated? How might this affect advisers’ incentives to make recommendations to the board when it is considering whether to not impose a liquidity fee or gate? We note that we are not proposing to repeal or otherwise modify rule 17a–9 (permitting sponsors to support money market funds through portfolio purchases in some circumstances) under this proposal. Therefore, money market fund sponsors would be able to continue to support the money market funds they manage by purchasing securities from money market fund portfolios at their amortized cost value (or market price, if greater). Instead, we are requiring greater and more timely disclosure of any sponsor support of a money market fund, as further described in section III.F.1 below. We note that some sponsors could use such support to prevent a money market fund from breaching a threshold that would otherwise require the board to consider imposition of a liquidity fee. Such support could benefit fund shareholders by preventing them from incurring the costs or loss of liquidity that a liquidity fee or gate may entail. However, because such support would be discretionary, its possibility may create uncertainty about whether fund investors will have to bear the costs and burdens of a liquidity fee or gate in times of stress, which could lead to unpredictable shareholder behavior and inefficient shareholder allocation of investments if their expectations of risk turn out to be misplaced. Our continuing to permit sponsor support of money market funds, albeit with greater transparency,371 also could favor money market fund groups with a well-capitalized sponsor that is better able to provide discretionary support to its affiliated money market funds and thus avoid the imposition of fees or gates. Nonetheless, even the expectation of possible discretionary sponsor support may tend to slow redemptions. We request comment on the retention of rule 17a–9 under this proposal.
• Should we continue to allow this
  type of sponsor support of money market funds, given the enhanced transparency requirements? Would allowing sponsor support prevent or limit this proposal from achieving the goal of enhancing investor protection and improving money market funds’ ability to manage high levels of redemptions? If so, how? Should we instead prohibit sponsor support under this option? If so, why? If we prohibited sponsor support, how would this advance investor protection if such support would protect the value or liquidity of the fund? Should we modify rule 17a–9 to limit or condition sponsor support?
• Would sponsors provide support to
  prevent a money market fund from breaching a liquidity threshold? Would sponsors be more willing and able to provide support to stabilize the fund under the liquidity fees and gates proposal than they were to support money market funds before the 2007– 2008 financial crisis? Why or why not? As discussed further below, we also are proposing to require that money market funds disclose their market￾based NAVs and levels of daily and weekly liquid assets on a daily basis on the funds’ Web sites.372

2. Terms of the Liquidity Fees and Gates
   We are proposing that if a money market fund’s weekly liquid assets fall or remain below 15% of its total assets at the end of any business day, the next business day it must impose a 2% liquidity fee on each shareholder’s redemptions, unless the fund’s board of directors (including a majority of its independent directors) determines that

373Proposed (Fees & Gates) rule 2a–7(c)(2)(i). A ‘‘business day,’’ defined in rule 2a–7 as ‘‘any day, other than Saturday, Sunday, or any customary business holiday,’’ would end after 11:59 p.m. on that day. See rule 2a–7(a)(4). If the shareholder of record making the redemption was a direct shareholder (and not a financial intermediary), we would expect the fee to apply to that shareholder’s net redemptions for the day. In order to provide the money market fund flexibility, if a liquidity fee were in place for more than one business day, the fund’s board could vary the level of the liquidity fee (subject to the 2% limit) if the board determined that a different fee level was in the best interest of the fund. Proposed (Fees & Gates) rule 2a– 7(c)(2)(i)(A). The new fee level would take effect the next business day following the board’s determination. Id. 374Proposed (Fees & Gates) rule 2a–7(c)(2)(i)(B). 375The fund must reject any redemption requests it receives while the fund is gated. See proposed (Fees & Gates) rule 2a–7(c)(2)(ii). 376Proposed (Fees & Gates) rule 2a–7(c)(2)(ii). 377Proposed (Fees & Gates) rule 2a–7(c)(2)(ii). We also note that an adviser to a money market fund could seek an exemptive order from the Commission to allow for continued gating beyond 30 days if such gating would be necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Investment Company Act. 378See proposed (Fees & Gates) rule 22e–3. 379See proposed (Fees & Gates) rule 2a–7(c)(2)(i). 380See proposed (Fees & Gates) rule 2a–7(c)(2)(ii). 381Proposed (Fees & Gates) rule 2a–7(c)(2). such a fee would not be in the best interest of the fund or determines that a lower fee would be in the best interest of the fund.373 Any fee imposed would be lifted automatically once the money market fund’s level of weekly liquid assets had risen to or above 30%, and it could be lifted at any time by the board of directors (including a majority of its independent directors) if the board determines to impose a different fee or if it determines that imposing the fee is no longer in the best interest of the fund.374 In addition, once the fund had crossed below the 15% threshold, the fund’s board of directors (including a majority of its independent directors) would be able to temporarily suspend redemptions and gate the fund if the board determines that doing so is in the best interest of the fund.375 Any gate imposed also would be automatically lifted once the fund’s weekly liquid assets had risen back to or above 30% of its total assets (although the board of directors (including a majority of its independent directors) could lift the gate earlier.376 Any money market fund that imposes a gate would need to lift that gate within 30 days and a money market fund could not impose a gate for more than 30 days in any 90-day period.377 Under this proposal, we also would amend rule 22e–3 to
permit the suspension of redemptions and liquidation of a money market fund if the fund’s level of weekly liquid assets falls below 15% of its total assets.378 a. Discretionary Versus Mandatory Liquidity Fees and Gates We are proposing a default liquidity fee that the money market fund’s board of directors can modify or remove if it is in the best interest of the fund, because this structure offers the possibility of achieving many of the benefits of both fully discretionary and automatic (regulatory mandated) redemption restriction triggers. A purely discretionary trigger allows a fund board the flexibility to determine when a restriction is necessary, and thus allows tailoring of the triggering of the fee to the market conditions at the time, and the specific circumstances of the fund. However, a purely discretionary trigger creates the risk that a fund board may be reluctant to impose restrictions, even when they would benefit the fund and the short-term financing markets. They may not impose such restrictions out of fear that doing so signals trouble for the individual fund or fund complex (and thus may incur significant business and reputational effects) or could incite redemptions in other money market funds in anticipation that fees may be imposed in those funds as well. Fully discretionary triggers also provide shareholders with little advance knowledge of when such a restriction might be triggered and fund boards could end up applying them in a very disparate manner. Fully discretionary triggers also may present operational difficulties for fund managers who suddenly may need to implement a liquidity fee and may not have systems in place that can rapidly institute a fee whose trigger and size was previously unknown. Automatic triggers set by the Commission may mitigate these potential concerns, but they create a risk of imposing costs on shareholders when funds are not truly distressed or when liquidity is not abnormally costly. Establishing thresholds that result in the imposition of a fee, unless the board makes a finding that such a fee is not in the best interest of the fund, balances these tradeoffs by providing some transparency to shareholders on potential fee or gate triggers and giving some guidance to boards on when a fee or gate might be appropriate. At the same time, it also allows boards to avoid imposing a fee or gate when it would be inappropriate in light of the circumstances of the fund and the conditions in the market. Our proposed rule essentially creates a default liquidity fee of a pre￾determined size, imposed when the fund’s weekly liquid assets have dropped below a certain threshold. However, it provides the fund’s board flexibility to alter the default option— for example, by imposing a gate instead of a fee or by imposing a fee at a different threshold or imposing a lower percentage fee—as long as it determines that doing so is in the best interest of the fund. We request comment on our proposed default structure
for the liquidity fees and gates.

• Should the imposition of a liquidity
  fee or gate be fully discretionary or should it have a completely automatic trigger? Why?
• Would a money market fund’s
  board of directors impose a fully discretionary fee or gate during times of stress on the money market fund despite its possible unpopularity with investors and potential competitive disadvantage for the fund or fund group if other funds are not imposing a liquidity fee or gate? On the other hand, would a fund’s board of directors be able to best determine when a fee or gate should be imposed rather than an automatic trigger?
• What operational complexities
  would be involved in a fully discretionary liquidity fee? Would fund complexes and their intermediaries be able to program systems in advance to accommodate the immediate imposition of a liquidity fee whose trigger and size were unknown in advance? b. Threshold for Liquidity Fees and Gates We are proposing that a liquidity fee automatically be imposed on money market fund redemptions if the fund’s weekly liquid assets fall below 15% of its total assets, unless the fund’s board of directors (including a majority of its independent directors) determines that a fee would not be in the best interest of the fund.379 We also are proposing that, once the fund has crossed below this threshold, the money market fund board also would have the ability to impose a temporary gate for a limited period of time provided that the board of directors (including a majority of its independent directors) determines that imposing a gate is in the fund’s best interest.380 Any fee or gate imposed would be automatically lifted when the fund’s weekly liquid assets had risen back to or above 30% of its total assets (although the board of directors (including a majority of its independent directors) could lift the fee or gate earlier if the board determined it was in the best interest of the fund.381

382See infra text preceding n.385.
383See, e.g., BlackRock FSOC Comment Letter, supra note 204 (recommending an automatic trigger of 15% weekly liquid assets); ICI Jan. 24 FSOC Comment Letter, supra note 25 (recommending an automatic trigger of between 7.5% and 15% weekly liquid assets); Vanguard FSOC Comment Letter, supra note 172 (recommending an automatic trigger of 15% weekly liquid assets). 384For purposes of our analysis, the monthly distribution of prime money market funds with weekly liquid assets above 30% is not shown. Our proposed 15% weekly liquid asset threshold is a default for money market funds imposing liquidity fees that requires the board to consider taking action. Fund boards of directors have the flexibility to impose a liquidity fee or gate if weekly liquid assets fall below this threshold (or they may determine not to impose a liquidity fee or gate at all), and can continue to reconsider their decision in light of new events as long as the fund is below this liquidity threshold.382 Several industry commenters have recommended basing imposition of a liquidity fee on the money market fund’s level of weekly liquid assets, with their proposed thresholds ranging from 7.5% to 15% of weekly liquid assets.383 As shown in the chart below, our staff’s analysis of Form N–MFP data shows that, between March 2011 and October 2012, there were two months in which funds reported weekly liquid assets below 15% (one fund in May 2011, and four funds in June 2011) and there were two months in which funds reported weekly liquid assets of at least 15% but below 20% (one fund in March 2011, and one fund in February 2012). Fees and gates are a tool to mitigate problems in funds, so we selected a threshold that would indicate distress in a fund, but also one that few funds would cross in the ordinary course of business, allowing funds and their boards to avoid the costs of frequent unnecessary consideration of fees and gates. The analysis below shows that if the triggering threshold was between 25–30% weekly liquid assets, funds would have crossed this threshold every month except one during the period, and if it was set at between 20–25% weekly liquid assets, some funds would have crossed it nearly every other month. However, the analysis shows that funds rarely cross the threshold of between 15–20% weekly liquid assets during normal operations, and that during the time period analyzed, there were only 2 months that had any funds below the 15% weekly liquid assets threshold. DISTRIBUTION OF WEEKLY LIQUID ASSETS IN PRIME MONEY MARKET FUNDS, MARCH 2011—OCTOBER 2012 384 Date [0.00–0.05] [0.05–0.10] [0.10–0.15] [0.15–0.20] [0.20–0.25] [0.25–0.30] Total Mar–11 ......................... ........................ ........................ ........................ 1 1 11 259 Apr–11 .......................... ........................ ........................ ........................ ........................ ........................ 3 261 May–11 ........................ ........................
1 ........................ ........................ 2 9 260 Jun–11 ......................... ........................ ........................ 4 ........................ 2 25 257 Jul–11 ........................... ........................ ........................ ........................ ........................ ........................ 3 257 Aug–11 ......................... ........................ ........................ ........................ ........................ 3 10 256 Sep–11 ......................... ........................ ........................ ........................ ........................ ........................ 5 256 Oct–11 .......................... ........................ ........................ ........................ ........................ 1 6 258 Nov–11 ......................... ........................ ........................ ........................ ........................ ........................ 4 257 Dec–11 ......................... ........................ ........................ ........................ ........................ ........................ 7 256 Jan–12 ......................... ........................ ........................ ........................ ........................ ........................ 3 256 Feb–12 ......................... ........................ ........................ ........................ 1 ........................ 2 255 Mar–12 ......................... ........................ ........................ ........................ ........................ ........................ 5 251
Apr–12 .......................... ........................ ........................ ........................ ........................ ........................ ........................ 248
May–12 ........................ ........................ ........................ ........................ ........................ ........................ 7 247 Jun–12 ......................... ........................ ........................ ........................ ........................ 1 4 245 Jul–12 ........................... ........................ ........................ ........................ ........................ 1 3 245 Aug–12 ......................... ........................ ........................ ........................ ........................ ........................ 4 244 Sep–12 ......................... ........................ ........................ ........................ ........................ 1 6 241 Oct–12 .......................... ........................ ........................ ........................ ........................ ........................ 2 241 Because the data on liquidity is reported at the end of the month, it could be the case that more than four money market funds’ level of weekly liquid assets fell below 15% on other days of the month during our period of study. However, this number may overestimate the percentage of funds that are expected to impose a fee or gate because we expect that funds would increase their risk management around their level of weekly liquid assets in response to the fees and gates requirement to avoid breaching the liquidity threshold. Using this information to inform our choice of the appropriate level for a weekly liquid asset threshold, we are proposing a 15% weekly liquid assets threshold to balance the desire to have such consideration triggered while the fund still had liquidity reserves to meet redemptions but also not set the trigger at a level that frequently would be tripped by normal fluctuations in liquidity levels that typically would not indicate a fund under stress. We are proposing to require that any fee or gate be lifted automatically once the fund’s weekly liquid assets have risen back above 30% of the fund’s assets—the minimum currently mandated under rule 2a–7—and thus a fee or gate would appear to be no longer justified. We considered whether a fee or gate should be lifted automatically before the fund’s weekly liquid assets were completely restored to their required minimum—for example, once they had risen to 25%. However, we preliminarily believe that automatically removing such a restriction before the fund’s level of weekly liquid assets was fully replenished may result in a fund being unable to maintain a liquidity fee or gate to protect the fund even when the fund is still under stress and before stressed market conditions have fully subsided. We note that a fund’s board can always determine to lift a fee or gate before the fund’s level of weekly liquid assets is restored to 30% of its assets. There are a number of factors that a fund’s board of directors may consider in determining whether to impose a liquidity fee once the
fund’s weekly liquid assets have fallen below 15% of its total assets. For example, it may want to consider why the level of weekly

385HSBC FSOC Comment Letter, supra note 196 (suggesting setting the market-based NAV trigger at $0.9975). 386See proposed (Fees & Gates) rule 2a– 7(c)(2)(i)(A). 387See, e.g., Vanguard FSOC Comment Letter, supra note 172 (recommending a fee of between 1 liquid assets has fallen. Is it because the fund is experiencing mounting redemptions during a time of market stress or is it because a few large shareholders unexpectedly redeemed for idiosyncratic reasons unrelated to current market conditions? Another relevant factor to the fund board may be whether the fall in weekly liquid assets has been accompanied by a fall in the fund’s shadow price. The fund board also may want to consider whether the fall in weekly liquid assets is likely to be very short-term. For example, will the fall in weekly liquid assets be cured in the next day or two when securities currently in the fund’s portfolio qualify as weekly liquid assets? Many money market funds ‘‘ladder’’ the maturities of their portfolio securities, and thus it could be the case that a fall in weekly liquid assets will be rapidly cured by the portfolio’s maturity structure. We considered instead proposing a threshold based on the shadow price of the money market fund. For example, one money market fund sponsor has suggested that we require money market funds’ boards of directors to consider charging a liquidity fee on redeeming shareholders if the shadow price of a fund’s portfolio fell below a specified threshold.385 This commenter asserted that such a trigger would ensure that shareholders only pay a fee when redemptions would actually cause the fund to suffer a loss and thus redemptions clearly disadvantage remaining shareholders. However, we are concerned that a money market fund being able to impose a fee only when the fund’s shadow price has fallen by some amount below $1.00 in certain cases may come too late to mitigate the potential consequences of heavy redemptions and to fully protect investors. Heavy redemptions can impose adverse economic consequences on a money market fund even before the fund actually suffers a loss. They can deplete the fund’s most liquid assets so that the fund is in a substantially weaker position to absorb further redemptions or losses. In addition, our proposed threshold is a default trigger for the liquidity fee—the board is not required to impose a liquidity fee when the fund’s weekly liquid assets have fallen below 15%. Thus, a board can take into account whether the money market fund’s shadow price has deteriorated in determining whether to impose a liquidity fee or gate when the fund’s weekly liquid assets have fallen below the threshold. A threshold based on shadow prices also raises questions about whether and to what extent shareholders differentiate between realized (such as those from security defaults) and market-based losses (such as those from market interest rate changes) when considering a money market fund’s shadow price. If shareholders do not
redeem in response to market-based losses (as opposed to realized losses), it may be inappropriate to base a fee on a fall in the fund’s shadow price if such a fall is only temporary. On the other hand, a temporary decline in the shadow price using market-based factors can lead to realized losses from a shareholder’s perspective if redemptions cause a fund with an impaired NAV to ‘‘break the buck.’’ We also considered proposing a threshold based on the level of daily liquid assets rather than weekly liquid assets. We expect that a money market fund would meet heightened shareholder redemptions first by depleting the fund’s daily liquid assets and next by depleting its weekly liquid assets, as daily liquid assets tend to be the most liquid. Accordingly, basing this threshold on weekly liquid assets thus provides a deeper picture of the fund’s overall liquidity position, as a fund whose weekly liquid assets have fallen to 15% has likely depleted all of its daily liquid assets. In addition, a fund’s levels of daily liquid assets may be more volatile because they are one of the first assets used to satisfy day-to-day shareholder redemptions, and thus more difficult to use as a gauge of true fund distress. Finally, as noted above, funds are able under the Investment Company Act to delay payment of redemption requests for up to seven days. Thus, substantial depletion of weekly liquid assets may be a better indicator of true fund distress. We also considered a trigger that would combine liquidity and market-based NAV thresholds but have preliminarily concluded that a single threshold would accomplish our goals without undue complexity and would be easier for investors to understand. We request comment on our default threshold for liquidity fees and our threshold on when a money market fund’s board may impose a gate.

• What should be the trigger either for
  a default liquidity fee or for a board’s ability to impose a gate? Rather than our proposed trigger based on a fund’s level of weekly liquid assets, should it be based on the fund’s shadow price or its level of daily liquid assets? Should it be based on a certain fall in either the fund’s weekly liquid assets or shadow price? Why and what extent of a fall? Should it be based on some other factor? Should it be based on a combination of factors?
• If we considered a threshold based
  on the fund’s shadow price, do shareholders differentiate between realized and market-based losses (such as those from security defaults versus those from market interest rate changes) when considering a money market fund’s shadow price? If so, how does it affect their propensity to redeem shares when one or more funds have losses?
• Should we permit a fund board to
  impose a liquidity fee or gate even before a fund passes the trigger requiring the default fee to be considered if the board determines that an early imposition of a liquidity fee or gate would be in the best interest of the fund? Would that reduce the benefits discussed above of having an automatic default trigger? What concerns would arise from permitting imposition of a fee or gate before a fund passes the thresholds we may establish?
• What extent of decline in weekly
  liquid assets should trigger consideration of a fee or gate and why? Should it be more or less than 15% weekly liquid assets, such as 10% or 20%?
• How do fund holdings of weekly
  liquid assets vary within the calendar month, between Form N–MFP filing dates? How do net shareholder redemptions vary within the calendar month, between Form N–MFP filing dates? How accurately can the fund forecast the net redemptions of its shareholders? When is the fund more likely to make forecasting errors?
• Should a liquidity fee or gate not be
  required until the fund suffers an actual loss in value? Why or why not and if so, how much of a loss in value?
• Is one type of threshold less
  susceptible to preemptive runs? If so, why?
• Are there other factors that a board
  might consider in determining whether to impose a fee or gate? Should we require that boards consider certain factors? If so, which factors and why?
  c. Size of Liquidity Fee
  We are proposing that the liquidity fee be set at a default rate of 2%, although a fund’s board could impose a lower liquidity fee (or no fee at all) if it determines that a lower level is in the best interest of the fund.386 Commenters have suggested that liquidity fee levels ranging from 1% to 3% could be effective.387 We selected a default fee of

and 3%); BlackRock FSOC Comment Letter, supra note 204 (recommending a standby liquidity fee of 1%); ICI Jan. 24 FSOC Comment Letter, supra note 25 (recommending a 1% fee). 388See, e.g., Vanguard FSOC Comment Letter, supra note 172 (‘‘We believe a fee in this amount [1–3%] will serve as an adequate deterrent to investors who may attempt to flee a fund out of fear, but would still allow those investors who have a need to access their cash the ability to redeem a portion of their holdings.’’); ICI Jan. 24 FSOC Comment Letter, supra note 25 (‘‘A liquidity fee set at this level [1%] would discourage redemptions, but allow the fund to continue to provide liquidity to investors. . . . Investors truly in need of liquidity would have access to it, but at a pre￾determined cost.’’). 389See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 (‘‘Insofar as investors choose to redeem, the fee would benefit remaining shareholders by mitigating liquidation costs and potentially rebuilding NAVs.’’). 390HSBC FSOC Comment Letter, supra note 196. 391See Investment Company Institute, SEC Staff No-Action Letter (Oct. 10, 2008) (not recommending enforcement action through January 12, 2009, if money market funds used amortized cost to shadow price portfolio securities with maturities of 60 days or less in accordance with Commission interpretive guidance and noting: ‘‘You state that under current market conditions, the shadow pricing provisions of rule 2a–7 are not working as intended. You believe that the markets for short-term securities, including commercial paper, may not necessarily result in discovery of prices that reflect the fair value of securities the issuers of which are reasonably likely to be in a position to pay upon maturity. You further assert that pricing vendors customarily used by money market funds are at times not able to provide meaningful prices because inputs used to derive those prices have become less reliable indicators of price.’’). 392See proposed (Fees & Gates) rule 2a–7(c)(2)(i). 393Section 2(a)(32) of the Act [15 U.S.C. 80a– 2(a)(32)] defines the term ‘‘redeemable security’’ as a security that entitles the holder to receive approximately his proportionate share of the fund’s net asset value. The Division of Investment Management informally took the position that a fund may impose a redemption fee of up to 2% to cover the administrative costs associated with redemption, ‘‘but if that charge should exceed 2 percent, its shares may not be considered redeemable and it may not be able to hold itself out as a mutual fund.’’ See John P. Reilly & Associates, SEC Staff No-Action Letter (July 12, 1979). This position is currently reflected in our rule 23c– 3(b)(1) under the Act [17 CFR 270.23c–3(b)(1)], which permits a maximum 2% repurchase fee for interval funds and rule 22c–2(a)(1)(i) [17 CFR 270.22c–2(a)(1)(i)] which similarly permits a maximum 2% redemption fee to deter frequent trading in mutual funds. 2% because we believe that a liquidity
fee set at this level is high enough that it may impose sufficient costs on redeeming shareholders to deter redemptions in a crisis, but is low enough to permit investors who wish to redeem despite the cost to receive their proceeds without bearing unwarranted costs.388 A 2% level should also permit a fund to recoup the costs of liquidity it may bear, while repairing the fund if it has incurred losses.389 We recognize that establishing any fixed fee level may not precisely address the circumstances of a particular fund in a crisis, and accordingly are proposing to make this 2% level a default, which a fund board may lower or eliminate in accordance with the circumstances of any individual fund. We also considered whether we should require a liquidity fee with an amount explicitly tied to market indicators of changes in liquidity costs for money market funds. For example, one fund manager suggested that the amount of the liquidity fee charged could be based on the anticipated change in the market-based NAV of the fund’s portfolio from the redemption, assuming a horizontal slice of the fund’s portfolio was sold to meet the redemption request.390 This firm asserted that such a liquidity fee would proportionately target the extent that the redemption was causing a material disadvantage to remaining investors in the fund and it would be clear to investors how the fee would advance investor protection. There may be a number of drawbacks to such a ‘‘market-sized’’ liquidity fee, however. First, it does not provide significant transparency in advance to shareholders of the size of the liquidity fee they may have to pay in times of stress. It could also reduce the fees’ efficacy in stemming redemptions if investors fear that the fee might go up in the future. This lack of transparency may hinder shareholders’ ability to make well-informed decisions. It also may be difficult for money market funds to rapidly determine precise liquidity costs in times of stress when the short￾term financing markets may be generally illiquid. Indeed, our staff gave no-action assurances to money market funds relating to valuation during the 2008 financial crisis because determining pricing in the then-illiquid markets was so difficult.391 We also understand that a liquidity fee that is not fixed in advance and indeed may change from day-to-day may be considerably more difficult and expensive for money market funds to implement and administer from an operational perspective. Such a fee would require real-time inputs of pricing factors into fund systems that would need to be rapidly disseminated through chains of financial intermediaries in order to apply to daily redemptions from the large number of beneficial owners that hold money market fund shares through omnibus accounts. A floating fee would assume sale of a horizontal cross section of assets but we do not think that is how portfolio securities would be sold to meet redemptions. These factors have led us to propose a
default liquidity fee of a fixed size, but to allow the board of directors (including a majority of its independent directors) to impose a smaller-sized liquidity fee if it determines that such a smaller fee would be in the best interest of the fund.392 We preliminarily believe that such a default may provide the best combination of directing boards of directors to a liquidity fee size that may be appropriate in many stressed market conditions, but providing flexibility to boards to lower the size of that liquidity fee if it determines that a smaller fee would better and more fairly estimate and allocate liquidity costs to redeeming shareholders. Some factors that boards of directors may want to consider in determining whether to impose a smaller-sized liquidity fee than 2% include the shadow price of the money market fund at the time, relevant market indicators of liquidity stress in the markets, changes in spreads for portfolio securities (whether based on actual sales, dealer quotes, pricing vendor mark-to-model or matrix pricing, or otherwise), changes in the liquidity profile of the fund in response to redemptions and expectations regarding that profile in the immediate future, and whether the money market fund and its intermediaries are capable of rapidly putting in place a fee of a different amount. We are not proposing to allow fund boards to impose a larger liquidity fee than 2% because we understand that, even in ‘‘fire sales’’ or other crisis situations, money market funds typically have not realized haircuts greater than 2% when selling portfolio securities, and believe that investors should not face unwarranted costs when redeeming their shares. In addition, the staff has noted in the past that fees greater than 2% raise questions regarding whether a fund’s securities remain ‘‘redeemable.’’ 393 If a fund continues to be under stress even with a 2% liquidity fee, the fund board may consider imposing a redemption gate or liquidating the fund pursuant to rule 22e–3. We request comment on our proposed default size for the liquidity fee.

• What should be the amount of the
  liquidity fee? Should it be a default amount, a fixed amount, or an amount directly tied to the cost of liquidity in times of stress? If as proposed, we adopt a default fee, should it be 2%, 1%, or some other level? Should we give boards discretion to impose a higher fee if the board determines that it is in the best interest of the fund? Commenters are requested to please provide data to support your suggested fee level.
• If the amount of the liquidity fee is
  tied to the cost of liquidity at the time of the redemption, how would that

394See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25; Vanguard FSOC Comment Letter, supra note 172. 395See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 291–292 (1940) (statement of David Schenker, Chief Counsel, Investment Trust Study, SEC). 396See, e.g., Comment Letter of Thrivent Financial for Lutherans (Feb. 15, 2013) (available in File No. FSOC–2012–0003) (‘‘Thrivent FSOC Comment Letter’’) (‘‘The proposed liquidity fees reduce the simplicity, reduce the liquidity for the majority of shareholders, increase the potential for losses, and as a result, dramatically alter the product. Money market funds’ intended purpose is to be a liquidity product, but if the product is only liquid for the first 15% of investors that redeem, then it is no longer a liquidity product for the remaining 85%.’’). 397See Kevin McCoy, Primary Fund Shareholders Put in a Bind, USA Today, Nov. 11, 2008, available at http://usatoday30.usatoday.com/money/perfi/ funds/2008-11-11-market-fund-side_N.htm (discussing hardships faced by Reserve Primary Fund shareholders due to having their shareholdings frozen, including a small business owner who almost was unable to launch a new business, and noting that ‘‘Ameriprise has used ‘hundreds of millions of dollars’ of its own liquidity for temporary loans to clients who face financial hardships while they await final repayments from the Primary Fund’’); John G. Taft, Stewardship:
Lessons Learned from the Lost Culture of Wall Street (2012), at 2 (‘‘Now that the Reserve Primary Fund had suspended redemptions of Fund shares for cash, our clients had no access to their cash. This meant, in many cases, that they had no way to settle pending securities purchase and therefore no way to trade their portfolios at a time of historic market volatility. No way to make minimum required distributions from retirement plans. No way to pay property taxes. No way to pay college tuition. It meant bounced checks and, for retirees, interruption of the cash flow distributions they were counting on to pay their day-to-day living expenses.’’). 398Based on Form N–MFP data, with maturity determined in the same manner as it is for purposes of computing the fund’s weighted average life. 399See, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25. amount be determined? Would a liquidity fee that changes depending on market circumstances provide shareholders with sufficient transparency on the size of the fee to be able to affect their purchase and redemption behavior? If the size of the liquidity fee changed depending on market circumstances, would money market funds be able to determine readily the amount of the liquidity fee during times of market dislocation? Would such a fee affect one type of investor more than another type of investor?

• Is a flat, fixed liquidity fee
  preferable to a variable fee that might be higher than the flat fee? Will the fund’s ability to choose a lower liquidity fee result in any conflicts of interest between redeeming shareholders, non￾redeeming shareholders, and the investment adviser?
• How should we weigh the risk that
  a flat liquidity fee may be higher or lower than the actual liquidity costs to the money market fund from the redemption, against the risk that a market-based liquidity fee may not provide sufficient advance transparency to shareholders and may be difficult to set appropriately in a crisis?
• How difficult would it be for money
  market funds and various intermediaries in the distribution chain of money market fund shares to handle from an operational perspective a liquidity fee that varied? d. Default of Liquidity Fees Our proposal provides that a liquidity fee be imposed once a non-government money market fund’s weekly liquid assets has fallen below 15% of its total assets (which is one-half of its required 30% minimum), unless the board of directors determines that such a fee would not be in the best interest of the fund. After the fund has crossed that 15% liquidity threshold, the board could also impose a gate. Based on this default choice, the implicit ordering of redemption restrictions thus would be a liquidity fee, and if that fee is not sufficiently slowing redemptions, a gate (although once the liquidity fee threshold was crossed, a board would be able to immediately impose a gate instead of a fee). We proposed a liquidity fee, rather than a gate, as the default because we believe that a fee has the potential to be less disruptive to fund shareholders and the short-term financing markets because a fee allows fund shareholders to continue to transact in times of stress (although at a cost). Some industry commenters instead have suggested that money market funds impose a gate first.394 Such a pause in redemption activity could provide time for any spike in redemptions to subside before redemptions were allowed with a fee. We request comment on liquidity fees being the default under this proposal.
• Should the implicit ordering in the
  proposed rule be reversed, with a default of the fund imposing a gate once the fund has crossed the weekly liquid asset threshold, unless or until the board determines to re-open with a liquidity fee? Why?
• Should there be a different
  threshold for consideration of a gate if we adopted a gate as the default? Why or why not? Should a gate be mandatory under certain circumstances? If so, under what circumstances? Should any mandatory gate have a pre-specified window? If so, how long should that gate be imposed? e. Time Limit on Gates We are proposing that a money market fund board must lift any gate it imposes within 30 days and that a board could not impose a gate for more than 30 days in any 90-day period. As noted above, a fund board could only impose a gate if it determines that the gate is in the best interest of the fund, and we would expect the board would lift the gate as soon as it determines that a gate is no longer in the best interest of the fund. This time limitation for the gate is designed to balance protecting the fund in times of stress while not unduly limiting the redeemability of money market fund shares, given the strong preference embodied in the Investment Company Act for the redeemability of open-end investment company shares.395 We understand that investors use money market funds for cash management, and that lack of access to their money market fund investment for a long period of time can impose substantial costs and hardships.396 Indeed, many shareholders in The Reserve Primary Fund informed us about these costs and hardships during that fund’s lengthy liquidation.397 These concerns motivated us to propose a time period that would not freeze shareholders’ money market fund investments for an excessively long period of time. On the other hand, we do want to provide some time for stressed market conditions to subside, for portfolio securities to mature and provide internal liquidity to the fund, and for potentially distressed fund portfolio securities to recover or be held to maturity. As of February 28, 2013, 43% of prime money market fund assets had a maturity of 30 days or less.398 Accordingly, within a 30-day window for a gate, a substantial amount of a money market fund’s assets could mature and provide cash to the fund to meet redemptions when the fund re￾opened. We also note that some commenters suggested a 30-day time limit on any gate.399 Balancing all of these factors led us to propose a 30-day time limit for any gate imposed. So that this 30-day time limit could not be circumvented, for example, by reopening the fund on the 29th day for a day before re-imposing the gate for potentially another 30-day period, we also are proposing that the fund cannot impose a gate for more than 30 days in any 90-day period. The 30-day limit is a maximum, and a money market fund board likely would need to meet regularly during any period in which a redemption gate is in place and would lift the gate promptly when it

400The fund’s board may also consider permanently suspending redemptions in preparation for fund liquidation under rule 22e–3 if the fund approaches the 30 day gating limit. 401See rule 22c–2. Our understanding of how financial intermediaries handle redemption fees in mutual funds is based on Commission staff discussions with industry participants and service providers. 402See proposed (Fees & Gates) rule 2a–7(c). 403 15 U.S.C. 80a–6(c). In order to clarify the application of liquidity fees and gates to variable contracts, we also would amend rule 2a–7 to provide that, notwithstanding section 27(i) of the Act, a variable contract sold by a registered separate account funding variable insurance contracts or the sponsoring insurance company of such account may apply a liquidity fee or gate to contract owners who allocate all or a portion of their contract value to a subaccount of the separate account that is either a money market fund or that invests all of its assets in shares of a money market fund. See proposed (Fees & Gates) rule 2a–7(c)(2)(iv). Section 27(i)(2)(A) makes it unlawful for any registered separate account funding variable insurance contracts or the sponsoring insurance company of such account to sell a variable contract that is not a ‘‘redeemable security.’’ 404See 2009 Proposing Release, supra note 31, at n.281 and accompanying text. 405See proposed (Fees & Gates) rule 2a–7(c) (providing that, notwithstanding rule 22c–1, among other provisions, a money market fund may impose a liquidity fee under the circumstances specified in the proposed rule). determines that the gate is no longer in the best interest of the fund.400

• Does a 30-day limit appropriately
  balance these objectives? Should there be a shorter time limit, such as 10 days? Should there be a longer time limit, such as 45 days? Why?
• Will our proposed limit on the
  number of days a fund can be gated in any 90-day period effectively prevent ‘‘gaming’’ of the 30-day gate limitation? Should it be a shorter window or larger window? 60 days? 120 days?
• Should we impose additional
  restrictions on a money market fund’s use of a gate? Should we, for example, require the board of directors of a money market fund that has imposed a gate to meet each day or week that the gate is in place, and permit the gate to remain in place only if the board makes specified findings at these meetings? We could provide that a gate may only remain in place if the board, including a majority of the independent directors, finds that lifting the gate and meeting shareholder redemptions could result in material dilution or other unfair results to investors or existing shareholders. Would requiring the board to make such a finding to continue to use a gate help to prevent a fund from imposing a gate for longer than is necessary or appropriate? Would a different required finding better achieve this goal? Would fund boards be able to make such findings accurately, particularly during a crisis when a board may be more likely to impose a gate? Would such a requirement deter fund boards from keeping a gate in place when doing so may be in the best interest of the fund? f. Application of Liquidity Fees to Omnibus Accounts For beneficial owners holding mutual fund shares through omnibus accounts, we understand that, with respect to redemption fees imposed to deter market timing of mutual fund shares, financial intermediaries generally impose any redemption fees themselves to record or beneficial owners holding through that intermediary.401 We understand that they do so often in accordance with contractual arrangements between the fund or its transfer agent and the intermediary. We would expect any liquidity fees to be handled in a similar manner, although we understand that some money market fund sponsors will want to review their contractual arrangements with their funds’ financial intermediaries and service providers to determine whether any contractual modifications would be necessary or advisable to ensure that any liquidity fees are appropriately applied to beneficial owners of money market fund shares. We also understand that some money market fund sponsors may seek certifications or other assurances that these intermediaries and service providers will apply any liquidity fees to the beneficial owners of money market fund shares. We also recognize that money market funds and their transfer agents and intermediaries will need to engage in certain communications regarding a liquidity fee. We request comment on the application of liquidity fees and gates to shares held through omnibus accounts.
• Do commenters agree with our view
  that liquidity fees likely will be handled by intermediaries in a manner similar to how they currently impose redemption fees? If not, how would liquidity fees be applied to shares held through financial intermediaries? Is our understanding correct that financial intermediaries generally apply any liquidity fees themselves to record or beneficial owners holding through that intermediary? Would they do so based on existing contractual arrangements or would funds make contractual modifications? What cost would be involved in any contractual modifications?
• Would funds in addition or instead
  seek certifications from financial intermediaries that they will apply any liquidity fees? What cost would be involved in any such certifications?
• What other methods might money
  market funds use to gain assurances that financial intermediaries will apply any liquidity fees appropriately? At what costs? Will some intermediaries not offer prime money market funds to avoid operational costs involved with fees and gates?

3. Exemptions To Permit Liquidity Fees
   and Gates
   The Commission is proposing exemptions from various provisions of the Investment Company Act to permit a fund to institute liquidity fees and gates.402 In the absence of an exemption, imposing gates could violate section 22(e) of the Act, which generally prohibits a mutual fund from suspending the right of redemption or postponing the payment of redemption proceeds for more than seven days, and imposing liquidity fees could violate rule 22c–1, which (together with section 22(c) and other provisions of the Act) requires that each redeeming shareholder receive his or her pro rata portion of the fund’s net assets. The Commission is proposing to exercise its authority under section 6(c) of the Act to provide exemptions from these and related provisions of the Act to permit a money market fund to institute liquidity fees and gates notwithstanding these restrictions.403 As discussed in more detail below, we believe that such exemptions do not implicate the concerns that Congress intended to address in enacting these provisions, and thus they are necessary and appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the Act. We do not believe that gates would conflict with the purposes underlying
   section 22(e), which was designed to
   prevent funds and their investment advisers from interfering with the redemption rights of shareholders for improper purposes, such as the preservation of management fees.404 The board of a money market fund would impose gates to benefit the fund and its shareholders by making the fund better able to handle substantial redemptions, as discussed above. We also propose to provide exemptions from rule 22c–1 to permit a money market fund to impose liquidity fees because a money market fund would impose liquidity fees to benefit the fund and its shareholders by providing a more systematic allocation of liquidity costs.405 Remaining shareholders also may benefit if the fees help repair any decline in the fund’s shadow price or lead to an increased

406See 2010 Adopting Release, supra note 92, at text following n.379. 407See proposed (Fees & Gates) rule 2a–7(c)(2). Cf. 2010 Adopting Release, supra note 92, at text following n.379 (‘‘Because the suspension of redemptions may impose hardships on investors who rely on their ability to redeem shares, the conditions of [rule 22e–3] limit the fund’s ability to suspend redemptions to circumstances that present a significant risk of a run on the fund and potential harm to shareholders.’’) 408See proposed (Fees & Gates) rule 22e–3. 409See proposed (Fees & Gates) rule 22e–3. 410See proposed (Fees & Gates) rule 2a– 7(c)(2)(iii). 411See RSFI Study, supra note 21, at 6–13. 412 Government money market funds tend to attract significant inflows of investments during times of broader market distress, which can appreciate their value. See, e.g., figure 1 in supra
section I.B (showing that during the 2008 Lehman
crisis institutional share classes of government money market funds, which include Treasury and government funds, experienced heavy inflows). Also see, e.g., ICI Jan. 24 FSOC Comment Letter, supra note 25 (noting government money market funds attracted an inflow of $192 billion during the week following the Lehman bankruptcy in September 2008); HSBC FSOC Comment Letter, supra note 196 (‘‘As evidenced during the credit crisis of 2008, Treasury and government funds benefitted from a ‘‘flight to quality’’ during these dividend paid to remaining fund shareholders. The amount of additional fees that the fund might collect in this regard would be only to further the purpose of the provision and could only be imposed under circumstances of stress on the fund. A gate would also be similarly limited. It could only be imposed for a limited period of time and only under circumstances of stress on the fund. This aspect of gates, therefore, is akin to rule 22e–3, which also provides an exemption from section 22(e) to permit money market fund boards to suspend redemptions of fund shares in order to protect the fund and its shareholders from the harmful effects of a run on the fund, and to minimize the potential for disruption to the securities markets.406 We are proposing to permit money market funds to be able to impose fees and gates because they may provide substantial benefits to money market funds and the short-term financing markets for issuers, as discussed above. However, because we recognize that fees and gates may impose hardships on investors who rely on their ability to freely redeem shares (or to redeem shares without paying a fee), we also have proposed limitations on when and for how long money market funds could impose these restrictions.407 We request comment on our proposed amendments allowing money market funds to institute fees and gates.

• Would the proposed amendments
  to rule 2a–7 provide sufficient exemptive relief to permit a money market fund to institute fees or gates with both the requirements of rule 2a– 7 and the Investment Company Act? Are there other provisions of the Investment Company Act from which the Commission should consider providing an exemption?

4. Amendments to Rule 22e–3
   Under this proposal, we also would amend rule 22e–3 to permit (but not require) the permanent suspension of redemptions and liquidation of a money market fund if the fund’s level of weekly liquid assets falls below 15% of its total assets.408 This will allow a money market fund that imposes a fee or a gate, but determines that it would not be in the best interest of the fund to continue operating, to permanently suspend redemptions and liquidate. As such, it will provide an additional tool to fund boards of directors to manage a fund in the best interest of the fund when that fund comes under stress regarding its liquidity buffers. It will allow fund boards to suspend redemptions and liquidate a fund that the board determines would be unable to stay open (or, if gated, re-open) without further harm to the fund, and prevents such a fund from waiting until its shadow price has declined so far that it is about to ‘‘break the buck.’’ We considered whether a money market fund’s level of weekly liquid assets should have to fall further than the 15% threshold that allows the imposition of fees and gates for the fund to be able to permanently suspend redemptions and liquidate. A permanent suspension of redemptions could be considered more draconian because there is no prospect that the fund will re-open—instead the fund will simply liquidate and return money to shareholders. Accordingly, one could consider a lower weekly liquid asset threshold than 15% justified. However, we believe such considerations must be balanced against the risk that might be caused by establishing a lower threshold for enabling a permanent suspension of redemptions. For example, a fund with a fee or gate in place might know (based on market conditions or discussions with its shareholders or otherwise) that upon lifting the fee or gate it will experience a severe run. We would not want to force such a fund to lift the fee or re-open and weather enough of that run to deplete its weekly liquid assets below a lower threshold. We preliminarily believe this risk is great enough to warrant allowing money market funds to suspend redemptions permanently once the fund’s weekly liquid assets fall below 15% of its total assets. As under existing rule 22e–3, a money market fund also would still be able to suspend redemptions and liquidate if it determines that the extent of the deviation between its shadow price and its market-based NAV per share may result in material dilution or other unfair results to investors or existing shareholders.409 Accordingly, a money market fund that suffers a default would still be able to suspend redemptions and liquidate before that credit loss lead to redemptions and a fall in its weekly liquid assets. We request comment on our proposed amendments to rule 22e–3 under this proposal.

• Is it appropriate to allow a money
  market fund to suspend redemptions and liquidate if its level of weekly liquid assets falls below 15% of its total assets? Is there a different threshold based on daily or weekly assets that would better protect money market fund shareholders?
• Should a fund’s ability to suspend
  redemptions and liquidate be tied only to adverse deviations in its shadow price? If so, is our current standard under rule 22e–3 appropriate or is there a different level of shadow price decline that should trigger a money market fund’s ability to suspend redemptions and liquidate?

5. Exemptions From the Liquidity Fees
   and Gates Requirement
   We are proposing that government money market funds (including Treasury money market funds) be exempt from any fee or gate requirement but that these funds be permitted to impose such a fee or gate under the regime we have described above if the ability to impose such fees and gates were disclosed in the fund’s prospectus.410 This exemption is based on a similar analysis to our proposed exemption of government money market funds from the floating NAV proposal and also on our desire to facilitate investor choice by providing a money market fund investment option for an investor who was unwilling or unable to invest in a money market fund that could impose liquidity fees or gates in times of stress. As discussed in the RSFI Study, government money market funds historically have experienced inflows, rather than outflows, in times of stress due to flights to quality, liquidity, and transparency.411 The assets of government money market funds tend to appreciate in value in times of stress rather than depreciate.412 Accordingly,

systemic events’’); Dreyfus FSOC Comment Letter, supra note 174 (noting its institutional government and institutional Treasury money market funds generally experienced high levels of net inflows during 2008). the portfolio composition of government money market funds means that these funds are less likely to need to use these restrictions. We also expect that some money market fund investors may be unwilling or unable to invest in a money market fund that could impose a fee or gate. For example, there could be some types of investors, such as sweep accounts, that may be unwilling or unable to invest in a money market fund that could impose a gate because such an investor requires the ability to immediately redeem at any point in time, regardless of whether the fund or the markets are distressed. Accordingly, exempting government money market funds from the fees and gates requirement would allow fund sponsors to offer a choice of money market fund investment products that meet differing liquidity needs, while minimizing the risk of adverse contagion effects from heavy money market fund redemptions. Based on our evaluation of these considerations and tradeoffs, and the more limited risk of heavy redemptions in government money market funds, we preliminarily believe that on balance it is preferable to exempt these funds from this potential requirement, but permit them to use liquidity fees and gates if they choose. We note that Treasury money market funds generally would be exempt from any liquidity fees and gates requirement because at least 80% of their assets generally must be Treasury securities and overnight repurchase agreements collateralized with Treasury securities, each of which is a weekly liquid asset. Accordingly, it is highly unlikely for a Treasury money market fund to breach the 15% weekly liquid asset threshold that would allow imposition of a fee or gate. Most government money market funds similarly always would have at least 15% weekly liquid assets because of the nature of their portfolio, but it is possible to have a government money market fund with below 15% weekly liquid assets. We also note that government money market funds and Treasury money market funds do not necessarily have the same risk profile. For example, government money market funds generally have a much higher portion of their portfolios invested in securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Banks and thus a higher exposure to the home mortgage market than Treasury money market funds. We note that this exemption would not apply to tax-exempt (or municipal) money market funds. As discussed above, because tax-exempt money market funds are not required to maintain 10% daily liquid assets, these funds may be less liquid than other money market funds, which could raise concerns that tax-exempt retail funds might not be able to manage even the lower
level of redemptions expected in a retail money market fund. In addition, municipal securities typically present greater credit and liquidity risk than government securities and thus could come under pressure in times of stress. We request comment on our proposed exemption of government money market funds from the proposed liquidity fees and gates requirement.

• Is this exemption appropriate,
  particularly in light of the redemptions from government funds in late June and early July 2011? Why or why not?
• Is it appropriate to give government
  money market funds the option to have the ability to impose fees and gates so long as they disclose the option to investors? Why or why not? What factors might lead a government fund to exercise this option?
• Should the exemption for
  government money market funds be extended to municipal money market funds? Why or why not? We also considered whether there should be other exemptions from the proposed liquidity fees and gates requirement. For example, as discussed in section III.A.4 above, we are proposing an exemption for retail money market funds from any floating NAV requirement. We noted in that
  section how retail money market funds
  experienced fewer redemptions during the 2007–2008 financial crisis and thus may be less likely to suffer heavy redemptions in the future. However, unlike with government money market funds, a retail prime money market fund generally is subject to the same credit and liquidity risk as an institutional prime money market fund. In addition, a floating NAV requirement affects a shareholder’s experience with a money market fund on a daily basis. Given the costs and burdens associated with a floating NAV requirement, and the potential limited benefit to retail shareholders on an ongoing basis given that they are less likely to engage in heavy redemptions, a retail exemption might be more appropriate on balance under a floating NAV requirement than under a liquidity fees and gates requirement. In contrast, a fee or gate requirement would not affect a money market fund unless the fund’s weekly liquid assets fell below 15% of its total assets—i.e., unless it came under stress. Exempting retail money market funds from this requirement thus could leave only institutional (and not retail) shareholders protected when the money market fund in which they have invested comes under stress. Given that such an exemption would merely relieve them in normal times of the costs and burden on those investors created by the prospect that the fund could impose a fee or gate if someday it came under stress, we preliminarily believe that a retail exemption may not be warranted for this alternative. We also considered methods of exempting some retail investors from a fee or gate requirement. For example, we could exempt small redemption requests, such as those below $10,000, or $100,000 per day, from any fee or gate requirement. Such small redemptions are less likely to materially impact the liquidity position of the fund. This type of exemption could retain the benefits of fees and gates for retail money market funds generally while providing some relief from the burdens for investors with smaller redemption needs. However, we are concerned that granting such exemptions could complicate the fees and gates requirement both as an operational matter and in terms of ease of shareholder understanding without providing substantial benefits. We also have considered whether irrevocable redemption requests submitted at least a certain period in advance should be exempt as the fund should be able to plan for such liquidity demands and hold sufficient liquid assets. However, we are concerned that shareholders could try to ‘‘game’’ the fee or gate requirement through such exemptions, for example, by redeeming a certain amount every week and then reinvesting the redemption proceeds immediately if the cash is not needed. We also are concerned that allowing such an exception would add significantly to the cost and complexity of this requirement, as fund groups would need to be able to separately track which shares are subject to a fee or gate and which are not. We request comment on
  other potential exemptions from the proposed liquidity fees and gates requirement.
• Should retail money market funds
  (including tax-exempt money market funds) or retail investors be exempt from any liquidity fee or gate provision? Should there be an exemption for small redemption requests, such as redemptions below $10,000? If so, below what level? If a retail money

413Many shareholders use common third party￾created systems and thus would not each need to modify their systems. 414Staff estimates that these costs would be attributable to the following activities: (i) Planning, coding, testing, and installing system modifications; (ii) drafting, integrating, and implementing related procedures and controls; and (iii) preparing training materials and administering training sessions for staff in affected areas. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 415Staff estimates that these costs would be attributable to the following activities: (i) Project planning and systems design; (ii) systems modification, integration, testing, installation, and deployment; (iii) drafting, integrating, implementing procedures and controls; and (iv) preparation of training materials. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 416Staff estimates that these costs would be attributable to the following activities: (i) modifying the Web site to provide online account information and (ii) written and telephone communications with investors. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 417Total costs of the mailing for individual funds would vary significantly depending on the number of shareholders that receive information from the fund by mail (as opposed to electronically). market fund crossed the thresholds we are proposing for board consideration of a fee or gate, is there a reason not to allow the fund’s board to protect the fund and its shareholders through the use of a liquidity fee or gate? Would investors ‘‘game’’ such exemptions?

• Should we create an exemption for
  shareholders that submit an irrevocable redemption request at least a certain period in advance of the needed redemption? Why or why not? With what period of advance notice? For each of these exemptions, could funds track the shares that are not subject to the fee or gate? What operational costs would be involved in including such an exemption? Would shareholders ‘‘game’’ such exemptions?
• Would further exemptions
  undermine the goal of the liquidity fee or gate in deterring or stopping heavy redemptions? Why or why not? Would exemptions from the fee or gate proposal make it more difficult or costly to implement or operationalize? How would any such difficulties compare to the benefits that could be obtained from such exemptions?

6. Operational Considerations Relating
   to Liquidity Fees and Gates Money market funds and others in the distribution chain (depending on how they are structured) likely would incur some operational costs in establishing or modifying systems to administer a liquidity fee or gate. These costs likely would be incurred by, or spread amongst, a fund’s transfer agents, sub￾transfer agents, recordkeepers, accountants, portfolio accounting departments, and custodian. Money market funds and others also may be required to develop procedures and controls, and may incur other costs, for example to update systems necessary for confirmations and account statements to reflect the deduction of a liquidity fee from redemption proceeds. Money market funds and their intermediaries may need to establish new, or modify existing, systems or procedures that would allow them to administer temporary gates. Money market fund shareholders also might be required to modify their own systems to prepare for possible future liquidity fees, or manage gates, although we expect that only some shareholders would be required to make these changes.413 They also may modify contracts or seek certifications from financial intermediaries that they will apply any liquidity fee. These costs would vary depending on how a liquidity fee or gate is structured, including its triggering event, as well as on the capabilities, functions, and sophistication of the fund’s and others’ current systems. These factors will vary among money market funds, shareholders, and others, and particularly because we request comment on a number of ways in which we could structure a liquidity fee or gate requirement, we cannot ascertain at this stage the systems and other modifications any particular money market fund or other affected entity would be required to make to administer a liquidity fee or manage a gate. Indeed, we believe that money market funds and other affected entities themselves would need to engage in an in-depth analysis of this alternative in order to estimate the costs of the necessary systems modifications. While we do not have the information necessary to provide a point estimate of the potential costs of systems modifications needed to administer a liquidity fee or gate, our staff has estimated a range of hours and costs that may be required to perform activities typically involved in making systems modifications.414 In estimating these hours and costs, our staff considered the need to modify the systems described above. If a money market fund determines that it would only impose a flat liquidity fee of a fixed percentage known in advance (e.g., it would only impose the default 2% liquidity fee) and have the ability to impose a gate, our staff estimates that a money market fund (or others in the distribution chain) would incur one-time systems modification costs (including modifications to related procedures and controls) that ranges from $1,100,000 to $2,200,000.415 Our staff estimates that the one-time costs for entities to
   communicate with shareholders (including systems costs related to communications) about the liquidity fee or gate would range from $200,500 to $340,000.416 In addition, we estimate that the costs for a shareholder mailing would range between $1.00 and $3.00 per shareholder.417 We also recognize that adding new capabilities or capacity to a system will entail ongoing annual maintenance costs and understand that those costs generally are estimated as a percentage of initial costs of building or expanding a system. Our staff estimates that the costs to maintain and modify these systems required to administer a liquidity fee and the ability to administer a standby gate (to accommodate future programming changes), to provide ongoing training, and to administer the liquidity fee or gate on an ongoing basis would range from 5% to 15% of the one-time costs. Our staff understands that if a fund board imposes a liquidity fee whose amount could vary, the cost could exceed this range, but because such costs depend on to what extent the fee might vary, we do not have the information necessary to provide a reasonable estimate of how much more a varying fee might cost to implement. Although our staff has estimated the costs that a single affected entity would incur, we anticipate that many money market funds, transfer agents, and other affected entities may not bear the estimated costs on an individual basis. Instead, the costs of systems modifications likely would be allocated among the multiple users of the systems, such as money market fund members of a fund group, money market funds that use the same transfer agent or custodian, and intermediaries that use systems purchased from the same third party. Accordingly, we expect that the cost for many individual entities may be less than the estimated costs due to economies of scale in allocating costs among this group of users. Moreover, depending on how a liquidity fee or gate is structured, mutual fund groups and other affected entities already may have systems that could be adapted to administer a liquidity fee or gate at minimal cost, in which case the costs may be less than the range we estimate above. For example, some money market funds may be part of mutual fund groups in which one or more funds impose deferred sales loads or redemption fees

418Staff estimates that these costs would be attributable to the following activities: (i) Project planning and systems design; (ii) systems modification, integration, testing, installation; and (iii) drafting, integrating, implementing procedures and controls. See also supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). 419Cf. 26 CFR 1.263(a)–2(e) (commissions paid in sales of securities by persons who are not dealers are treated as offsets against the selling price). See also Investment Income and Expenses (Including Capital Gains and Losses), IRS Publication 550, at 44 (‘‘fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the redemption price (sales price).’’), available at http://www.irs.gov/pub/irs-pdf/ p550.pdf. 420Referring to IRS guidance in a different context, one commenter suggested that our proposed liquidity fee also might be characterized for tax purposes as an investment expense for the shareholder and income to the fund. See ICI Jan. 24 FSOC Comment Letter, supra note 25. This commenter noted that, if the fund were required to treat the liquidity fee as ordinary income, the fund would have to distribute the income to avoid liability for the corporate level income tax and a 4% excise tax on the amount retained. In that case, the fund would not realize all of the benefit the liquidity fee is designed to provide. Id. (citing IRS Revenue Procedure 2009–10 as supporting the position that the fee received by the fund should be treated as a capital gain because it is being used to offset capital losses incurred by the fund on its portfolio in order to pay the redeeming shareholder and noting that because the capital gain would offset the capital loss, the fund would not have an additional distribution requirement). This commenter suggests that the IRS provide guidance to this effect (noting that in Revenue Procedure 2009–10, which provided only temporary administrative guidance, the IRS took this position with respect to amounts paid to a money market fund by the fund’s adviser to prevent the fund from breaking the buck). Id. See also Arrowsmith et al.
v. Commissioner of Internal Revenue, 344 U.S. 6
(1952).
421See proposed (Fees & Gates) rule 2a–7(g)(2). 422 If the payment of liquidity fees forces a money market fund to make a return of capital distribution to avoid re-pricing its shares above $1.00, this could also create tax consequences for remaining shareholders in the fund. 423See the discussion above of the additional obligations that would be created by gains and losses recognized with respect to floating NAV funds. 424Redemptions subject to a liquidity fee would almost always result in losses, but gains are possible if a shareholder received a return of capital distribution with respect to some shares and the shareholder later redeemed the shares for $1.0000 each. under rule 22c–2, both of which require the capacity to administer a fee upon redemptions and may involve systems that could be adapted to administer a liquidity fee. Our staff estimates that a money market fund shareholder whose systems (including related procedures and controls) required modifications to account for a liquidity fee or gate would incur one-time costs ranging from $220,000 to $450,000.418 Our staff estimates that the costs to maintain and modify these systems and to provide ongoing training would range from 5% to 15% of the one-time costs. We request comment on our estimate of operational costs associated with the liquidity fees and gates alternative.

• Do commenters agree with our
  estimates of operational costs?
• Are there operational costs in
  addition to those we estimate above? What systems would need to be reprogrammed and to what extent? What types of ongoing maintenance, training, and other activities to administer the liquidity fee or gate would be required, and to what extent?
• Are our estimates too high or too
  low and, if so, by what amount? To what extent would the estimate vary based on the event that would trigger the imposition of a liquidity fee or the manner in which the fee would be calculated once triggered? To what extent would the estimate vary based on how the gate is structured?
• To what extent would money
  market funds or others experience the economies of scale that we identify?

7. Tax Implications of Liquidity Fees
   We understand that liquidity fees may have certain tax implications for money market funds and their shareholders. Similar to the liquidity fee we are proposing today, rule 22c–2 allows mutual funds to recover costs associated with frequent mutual fund share trading by imposing a redemption fee on shareholders who redeem shares within seven days of purchase. We understand that for tax purposes, shareholders of these mutual funds generally treat the redemption fee as offsetting the shareholder’s amount realized on the redemption (decreasing the shareholder’s gain, or increasing the shareholder’s loss, on redemption).419 Consistent with this characterization, funds generally treat the redemption fee as having no associated tax effect for the fund. We understand that our proposed liquidity fee, if adopted, would be treated for tax purposes consistently with the way that funds and shareholders treat redemption fees under rule 22c–2.420 If, as described above, a liquidity fee has no direct tax consequences for the money market fund, that tax treatment would allow the fund to use 100% of the fee to repair a market-based price per share that was below $1.0000. If redemptions involving liquidity fees cause the money market fund’s shadow price to reach $1.0050, however, the fund may need to distribute to the remaining shareholders sufficient value to prevent the fund from breaking the buck (and thus rounding up to $1.01 in pricing its shares).421 We understand that any such distribution would be treated as a dividend to the extent that the money market fund has sufficient earnings and profits. Both the fund and its shareholders would treat these additional dividends the same as they treat the fund’s routine dividend distributions. That is, the additional dividends would be taxable as ordinary income to shareholders and would be eligible for deduction by the funds. In the absence of sufficient earnings and profits, however, some or all of these additional distributions would be treated as a return of capital. Receipt of a return of capital would reduce the recipient shareholders’ basis (and thus could decrease a loss, or create or increase a gain for the shareholder in the future when the shareholder redeems the affected shares).422 Thus, in the event of any return of capital distributions, the shareholders, the fund, and other intermediaries might become subject to tax-payment or tax￾reporting obligations that do not affect stable NAV funds currently operating under rule 2a–7.423 Finally, we understand that the tax treatment of a liquidity fee may impose certain operational costs on money market funds and their financial intermediaries and on shareholders. Either fund groups or their intermediaries would need to track the tax basis of money market fund shares as the basis changed due to any return of capital distributions, and shareholders would need to report in their annual tax filings any gains 424 or losses upon the sale of affected money market fund
   shares. We are unable to quantify any of the tax and operational costs discussed in this section because we are unable to predict how often liquidity fees will be imposed by money market funds and how often redemptions subject to liquidity fees would cause the funds to make return of capital distributions to the remaining shareholders. We request comment on this aspect of our proposal.

• If liquidity fees cause the fund’s
  shadow price to exceed $1.0049, will that result cause the fund to make a special distribution to current shareholders?
• Do money market funds and other
  intermediaries already have systems in place to track and report the variations in basis, and the gains and losses that might result from imposing liquidity fees? If not, what costs would be

425See supra note 303.
426See Summary Prospectus Adopting Release, supra note 304, at paragraph preceding section III. 427See id. Rule 482(b)(4) currently requires a money market fund to include to following disclosure statement on its advertisements and sales materials: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. 428See infra note 607 and accompanying text (discussing the extent to which discretionary sponsor support has the potential to confuse money market fund investors); supra note 141 and accompanying text (noting that survey data shows that some investors are unsure about the amount of risk in money market funds and the likelihood of government assistance if losses occur). 429See proposed (Fees & Gates) rule 482(b)(4)(i). Rule 482(b)(4) currently requires a money market fund to include to following disclosure statement on its advertisements and sales materials: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, the fund would be permitted to omit this bulleted sentence from the disclosure statement for the term of the agreement. See Note to paragraph (b)(4), proposed (Fees & Gates) rule 482(b)(4). 430See proposed (Fees & Gates) Item 4(b)(1)(ii)(A) of Form N–1A. Item 4(b)(1)(ii) currently requires a money market fund to include the following statement in its prospectus: An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. 431See proposed (Fees & Gates) rule 482(b)(4)(ii) and proposed (Fees & Gates) Item 4(b)(1)(ii)(B) of Form N–1A. If an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, the fund would be permitted to omit this bulleted sentence from the disclosure statement that appears expected to be incurred to establish this capability? In light of the fact that it may be necessary to establish new systems to track this information, how does the cost of these new systems compare with the costs that would be incurred to accommodate floating NAVs?
8. Disclosure Regarding Liquidity Fees
and Gates
In connection with the liquidity fees and gates alternative, we are also proposing alternate disclosure-related amendments to rule 2a–7, rule 482 under the Securities Act,425 and Form N–1A. We anticipate that the proposed rule and form amendments would provide current and prospective shareholders with information regarding the operations and risks of this reform alternative, as well as current and historical information regarding the imposition of fees and gates. In keeping with the enhanced disclosure framework we adopted in 2009,426 the proposed amendments are intended to provide a layered approach to disclosure in which key information about the proposed new features of money market funds would be provided in the summary section of the statutory prospectus (and, accordingly, in any summary prospectus, if used) with more detailed information provided elsewhere in the statutory prospectus and in the SAI. a. Disclosure Statement The Commission’s liquidity fees and gates alternative proposal would permit funds to charge liquidity fees and impose redemption restrictions on money market fund investors. As a measure to achieve this reform, we propose to require that each money market fund (other than government money market funds that have chosen to rely on the proposed rule 2a–7 exemption for government money market funds from any fee or gate requirements), include a bulleted statement, disclosing the particular risks associated with investing in a fund that may impose liquidity fees or redemption restrictions, on any advertisement or sales material that it disseminates (including on the fund Web site). We also propose to include wording designed to inform investors about the primary general risks of investing in money market funds in this bulleted disclosure statement. While money market funds are currently required to include a similar disclosure statement on their advertisements and sales materials,427 we propose amending this disclosure statement to emphasize that money market fund sponsors are not obligated to provide financial support, and that money market funds may not be an appropriate investment option for investors who cannot tolerate losses.428 Specifically, we would require each money market fund (other than government money market funds that have chosen to rely on the proposed rule 2a–7 exemption for government money market funds from any fee or gate requirements) to include the following bulleted disclosure statement on their advertisements and sales materials:

• You could lose money by investing
  in the Fund.
• The Fund seeks to preserve the
  value of your investment at $1.00 per share, but cannot guarantee such stability.
• The Fund may impose a fee upon
  sale of your shares when the Fund is under considerable stress.
• The Fund may temporarily suspend
  your ability to sell shares of the Fund when the Fund is under considerable stress.
• 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.429 We also propose to require a substantially similar bulleted disclosure statement in the summary section of the statutory prospectus (and, accordingly, in any summary prospectus, if used).430 As discussed above, the liquidity fees and gates proposal would exempt government money market funds from any fee or gate requirement, but a government money market fund would be permitted to charge liquidity fees and impose gates if the ability to charge liquidity fees and impose gates were disclosed in the fund’s prospectus. Accordingly, the proposed amendments to rule 482 and Form N–1A would require government money market funds that have chosen to rely on this exemption to include a bulleted disclosure statement on the fund’s advertisements and sales materials and in the summary section of the fund’s statutory prospectus (and, accordingly, in any summary prospectus, if used) that does not include disclosure of the risks of liquidity fees and gates, but that includes additional detail about the risks of investing in money market funds generally. We propose to require each government money market fund that relies on the exemption to include the following bulleted disclosure statement in the summary section of its statutory prospectus (and, accordingly, in any summary prospectus, if used), and on any advertisement or sales material that it disseminates (including on the fund Web site):
• You could lose money by investing
  in the Fund.
• The Fund seeks to preserve the
  value of your investment at $1.00 per share, but cannot guarantee such stability.
• 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.431

on a fund advertisement or fund sales material, for the term of the agreement. See Note to paragraph (b)(4), proposed (Fees & Gates) rule 482(b)(4). Likewise, if an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, has entered into an agreement to provide financial support to the fund, and the term of the agreement will extend for at least one year following the effective date of the fund’s registration statement, the fund would be permitted to omit this bulleted sentence from the disclosure statement that appears on the fund’s registration statement. See Instruction to proposed (Fees & Gates) Item 4(b)(1)(ii) of Form N–1A. 432See supra section II.B.3. 433See supra notes 316 and 317. 434See supra notes 429 and 430. 435 In the questions that follow, we use the term ‘‘disclosure statement’’ to mean the new disclosure statement that we propose to require money market funds other than those exempted from the fees and gates requirements to incorporate into their prospectuses and advertisements and sales materials or, alternatively and as appropriate, the new disclosure statement that we propose to require government funds (that choose to rely on the rule 2a–7 exemption from the fees and gates requirements) to incorporate into their prospectuses and advertisements and sales materials. 436Such instruction or guidance would supplement current requirements for the presentation of the disclosure statement required by rule 482(b)(4). See supra note 429; rule 482(b)(5). 437See Item 11(c)(1) and Item 23 of Form N–1A. 438See supra note 351 and accompanying text (discussing the extent to which standby liquidity fees can provide a disincentive for money market fund investors to redeem their shares during times of stress). 439See infra section III.B.8.d. 440Prospectus disclosure regarding any restrictions on redemptions is currently required by Item 11(c)(1) of Form N–1A. However, we believe that funds could determine that more detailed disclosure about the operations of fees and gates, as further discussed in this section, would appropriately appear in a fund’s SAI, and that this more detailed disclosure is responsive to Item 23 Continued The proposed disclosure statements are intended to be one measure to change the investment expectations of money market fund investors, including the expectation that a money market fund is a stable, riskless investment.432 In addition, we are concerned that investors, under the liquidity fees and gates proposal, will not be fully aware of potential restrictions on fund redemptions. In proposing the disclosure statement, we have taken into consideration investor preferences for clear, concise, and understandable language and have also considered whether language that was stronger in conveying potential risks associated with money market funds would be effective for investors.433 In addition, we considered whether the proposed disclosure statement should be limited to only
money market fund advertisements and sales materials, as discussed above. Although we acknowledge that the summary section of the prospectus must contain a discussion of key risk factors associated with a money market fund, we believe that the importance of the disclosure statement merits its placement in both locations, similar to how the current money market fund legend is required in both money market fund advertisements and sales materials and the summary section of the prospectus.434 We request comment on the proposed disclosure statement.435

• Would the proposed disclosure
  statement adequately alert investors to the risks of investing in a money market fund, including a fund that could impose liquidity fees or gates under certain circumstances? Would investors understand the meaning of each part of the proposed disclosure statement? If not, how should the proposed disclosure statement be amended? Would the following variations on the proposed disclosure statement be any more or less useful in alerting shareholders to potential investment risks? Æ Removing or amending the following bullet in the proposed disclosure statement: ‘‘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.’’ Æ Including additional disclosure of the possibility that a temporary suspension of redemptions could become permanent if the board determines that the fund should liquidate. Æ Including additional disclosure to the effect that retail shareholders should not invest all or most of the cash that they might need for routine expenses (e.g., mortgage payments, credit card bills, etc.) in any one money market fund, on account of the possibility that the fund could impose a liquidity fee or suspend redemptions. Æ Amending the final bullet in the proposed disclosure statement to read:
  ‘‘Your investment in the Fund therefore may experience losses.’’
• Will the proposed disclosure
  statement respond effectively to investor preferences for clear, concise, and understandable language?
• Would investors benefit from
  requiring this disclosure statement also to be included on the front cover page of a non-government money market fund’s prospectus (and on the cover
  page or beginning of any summary
  prospectus, if used)?
• Should we provide any instruction
  or guidance in order to highlight the proposed disclosure statement on fund advertisements and sales materials (including the fund’s Web site) and/or lead investors efficiently to the disclosure statement? 436 For example, with respect to the fund’s Web site, should we instruct that the proposed disclosure statement be posted on the fund’s home page or be accessible in no more than two clicks from the fund’s home page? b. Disclosure of the Effects of Liquidity Fees and Gates on Redemptions Currently, funds are required to disclose any restrictions on fund redemptions in their registration statements.437 We expect that, to comply with these requirements, money market funds (besides government money market funds that have chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements) would disclose in the registration statement the effects that the potential imposition of fees and/or gates may have on a shareholder’s ability to redeem shares of the fund. We believe that this disclosure would help investors understand the potential effect of their redemption decisions during periods that the fund experiences stress, and to evaluate the full costs of redeeming fund shares—one of the goals of this rulemaking.438 Specifically, we would expect money market funds to briefly explain in the prospectus that if the fund’s weekly liquid assets have fallen below 15% of its total assets, the fund will impose a liquidity fee of 2% on all redemptions, unless the board of directors of the fund (including a majority of its independent directors) determines that imposing such a fee would not be in the best interest of the fund or determines that a lesser fee would be in the best interest of the fund. We also would expect money market funds to briefly explain in the prospectus that if the fund’s weekly liquid assets have fallen below 15% of its total assets, the fund board would be able to impose a temporary suspension of redemptions for a limited period of time and/or liquidate the fund. We also would expect money market funds to disclose in the prospectus that information about the historical occasions on which the fund’s weekly liquid assets have fallen below 15% of its total assets, or the fund has imposed liquidity fees or redemption restrictions, appears in the funds’ SAI (as applicable).439 In addition, we would expect money market funds to incorporate additional disclosure in the prospectus or SAI, as the fund determines appropriate, discussing the operations of fees and gates in more detail.440 This could

of Form N–1A (‘‘Purchase, Redemption, and Pricing of Shares’’). In determining whether to include this disclosure in the prospectus or SAI, money market funds should rely on the principle that funds should limit disclosure in prospectuses generally to information that is necessary for an average or typical investor to make an investment decision. Detailed or highly technical discussions, as well as information that may be helpful to more sophisticated investors, dilute the effect of necessary prospectus disclosure and should be placed in the SAI. See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)], at section
I. Based on this principle, we anticipate that funds
would generally consider the disclosure topics covered by the first two bullets on the above list (means of notifying shareholders of fees and gates and the timing of the imposition and removal of fees and gates) to be appropriate prospectus disclosure. 441See supra note 408 and accompanying text. 442 Disclosure about the process of fund liquidation might include, for example, disclosure regarding any fees, including advisory fees, that the adviser will collect during the liquidation process. 443See infra section III.G. 444See proposed (Fees & Gates) rule 2a– 7(h)(10)(v); proposed (Fees & Gates) Form N–CR Parts E, F, and G; see also infra section III.G (discussing the proposed Form N–CR requirements). With respect to the events specified in Part E of Form N–CR (imposition of a liquidity fee) and Part F of Form N–CR (suspension of fund redemptions), a fund would be required to post on its Web site only the preliminary information required to be filed on Form N–CR on the first business day following the triggering event. See Instructions to proposed (Fees & Gates) Form N–CR Parts E and F. 445A fund must file an initial report on Form N– CR in response to any of the events specified in Parts E, F, or G within one business day after the occurrence of any such event. We believe that funds should disclose these events within one business day following the event because it is particularly important to provide shareholders with information that could directly affect their redemption of fund shares, and that could be a material factor in determining whether to purchase or redeem fund shares, as soon as reasonably possible. 446See proposed (Fees & Gates) rule 2a– 7(h)(10)(v). We believe that the one-year minimum time frame for Web site disclosure is appropriate because this time frame would effectively oblige a fund to post the required information in the interim period until the fund files an annual post-effective amendment updating its registration statement, which update would incorporate the same information. See infra notes 450 and 451 and accompanying text. Although a fund would inform prospective investors of any redemption fee or gate currently in place by means of a prospectus supplement (see infra note 449 and accompanying text), the prospectus supplement would not inform shareholders of any fees or gates that were imposed, and then were removed, during the previous 12 months. 447For example, fund investors may access the fund’s proxy voting guidelines, and proxy vote report, as well as the fund’s prospectus, SAI, and shareholder reports if the fund uses a summary prospectus, on the fund Web site. 448See, e.g., 2010 Adopting Release, supra note 92 (adopting amendments to rule 2a-7 requiring money market funds to disclose information about their portfolio holdings each month on their Web sites); SIFMA FSOC Comment Letter, supra note 358 (noting that some industry participants now post on their Web sites portfolio holdings-related information
beyond that which is required by the include disclosure regarding the following:

• Means of notifying shareholders
  about the imposition and lifting of fees and/or gates (e.g., press release, Web site announcement);
• Timing of the imposition and lifting
  of fees and gates, including an explanation that if a fund’s weekly liquid assets fall below 15% of its total assets at the end of any business day, the next business day it must impose a 2% liquidity fee on shareholder redemptions unless the fund’s board of directors determines otherwise, and an explanation of the 30-day limit for imposing gates;
• Use of fee proceeds by the fund,
  including any possible return to shareholders in the form of a distribution;
• The tax consequences to the fund
  and its shareholders of the fund’s receipt of liquidity fees; and
• General description of the process
  of fund liquidation 441 if the fund’s weekly liquid assets fall below 15%, and the fund’s board of directors determines that the fund would be unable to stay open (or, if gated, re￾open) without further harm to the fund. We request comment on the disclosure that we expect funds to include in their registration statements regarding the operations and effects of liquidity fees and redemption gates.
• Would the disclosure that we
  discuss above adequately assist money market fund investors in understanding the potential effect of their redemption decisions, and in evaluating the full costs of redeeming fund shares? Should we require funds to include this disclosure in their prospectuses and/or SAIs? Should we require funds to include any additional prospectus and SAI disclosure discussing, in detail, the operations and effects of fees and redemption gates? In particular, should we require funds to include any additional details about the fund’s liquidation process? 442 Alternatively, should any of the proposed prospectus and SAI disclosure not be required, and if so, why not?
• Should we require any information
  about the basic operations and effects of fees and redemption gates to be disclosed in the summary section of the statutory prospectus (and any summary prospectus, if used)?
• Should we require disclosure to
  investors of the particular risks associated with buying fund shares when the fund or market is stressed, especially when the fund is imposing either a liquidity fee or a gate?
• Should Form N–1A or its
  instructions be amended to more explicitly require any of the proposed disclosure to be included in a fund’s prospectus and/or SAI? If so, how should it be amended?
  c. Disclosure of the Imposition of
  Liquidity Fees and Gates
  If we were to adopt a reform alternative involving liquidity fees and gates, we believe that it would be important for money market funds (other than government money market funds that have chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements) to inform existing and prospective shareholders when: (i) The fund’s weekly liquid assets fall below 15% of its total assets; (ii) the fund’s board of directors imposes a liquidity fee pursuant to rule 2a–7; or (iii) the fund’s board of directors temporarily suspends the fund’s redemptions pursuant to rule 2a–7 or permanently suspends redemptions pursuant to rule 22e–3. This information would be important for shareholders to receive, as it could influence prospective shareholders’ decision to purchase shares of the fund, as well as current shareholders’ decision or ability to sell fund shares. To this end, we are proposing an amendment to rule 2a–7 that would require a fund to post prominently on its Web site certain information that the fund would be required to report to the Commission on Form N–CR443 regarding the imposition of liquidity fees, suspension of fund redemptions, and the removal of liquidity fees and/or resumption of fund redemptions.444 The amendment would require a fund to include this Web site disclosure on the same business day as the fund files an initial report with the Commission in response to any of the events specified in Parts E, F, and G of Form N–CR,445 and, with respect to any such event, to maintain this disclosure on its Web site for a period of not less than one year following the date on which the fund filed Form N–CR concerning the event.446 We believe that this Web site disclosure would provide greater transparency to shareholders regarding occasions on which a fund’s weekly liquid assets drop below 15% of the fund’s total assets, as well as the imposition of liquidity fees and suspension of fund redemptions, because many investors currently obtain important information about the fund on the fund’s Web site.447 We understand that investors have, in past years, become accustomed to obtaining money market fund information on funds’ Web sites.448 While we believe

money market reforms adopted by the Commission in 2010, as well as daily disclosure of market value per share); see also infra note 659 (discussing recent decisions by a number of money market fund firms to begin reporting funds’ daily shadow prices on the fund Web site). 449See 17 CFR 230.497. 450See proposed (Fees & Gates) Item 16(g)(1) of Form N–1A. We believe that the proposed 10-year look-back period would provide shareholders and the Commission with a historical perspective that would be long enough to provide a useful understanding of past events, and to analyze patterns with respect to fees and gates, but not so long as to include circumstances that may no longer be a relevant reflection of the fund’s management or operations. 451See instructions to proposed (Fees & Gates) Item 16(g)(1) of Form N–1A. 452See supra note 365. that it is important to have a uniform, central place for investors to access the required disclosure, we note that nothing in this proposal would prevent a fund from supplementing its Form N– CR filing and Web site posting with complementary shareholder communications, such as a press release or social media update disclosing a fee or gate imposed by the fund. A fund currently must update its registration statement to reflect any material changes by means of a post￾effective amendment or a prospectus supplement (or ‘‘sticker’’) pursuant to rule 497 under the Securities Act.449 We would expect that, to meet this requirement, promptly after a money market fund imposes a redemption fee or gate, it would inform prospective investors of any fees or gates currently in place by means of a prospectus supplement. We request comment on the proposed requirement for money market funds to inform existing and prospective shareholders, on the fund’s Web site and in the fund’s registration statement, of any present occasion in which the fund’s weekly liquid assets fall below 15% of its total assets, the fund’s board imposes a liquidity fee, or the fund’s board temporarily suspends the fund’s redemptions.

• Should any more, any less, or any
  other information be required to be posted on the fund’s Web site than that disclosed on Form N–CR?
• As proposed, should we require this
  information to be posted ‘‘prominently’’ on the fund’s Web site? Should we provide any other instruction as to the presentation of this information, in order to highlight the information and/ or lead investors efficiently to the information, for example, should we require that the information be posted on the fund’s home page or be accessible in no more than two clicks from the fund’s home page?
• Should this information be posted
  on the fund’s Web site for a longer or shorter period than one year following the date on which the fund filed Form N–CR to disclose any of the events specified in Part E, F, or G of Form N– CR?
• Besides requiring a money market
  fund that imposes a liquidity fee or gate to file a prospectus supplement and include related disclosure on the fund’s Web site, should we also require the fund to notify shareholders individually about the effects of the fee or gate? Should we require a fund to engage in any other supplemental shareholder communications, such as issuing a press release or disclosing the fee or gate on any form of social media that the fund uses?
• How will the disclosure of the
  imposition of a fee or gate affect the willingness of current or prospective investors to purchase shares of the fund? How will this disclosure affect investors’ purchases and redemptions in other funds? How will it affect other market participants? Will these effects differ based on the number of funds that concurrently impose fees and/or gates? d. Historical Disclosure of Liquidity Fees and Gates We also believe that money market funds’ current and prospective shareholders should be informed of post-compliance-period historical occasions in which the fund’s weekly liquid assets have fallen below 15% or the fund has imposed liquidity fees or redemption gates. While we recognize that historical occurrences are not necessarily indicative of future events, we anticipate that current and prospective fund investors could use this information as one factor to compare the risks and potential costs of investing in different money market funds. We are therefore proposing an amendment to Form N–1A to require money market funds (other than government money market funds that have chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements) to provide disclosure in their SAIs regarding any occasion during the last 10 years (but not before the compliance period) on which the fund’s weekly liquid assets have fallen below 15%, and with respect to each such occasion, whether the fund’s board of directors determined to impose a liquidity fee and/or suspend the fund’s redemptions.450 With respect to each occasion, we propose requiring funds to disclose: (i) The length of time for which the fund’s weekly liquid assets remained below 15%; (ii) the dates and length of time for which the fund’s board of directors determined to impose a liquidity fee and/or temporarily suspend the fund’s redemptions; and (iii) a short discussion of the board’s analysis supporting its decision to impose a liquidity fee (or not to impose a liquidity fee) and/or temporarily suspend the fund’s redemptions.451 We would expect that this disclosure could include (as applicable, and taking into account considerations regarding the confidentiality of board deliberations) a discussion of the following factors relating to the board’s decision to impose a liquidity fee and/or suspend redemptions: The fund’s shadow price; relevant market indicators of liquidity stress in the markets; changes in spreads for portfolio securities; the fund’s future liquidity profile (taking into account predicted redemptions and other expectations); the fund’s ability to apply any collected fees quickly to rebuild fund liquidity; and the predicted time for portfolio securities to mature and provide internal liquidity to the fund, and for potentially distressed portfolio securities to mature or recover. The required disclosure would permit current and prospective shareholders to assess, among other things, any patterns of stress experienced by the fund, as well as whether the fund’s board
  has previously imposed fees and/or redemption gates in light of significant drops in portfolio liquidity. This disclosure also would provide investors with historical information about the board’s past analytical process in determining how to handle liquidity issues when the fund experiences stress, which could influence an investor’s decision to purchase shares of, or remain invested in, the fund. In addition, the required disclosure may encourage portfolio managers to increase the level of daily and weekly liquid assets in the fund, as that would tend to lessen the likelihood of a liquidity fee or gate being needed, and the fund being required to disclose the fee or gate to current and prospective investors.452 We request comment on the proposed requirement for money market funds to include SAI disclosure regarding the historical occasions in which the fund’s weekly liquid assets have fallen below 15% or the fund has imposed liquidity fees or redemption gates.
• Would the proposed disclosure
  requirement assist current and prospective fund investors in comparing the risks and potential costs of investing in different money market funds, and would retail investors as well as

453See infra section III.N.
454See proposed (Fees & Gates) Form N–CR Parts E, F, and G. 455See supra text following note 383. 456 Instruction 2(b) to Item 3 of Form N–1A currently defines ‘‘redemption fee’’ to include any fee charged for any redemption of the Fund’s shares, but does not include a deferred sales charge (load) imposed upon redemption. 457See instruction 2(b) to proposed (Fees & Gates) Item 3 of Form N–1A. 458See supra notes 450 and 451 and accompanying text. 459See supra notes 429, 431 and 440 and accompanying text. 460Likewise, uncertainty regarding how the proposed disclosure may affect different investors’ behavior makes it difficult for the SEC staff to measure the quantitative benefits of the proposed requirements. With respect to the proposed disclosure statement, there are many possible permutations on specific wording that would convey the specific concerns identified in this Release, and the breadth of these permutations makes it difficult for SEC staff to test how investors would respond to each wording variation. institutional investors benefit from the proposed disclosure? Would the proposed requirement to include a short discussion of the board’s analysis supporting its decision whether to impose a fee or suspend redemptions result in meaningful and succinct disclosure? Should any more, any less, or any other disclosure be required to be included in the fund’s SAI? Should the disclosure instead be required in the prospectus?

• Keeping in mind the compliance
  period we propose,453 should the ‘‘look￾back’’ period for this historical disclosure be longer or shorter than 10 years?
• Should the proposed SAI disclosure
  be permitted to be incorporated by reference in a fund’s registration statement, on account of the fact that funds will have previously disclosed the information proposed to be required in this SAI disclosure on Form N–CR? 454
• Should we require this historical
  disclosure to be included anywhere else, for example, on the fund’s Web site? e. Prospectus Fee Table Under the proposed liquidity fees and gates alternative, a liquidity fee would only be imposed when a fund experiences stress (i.e., we believe that shareholders would not pay the liquidity fee in connection with their typical day-to-day transactions with the fund under normal conditions and many funds may never need to impose the fee). Because funds are anticipated to rarely, if at all, impose this fee,455 we do not believe that the prospectus fee
  table, which is intended to help
  shareholders compare the costs of investing in different mutual funds, should include the proposed liquidity fee.456 Therefore, we propose clarifying in 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–
  7.457 As discussed above, we do believe
  that shareholders should be able to compare the extent to which money market funds have historically imposed liquidity fees, and to this end, we have proposed SAI amendments requiring this disclosure.458 Also, as previously discussed, funds would disclose in the summary section of the statutory prospectus (and, accordingly, any summary prospectus, if used) that they may impose a liquidity fee, and also would include a detailed description of the size of the fees, and when the fees might be imposed, elsewhere in the statutory prospectus.459 We request comment on the proposed Form N–1A instruction that would clarify that, for purposes of the prospectus fee table, the term ‘‘redemption fee’’ does not include a liquidity fee imposed in accordance with rule 2a–7.
• Would shareholders find it
  instructive for funds to disclose the proposed liquidity fee in the prospectus fee table? Why or why not? If we were to require money market funds to include liquidity fees in the fee table, how should the fee table account for the contingent nature of liquidity fees and inform investors that liquidity fees will only be imposed in certain circumstances? Should the possibility of a liquidity fee be disclosed in a footnote of the fee table? Should a cross￾reference to the fund’s SAI disclosure regarding historical occasions on which the fund has imposed liquidity fees be disclosed in a footnote of the fee table?
• Would the proposed SAI
  amendments requiring disclosure of the historical occasions on which the fund has imposed liquidity fees be an effective way for shareholders to compare the extent to which money market funds have historically imposed liquidity fees, and analyze the probability that a fund will impose such fees in the future? f. Economic Analysis The liquidity fees and gates proposal makes significant changes to the nature of money market funds as an investment vehicle. The proposed disclosure requirements in this section are intended to communicate to shareholders the nature of the risks that follow from the liquidity fees and gates proposal. In section III.B, we discussed why we are unable to estimate how the liquidity fees and gates proposal will affect shareholders’ use of money market funds or the resulting effects on the short-term financing markets because we do not have the information necessary to provide a reasonable estimate. For similar reasons, we are unable to estimate the incremental effects that the proposed disclosure requirements will have on either shareholders or the short-term financing markets. However, we believe that the proposed disclosure will better inform shareholders about the changes, which should result in shareholders making investment decisions that better match their investment preferences. We expect that this will have similar effects on efficiency, competition, and capital formation as those outlined in section III.E rather than to introduce new effects. We further believe that the effects of the proposed disclosure requirements will be small relative to the liquidity fees and gates proposal. The Commission staff has not measured the quantitative benefits of these proposed requirements at this time because of uncertainty about how increased transparency may affect different investors’ understanding of the risks associated with money market funds.460 Where it is relevant, we request the data needed to make these calculations below. We anticipate that money market funds would incur costs to amend their registration statements, and to update their advertising and sales materials (including the fund Web site), to include the proposed disclosure statement. We also anticipate that money market funds (besides government money market funds that have chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements) would incur costs to (i) amend their registration statements to incorporate disclosure regarding the effects of fees and gates on redemptions; (ii) include disclosure of the post￾compliance-period historical occasions in which the fund’s weekly liquid assets have fallen below 15% or the fund has imposed liquidity fees or gates; and (iii) update the prospectus fee table. These funds also would incur costs to disclose current instances of liquidity fees or gates on the fund’s Web site. These costs would include initial, one-time costs, as well as ongoing costs. Our staff estimates that the average
  one-time costs for a money market fund (except government money market funds that have chosen to rely on the proposed rule 2a–7 exemption from the fees and

461Staff estimates that these costs would be attributable to amending the fund’s disclosure statement and updating the fund’s advertising and sales materials. See supra note 245 (discussing the bases of our staff’s estimates of operational and related costs). The costs associated with these activities are all paperwork-related costs and are discussed in more detail in infra section IV.B.7. We expect the new required disclosure would add minimal length to the current required registration statement disclosure, and thus would not increase the number of pages in, or change the printing costs of, a fund’s registration statement. Based on conversations with fund representatives, the Commission understands that, in general, unless the page count of a registration statement is changed by at least four pages, printing costs would remain the same. 462See proposed (Fees & Gates) Form N–CR Parts E, F, and G. 463The costs associated with updating the fund’s registration statement are paperwork-related costs and are discussed in more detail in infra section IV.B.7. 464The costs associated with updating the fund’s Web site are paperwork-related costs and are discussed in more detail in infra section IV.B.1.g.iv. 465See, e.g., Comment Letter of BlackRock, Inc. on the IOSCO Consultation Report on Money Market Fund Systemic Risk Analysis and Reform Options (May 28, 2012), available at http:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD392.pdf. (stating their preference for liquidity fees over gates ‘‘because clients with an extreme need for liquidity can choose to pay for that liquidity in a crisis’’); BNP Paribas IOSCO Comment Letter, supra note 357 (stating that it ‘‘would not make sense to restrict the redeemer willing to pay the price of liquidity’’). 466See, e.g., HSBC EC Letter, supra note 156 (stating that a money market fund should be able to limit the total number of shares that the fund is required to redeem on any trading day to 10% of the shares in issue, that any such gate be applied pro rata to redemption requests, and that any redemption requests not met be carried over to the next business day and so forth until all redemption requests have been met). gates requirements) to comply with these proposed disclosure amendments would be approximately $1,480, and that the average one-time compliance costs for a government money market fund that has chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements would be approximately $592.461 Ongoing compliance costs include the costs for money market funds periodically to update disclosure in their registration statements regarding historical occasions in which the fund’s weekly liquid assets have fallen below 15% or the fund has imposed fees or gates, and also to disclose current instances of any of these events on the fund’s Web site. Because the required registration statement and Web site disclosure overlaps with the information that a fund must disclose on Form N–CR when the
fund’s weekly liquid assets fall below 15%, or the fund imposes or removes a fee or gate,462 we anticipate that the costs a fund will incur to draft and finalize the disclosure that will appear in its registration statement and on its Web site will largely be incurred when the fund files Form N–CR, as discussed below in
section III.G.3. In addition, we estimate
that a fund (besides a government money market fund that has chosen to rely on the proposed rule 2a–7 exemption from the fees and gates requirements) would incur average annual costs of $296 463 to review and update the historical disclosure in its registration statement (plus printing costs), and costs of $207 464 each time that it updates its Web site to include the required disclosure. We request comment on this economic analysis:

• Are any of the proposed disclosure
  requirements unduly burdensome, or would they impose any unnecessary costs?
• We request comment on the staff’s
  estimates of the operational costs associated with the proposed disclosure requirements.
• We request comment on our
  analysis of potential effects of these proposed disclosure requirements on efficiency, competition, and capital formation.

9. Alternative Redemption Restrictions
   a. Stand-Alone Liquidity Fees or Stand￾Alone Gates We are proposing that money market fund boards of directors be permitted to institute liquidity fees or gates (and potentially one followed by the other). This proposal is designed to provide money market funds with multiple tools to manage heightened redemptions in the best interest of the fund and to mitigate potential contagion effects on the short-term financing markets for issuers. We also have considered whether we should permit these money market funds to institute only liquidity fees or only gates. As discussed above, fees and gates can accomplish somewhat different objectives and have somewhat different tradeoffs and effects on shareholders and the short-term financing markets for issuers. For shareholders valuing principal preservation in their evaluation of money market fund investments, a gate may be preferable to a liquidity fee particularly if the fund expects to rebuild liquidity through maturing assets. In contrast, shareholders preferring liquidity over principal preservation may prefer a liquidity fee because it allows full liquidity of that investor’s money market fund shareholdings—it just imposes a greater cost for that liquidity if the fund is under stress.465 Because fees and gates can accomplish somewhat different objectives and one may be better suited to one set of market circumstances than the other, we preliminarily believe that providing funds with the ability to use either tool, as the board determines is in the best interest of the fund, is a better approach to preserve the benefits of money market funds for investors and the short-term financing markets for issuers, enhance investor protection, and improve money market funds’ ability to manage and mitigate high levels of redemptions. It also may better allow funds to tailor the redemption restrictions they employ to their experience with the preferences and behavior of their particular shareholder base and to adapt the restriction they institute as they or the industry gains experience over time employing such restrictions. We request comment on stand-alone liquidity fees or stand-alone gates.

• Should we adopt rule amendments
  that would just permit money market funds to institute liquidity fees or just permit these money market funds to institute a gate? Why might it be preferable to allow only a fee or only a gate? If we allowed only a fee or only a gate, should there be different parameters or restrictions around when the fee or gate could be imposed or lifted than what we have proposed? If so, what should they be and why? b. Partial Gates We are proposing to permit money market funds to institute a complete gate in certain circumstances—a temporary suspension of redemptions. Some have suggested that we allow money market funds to impose partial gates in times of stress.466 For example, once the money market fund had crossed the 15% weekly liquid asset threshold, we could permit the board of directors (including a majority of its independent directors) to limit redemptions by any particular shareholder to a certain percentage of their shareholdings, to a certain percentage of the fund’s outstanding shares, or to a certain dollar amount per day. Those limited redemptions would not be charged a liquidity fee. A partial gate can operate to prevent ‘‘fire sales’’ of assets in the fund and provide some liquidity to investors while allowing time for the fund to satisfy the remaining portion of redemptions requests under better market conditions or with internally generated liquidity. It can act as a gradual brake on redemptions, reducing

467See David Evans and Darrell Preston, Florida Investment Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007). 468See, e.g., Neil Weinberg, Florida Fund Meltdown: Bad to Worse, Forbes (Dec. 6, 2007) (noting that investors withdrew $1.2 billion from the $14 billion pool after it re-opened, while depositing only $7 million, but that only 3 out of about 1,700 participants in the pool chose to pay the redemption fee to withdraw additional assets). 469See 2009 Proposing Release, supra note 31, at
section III.B. An in-kind redemption occurs when
a shareholder’s redemption request to a fund is satisfied by distributing to that shareholder portfolio assets of that fund instead of cash. 470See PWG Report, supra note 111, at section 3.c (discussing requiring that money market funds satisfy certain redemptions in-kind). 471See 2009 Proposing Release, supra note 31, at n.309. 472But see Comment Letter of Forward Management (Aug. 21, 2009) (available in File No. S7–11–09) (supporting in-kind redemption requirement); Comment Letter of the American Bar Association (Committee on Federal Regulation of Securities) (Sept. 9, 2009) (available in File No. S7– 11–09) (same). In addition, two PWG Report commenters expressed concern that redemptions in-kind would be technically unworkable, but were open to further examination of this option. See Comment Letter of Invesco Advisers, Inc. (Jan. 10,
2011) (available in File No. 4–619) (‘‘We have
previously expressed our concern that requiring money market funds to satisfy redemptions in-kind under certain circumstances would likely be technically unworkable and could result in disrupting, rather than stabilizing, markets. While we continue to harbor these concerns, we would be supportive in principle of a mandatory in-kind redemption requirement if these technical challenges could be addressed successfully in a partnership with regulatory authorities.’’); Comment Letter of Federated Investors, Inc. (Jan. 7,
2011) (available in File No. 4–619) (‘‘Federated Jan
2011 PWG Comment Letter’’) (‘‘we have identified some of the major problems associated with redemption in-kind and included these in our comment letter to the Commission on the recent money market fund reforms. . . . At the appropriate time, we would be willing to meet with the Commission or its staff to review our analysis of the issues raised in responding to such events and to discuss approaches to resolving these issues.’’). 473See, e.g., Comment Letter of BlackRock Inc. (Jan. 10, 2011) (available in File No. 4–619) (‘‘BlackRock PWG Comment Letter’’); Comment Letter of The Dreyfus Corporation (Jan. 10, 2011) (available in File No. 4–619) (‘‘Dreyfus PWG Comment Letter’’); Comment Letter of Investment Company Institute (Jan. 10, 2011) (available in File No. 4–619) (‘‘ICI Jan 2011 PWG Comment Letter’’); Comment Letter of Fidelity Investments (Jan. 10,
2011) (available in File No. 4–619) (‘‘Fidelity Jan
2011 PWG Comment Letter’’). For example, the BlackRock PWG Comment Letter stated that some shareholders cannot receive and hold direct investments in money market assets and some portfolio securities, such as repurchase agreements and Eurodollar time deposits, are OTC contracts and cannot be transferred to retail or to multiple investors. The Fidelity Jan 2011 PWG Comment Letter added that advisers may only be able to transfer the most liquid securities, leaving a less liquid portfolio for non-redeeming shareholders and with odd-lot positions that are more difficult and expensive to trade. 474See, e.g., Comment Letter of Goldman Sachs Asset Management, L.P. (Jan. 10, 2011) (available in File No. 4–619) (‘‘a potential result of forced in-kind redemptions is simply to transfer the selling responsibility from presumably sophisticated and experienced asset managers to a disparate group of investors who do not necessarily have any reason to know how to dispose of these securities effectively’’); Comment Letter of SVB Asset Management (Jan. 10, 2011) (available in File No. 4–619); Comment Letter of T. Rowe Price Associates, Inc. (Jan. 10, 2011) (available in File No. 4–619). them to the extent that they no longer impact the fund’s value or liquidity. In doing so, they can have a less severe impact on fund shareholders because they know they will be able to redeem without cost at least a certain portion of their investment on any particular day, even in times of stress. A partial gate could be imposed in lieu of a liquidity fee or could be combined with a liquidity fee (e.g., once the fund imposed a partial gate, a shareholder could redeem 10% of their shareholdings at no cost and the rest of their shareholdings by paying a liquidity fee). Similarly, we could consider adopting a partial gate in lieu of our full gate proposal or as an additional tool that would be available to fund boards on the same terms as a full gate is available. On the other hand, a partial gate may not impose a substantial enough deterrent on redemption activity in times of stress to effectively reduce the contagion impact of heavy redemptions on remaining investors and the short￾term financing markets. For example, in 2007 when a Florida local government investment pool suspended redemptions in response to a run, it re￾opened with a combined partial gate and liquidity fee—local governments could take out the greater of 15% of their holdings or $2 million without penalty, and the remainder of any redemptions were subject to a 2% redemption fee.467 We understand that only a few investors redeemed more than what was allowed without a fee, but that investors redeemed most of what was allowed under the partial gate without triggering the redemption fee.468 We also are concerned that a partial gate would operate in substantially the same manner as an exemption from the fee or gate requirement for small withdrawals, discussed above in section III.B.5, and thus may be subject to many of
the same drawbacks in terms of operational costs and added complexity compared to our liquidity fees and gates proposal. We request comment on whether we should require or permit partial gates in certain circumstances.

• Should we allow partial gates? If so,
  why? Under what conditions and of what nature? Should they limit each shareholder’s redemptions to a certain percentage of his or her shareholdings (e.g., 10% or 25%), to a certain percentage of the fund’s outstanding shares (e.g., 1% or 5%), or to a certain dollar amount per day (e.g., $10,000 or $50,000)? If so, what percentage or dollar amount and why?
• How would partial gates affect
  shareholder redemption decisions compared to our proposal of liquidity fees and full gates? Would they achieve our goals of preserving the benefits of money market funds for investors and the short-term financing markets for issuers, while mitigating the risk of runs, enhancing investor protection and improving money market funds’ ability to manage and mitigate high levels of redemptions to the same extent as our proposed liquidity fees and gates? Why or why not?
• If we allowed partial gates, should
  they be allowed in addition to liquidity fees and full gates or in lieu of fees or full gates? What operational and other costs would be involved if we allowed partial gates in addition to or in lieu of fees and/or full gates?
  c. In-Kind Redemptions
  In 2009, we requested comment on requiring that funds satisfy redemption requests in excess of a certain size through in-kind redemptions.469 We also requested comment on this type of redemption restriction when we requested comment on the PWG Report.470 In-kind redemptions might lessen the effect of large redemptions on remaining money market fund shareholders, and they would ensure that the redeeming investors bear part of the cost of their liquidity needs. During the 2008 financial crisis, one money market fund stated that it would honor certain large redemptions in-kind in an attempt to decrease the level of redemptions in that fund.471 In both instances, almost all commenters addressing this potential reform option opposed it.472 Most commenters believed that requiring in￾kind redemptions would be technically unworkable due to the complex valuation and operational issues that would be imposed on both the fund and on investors receiving portfolio securities.473 They also asserted that required in-kind redemptions could result in disrupting, rather than stabilizing, markets if redeeming shareholders needing liquidity were forced to sell into declining markets.474 Several commenters stated that investors would dislike the prospect of receiving redemptions in-kind and would structure their holdings to avoid the requirement, but would nevertheless still collectively engage in redemptions if the money market funds were to come

475See, e.g., ICI Jan 2011 PWG Comment Letter, supra note 473; Richmond Fed PWG Comment Letter, supra note 139; Comment Letter of Wells Fargo Funds Management, LLC (Jan. 10, 2011) (available in File No. 4–619) (‘‘Wells Fargo PWG Comment Letter’’). 476As discussed in supra section III.A.4, retail money market funds would also be exempt from our proposed floating NAV requirement. 477See supra section III.B.1 (discussing shareholders’ potential incentive to engage in preemptive redemptions in a stable price money market fund that can impose fees or gates). under stress with similar adverse consequences for the funds and the short-term financing markets.475 These comments led us to believe that requiring in-kind redemptions would create operational difficulties that could prevent funds from operating fairly to investors in practice and that it would not necessarily mitigate money market funds’ susceptibility to runs and related adverse effects on the short-term financing markets and capital formation. Thus, we expect that the liquidity fees and gates approach described above would better achieve our goals of preserving the benefits of money market funds for investors and the short-term financing markets for issuers while enhancing investor protection and improving money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions. Liquidity fees and gates also may be easier to implement than required in-kind redemptions. We request comment on whether we are correct in our analysis of the relative merits and costs of in-kind redemptions as compared to the other forms of redemption restrictions described in this Release as well as any others that money market funds could seek to impose. We also request comment on all the redemption restriction alternatives discussed in this Release.

• Are there other alternatives that we
  should consider? Do commenters agree with our discussion about the advantages and disadvantages of the various alternatives? Do commenters agree with our discussion of their potential benefits and costs and other economic effects?
  C. Potential Combination of Standby
  Liquidity Fees and Gates and Floating Net Asset Value Today, we are proposing two alternative methods of reforming money market funds. Although these two proposals are designed to achieve many of the same goals, by their nature they would do so to different degrees and with different tradeoffs. As discussed above, our first alternative would require money market funds (other than government and retail funds) to adopt floating NAVs. This proposal is designed primarily to address the incentive for shareholders to redeem shares ahead of other investors in times of fund and market stress. It also is intended to improve the transparency of funds’ investment risks through more transparent valuation and pricing methods. It makes explicit the risk and reward relation for money market funds. We recognize, however, that the proposal does not necessarily address shareholders’ incentive to redeem from money market funds due to their liquidity risk or for other reasons as discussed below. In times of severe market stress when the secondary markets for funds’ assets become illiquid, investors may still have incentives to redeem shares before their fund’s liquidity dries up. It also may not alter money market fund shareholders’ incentive to redeem in times of market stress when investors are engaging in flights to quality, liquidity, and transparency and the related contagion effects from such high levels of redemptions. Our second proposal, which requires funds to impose liquidity fees unless the fund’s board determines that it would not be in the best interest of the fund and permits them to impose gates in certain circumstances, is primarily focused on helping money market funds manage heightened redemptions and reducing shareholders’ incentive to redeem under stress. It also could improve the transparency of funds’ liquidity risks through a more transparent and systematic allocation of liquidity costs. In doing so, it addresses a principal drawback of our floating NAV proposal by imposing a cost on redemptions in times of market stress that may incorporate not just investment risk but also liquidity risk. The prospect of facing liquidity fees and gates will give the additional benefit of better informing and sensitizing investors to the risks of investing in money market funds. We recognize, however, that our liquidity fees and gates proposal does not entirely eliminate the incentive of shareholders to redeem when the fund’s shadow price falls below a dollar. Moreover, it does not eliminate the lack of valuation transparency in the pricing of money market funds and any corresponding lack of shareholder appreciation of money market fund valuation risks. We are considering addressing the limitations of the two proposals by combining them into a single reform package; that is, requiring money market funds (other than government money market funds and, regarding the floating NAV, retail money market funds) to both use a floating NAV and potentially impose
  liquidity fees or gates in times of fund and market stress.476 Doing so would address some of the drawbacks of each proposal individually, but would present other tradeoffs, as further discussed below.

1. Potential Benefits of a Combination
   A combined reform approach could reduce investors’ incentive to quickly redeem assets from money market funds in a crisis, improve the transparency of funds’ investment and liquidity risks, and enhance money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions relative to either proposal alone. Under a combined approach, the floating NAV should reduce investors’ incentive to redeem early to avoid a market-based loss embedded in the fund’s portfolio because the fund would be transacting at the fair value of its portfolio at all times. Doing so should reduce the likelihood that investors engage in preemptive redemptions that could trigger the imposition of fees and gates.477 Requiring a fund to operate with a floating NAV with potential imposition of fees and gates in times of fund or market stress should thus reduce the risk that funds would face heavy redemptions. Early redeeming shareholders would be less likely to be able to exit the fund without bearing the cost of their redemptions, and thereby it will be less likely to concentrate losses for the remaining shareholders. At the same time, requiring a floating NAV fund to consider imposing liquidity fees or impose gates when the fund’s liquidity buffer comes under strain should enhance its ability to manage its liquidity risk before it results in portfolio losses. The combination would provide a broader range of tools to a floating NAV money market fund to manage redemptions in a crisis, thereby avoiding ‘‘fire sales’’ of assets that would affect all shareholders and potentially the short-term financing markets for issuers. The combined approach also should further enhance the ability of money market funds to treat shareholders equitably, and could allow better management of funds’ portfolios in a crisis to minimize shareholder losses. Requiring funds that can impose liquidity fees and gates to have a floating NAV provides fuller transparency of fund valuation and

478See supra section III.A.1.
479One commenter noted their opposition to combining redemption gates with a floating NAV, arguing that such a combination ‘‘acknowledges that the floating NAV does not resolve such first mover advantage.’’ See Dreyfus FSOC Comment Letter, supra note 174. 480See supra sections III.A.3 and III.A.4. In any combination, retail funds would likely be subject to fees and gates, although exempt from the floating NAV, and thus would not be exempt from both provisions as government funds likely would. 481See 15 U.S.C. 80a–2(a)(32) and 80a–22(e); see also supra note 395. liquidity risk. This enhanced transparency may better inform investors to the risk profile of their money market fund investment, and may make investors less sensitive to fluctuations in a money market fund’s NAV. As a result of this familiarity with money market fund NAV fluctuations, investors may be less likely to redeem shares in times of fund and market stress because of the possibility that a fund’s NAV might change, and correspondingly reducing the chances that fees or gates may be triggered.478 Liquidity fees also can encourage funds to better and more systematically manage liquidity and redemption activity and encourage shareholders to monitor and exert market discipline over the fund to reduce the likelihood that the imposition of fees or gates will become necessary in that fund. We request comment on the potential benefits of combining our two alternatives into a single proposal.

• Would combining the floating NAV
  alternative with the liquidity fees and gates alternative have the benefits we discuss above? Are there any other benefits that we have not discussed? If so, what would they be?
• Would combining the floating NAV
  alternative with only liquidity fees or only gates provide different benefits?

2. Potential Drawbacks of a Combination
   Some drawbacks may result from combining the two proposals.479 One potential drawback is that combining a floating NAV with liquidity fees and gates does not preserve the benefits of stable price money market funds for investors as our liquidity fees and gates alternative does. Although any combination likely would include an exemption to the floating NAV requirement for government and retail money market funds,480 most other money market funds would have a floating NAV, thereby incurring the costs and operational issues associated with that proposal. As discussed more fully in the section on that alternative, some investors may be deterred from investing in a floating NAV fund for a variety of reasons. We have designed our liquidity fees and gates alternative in large part to preserve the benefits of stable price funds for those investors while enhancing investor protection and improving money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions. Combining the proposals thus may not fully accomplish our goal of preserving the current benefits of money market funds. Another drawback of combining the two proposals is that if a floating NAV significantly changes investor expectations regarding money market fund risk and their prospect of suffering losses, requiring funds with a floating NAV to also be able to impose standby liquidity fees and gates may be unnecessary to manage the risks of heavy redemptions in times of crisis. Because of the unique features of stable price money market funds, liquidity fees and gates may be necessary for a fund to ensure that all of its shareholders are treated the same, while also managing the risks of contagion from heavy redemptions. A fund with a floating NAV may not face these same risks and thus providing those funds with the ability to impose fees or gates may not be justified, particularly in light of the Investment Company Act’s expressed preference for full redeemability of open-end fund shares.481 A last potential drawback is that although some investors may be comfortable investing in a money market fund that has either a floating NAV or liquidity fees and gates, some investors may not wish to invest in a fund that has both features because a fund that does not have a stable price and also may restrict redemptions may not be suitable as a cash management tool for such investors. The combination of our proposals may result in these investors looking to other investment alternatives that offer principal stability or that do not also have potential restrictions on redemptions. We discuss the potential effects of such a shift in
   section III.E below.
   We request comment on the potential drawbacks of combining our two alternatives into a single proposal.

• Would combining the floating NAV
  alternative with the liquidity fees and gates alternative have the drawbacks we discuss above? Are there any other drawbacks that we have not discussed? If so, what would they be?
• Would combining the floating NAV
  alternative with only liquidity fees or only gates impose different costs?

3. Effect of Combination
   As discussed above, each of the alternatives that we are proposing today achieves similar goals, in different ways, but they bear distinct costs. Accordingly, if we were to combine the two proposals, while there is the likelihood that a combination may in some ways improve on each alternative standing alone, the combination would impose two separate sets of costs on funds, investors, and the markets. We request comment on whether the benefit of combining the two alternatives into a single reform would justify the drawbacks of imposing two distinct sets of costs and economic impacts.

• Should we combine the two
  alternatives as a single reform? What would be the advantages and drawbacks of such a combination? Would the benefits of combining the proposals justify requiring the two individual sets of costs associated with implementing the combined alternatives? Would the imposition of two sets of costs materially impact the decisions of money market fund sponsors on whether or not they would continue to offer the product?

4. Operational Issues
   Combining the two alternatives into a single approach could pose certain operational issues and raise questions about how we should structure such a reform. These issues are discussed below. a. Fee Structure Under our liquidity fees and gates proposal, the board of directors of a money market fund would be required to impose a liquidity fee (unless they find that not doing so would be in the best interest of the fund) if the fund’s weekly liquid assets fell below 15% of its total assets. The default liquidity fee would be 2% unless the board determined that a lesser fee would be in the best interest of fund shareholders. The liquidity fees imposed by a floating NAV fund may serve different purposes than those of a stable price fund. A stable price fund board, for example, might use liquidity fees to recoup the costs associated with selling assets at distressed prices in an illiquid market to meet redemptions, as well as to help repair the fund’s NAV. In contrast, a floating NAV fund board might choose to impose liquidity fees only to recoup the costs associated with selling assets at distressed prices. This difference in the purpose served by liquidity fees raises questions about the appropriate default size of a liquidity fee for the combined proposal, the

482See supra section III.B.2.c. 483See supra section III.A.6. appropriate thresholds for triggering imposition of the fee, and the thresholds for removing it. We request comment on the structure of the default liquidity fee if applied to a floating NAV money market fund.

• Should we alter the default
  liquidity fee for the combined proposal? Should we specify a default fee for the combined proposal or merely require that a fee be based on the costs incurred by the fund selling assets to meet redemptions? We previously noted issues that can arise with variable liquidity fees.482 Would these issues be of concern in the context of a floating NAV fund?
• Should we contemplate different
  percentages for funds to consider before applying liquidity fees or gates to a floating NAV money market fund than weekly liquid assets falling below 15%? If so, what percentages should we consider. Should we consider a different threshold for automatic removal of liquidity fees other than recovery of a fund’s liquidity to 30% weekly liquid assets? If so, what should the threshold for removal be?
• Should a liquidity fee in a floating
  NAV fund be triggered by a different factor other than weekly liquid assets falling below 15%, such as a change in NAV? If so, should such a trigger be based on a relative percentage change in NAV over some time period or on an absolute change since a fund’s inception? For example, should a liquidity fee be triggered if a fund’s NAV falls by more than 1⁄4 of 1% in a week? Alternatively, should a liquidity fee be triggered if a fund’s NAV falls by more than a certain number of basis points? If based on an absolute number, what should the number be? A drop in NAV of more than 25 basis points from its initial starting price or another number? What types of issues do the two options present? What other types of thresholds should be considered? What issues would arise from using other thresholds? b. Redemption gates Under our liquidity fees and gates alternative, a fund would have the option of imposing temporary redemption gates if liquidity falls below the same threshold that it imposes liquidity fees. These redemption gates are designed to act as ‘‘circuit breakers’’ to halt redemptions, thereby allowing funds to minimize losses to all shareholders and reducing any associated contagion risks. Most of the concerns that redemption gates are designed to address in a stable price money market fund also apply to a floating NAV money market fund, and gates should be similarly useful in addressing them. Much like a stable price fund, a floating NAV fund may also face difficulties managing heavy redemptions in times of stress, and redemption gates may work to mitigate these difficulties. Gates, by halting redemptions, would provide ‘‘breathing room’’ for investors to take better stock of a situation. Conversely, redemption gates may not be in the interest of investors who rationally wish to redeem at the time, or who want immediate liquidity.
• Do redemption gates on a floating
  NAV fund pose any particular issues or provide any specific benefits different than those associated with gates in a stable price fund? If so, what are they?
• If we were to combine the two
  alternatives and permit redemption gates on a floating NAV fund, should the thresholds be the same as for imposing liquidity fees? If not, what should they be? Should they be tied to redemption activity? Drops in NAV?
• Should the length of time permitted
  for redemption gates in a floating NAV fund be the same as that permitted under the standalone alternative? Should floating NAV funds be permitted to gate redemptions for a longer or shorter time? If so, why?
• If the proposals were combined,
  would a partial gate be appropriate?
  c. Floating NAV Combined with only
  Liquidity Fees or only Gates If we were to combine the alternatives, we could also do so in a partial manner, requiring money markets to maintain a floating NAV and combining it with standby liquidity fees standing alone. Similarly, we could instead require that a floating NAV fund be able to impose gates, but not liquidity fees. Combining a floating NAV with just liquidity fees or gates may simplify operational implementation of the combination and make money market funds more attractive to investors. On the other hand, such a limited combination may not achieve the goals of the proposed reform to the same extent as a full combination. We request comment on whether, if we were to combine the two alternatives, we should require a floating NAV fund to only have standby liquidity fees or gates, but not both.
• What advantages and disadvantages
  would result from such a limited combination?
• If we were to pursue a limited
  combination, which measure should we combine with the floating NAV? Liquidity fees or gates? Why? d. Choice of Floating NAV or Liquidity Fees and Gates Another way of combining the floating NAV and fees and gates alternatives discussed in this Release would be to require that money market funds (other than government money market funds) choose to either transact with a floating NAV or be able to impose liquidity fees and gates in times of stress—in other words, each non￾government money market fund would have to choose to apply either the floating NAV alternative or the liquidity fees and gates alternative. Providing such a choice may allow each money market fund to choose the reform alternative that is most efficient, cost￾effective, and preferable to shareholders. This could enhance the efficiency of our reforms and minimize costs and competitive impacts. On the other hand, allowing such a choice may not achieve the goals of the proposed reform to the same extent as a full combination or mandating one alternative versus another. In addition, in making such a choice, the money market fund industry may not necessarily be incentivized to take into consideration the full likely effects of their decisions on the short￾term financing markets, and thus capital formation, or the broader systemic effects of their choices. Funds would need to clearly communicate their choice of approaches to shareholders. We request comment on whether we should permit non-government money market funds to choose to apply either the floating NAV alternative or the fees and gates alternative.
• What advantages and disadvantages
  would result from permitting such a choice?
• Would permitting such a choice
  achieve our reform goals to the same extent as either our floating NAV proposal or our fees and gates proposal?
• Would this cause investor
  confusion because of a fragmentation in the market?
• How should a fund elect to make
  such a choice? At inception of the fund? Should a fund be permitted to switch elections? e. Other Issues The combination of the two alternatives could create other operational issues. For example, we have previously discussed our understanding that a floating NAV fund would meet the definition of a cash equivalent for accounting purposes, because it is unlikely to experience significant fluctuations in value.483 We

484 Id.
485See supra section III.A.2.
486We are proposing to change the trigger for use of rule 22e–3 under both alternatives to a reduction in a fund’s weekly liquid assets below 15%. See supra section III.A.5.b. 487See supra section III.A.9. would expect a fund that combines liquidity fees and gates with a floating NAV should not experience any additional volatility compared to a floating NAV fund alone. That said, in some circumstances, liquidity fees could effectively lower share value, by requiring the payment of fees upon redemption. It is also important to note that gates would potentially compromise liquidity. Nevertheless, we expect the value of floating NAV funds with liquidity fees and gates would be substantially stable and should continue to be treated as a cash equivalent under GAAP.484 We also do not expect that a combination of the two approaches would result in any novel tax issues that we have not previously discussed in the relevant sections above. We request comment on the implications of combining fees and gates with a floating NAV on tax and accounting issues.

• Would a money market fund that
  combines a floating NAV with liquidity fees and gates continue to be treated as a cash equivalent under GAAP? If not, why not?
• Would a combination of the
  alternatives create any additional accounting or any novel tax issues? If so, what would they be? Under our floating NAV proposal we are proposing that a fund would be required to price to the fourth decimal place if they price their shares at one dollar (e.g., $1.0000), or to an equivalent level of precision if the fund uses another price level. We would require such a level of pricing precision, in part, to ensure that any fluctuations in a fund’s NAV are visible to investors.485 We would expect that the value of such transparency would be unchanged under a combined approach.
• Would such a level of pricing
  precision be appropriate for a fund that combines liquidity fees and gates with a floating NAV? If not, why not, and what level of pricing precision should be required instead? As discussed above, we are proposing exemptions under each alternative. Under the floating NAV alternative, we are proposing an exemption for government and retail money market funds. Under the liquidity fees and gates alternative, we are proposing an exemption for government money market funds, but not retail funds. We would expect that a combined approach would also include these exemptions, considering that the reasons we are proposing the exemptions to the floating NAV remain the same in the context of a combined approach. However, our liquidity fees and gates proposal treats government and retail funds differently, and provides an exemption to the liquidity fees and gates proposal for government money market funds, but not for retail funds. For the reasons discussed in the sections where we propose the exemptions, if we were to combine the proposals, we would expect to continue to offer the exemptions provided under each alternative, but would not extend them. Accordingly, a combined approach would likely provide an exemption to the floating NAV and to fees and gates for government money market funds, but would provide only an exemption to the floating NAV for retail funds, and not an exemption to fees and gates.
• If we were to combine the two
  alternatives, should we retain the proposed exemptions to the floating NAV requirement for government and retail money market funds? If not, why not?
• Under a combined approach,
  should we also exempt retail funds from not only the floating NAV but also from the fees and gates requirements? If so, why? We are also proposing to retain rules 17a–9 and 22e–3 under both of the alternatives we are proposing today, with certain amendments to account for operational differences to rule 22e–3’s triggering mechanism.486 If we were to combine the two alternatives into a single approach, we would expect to make the amendments to the triggering mechanisms of rule 22e–3 we are proposing today (which are the same under each alternative) and retain rule 17a–9 unchanged. As discussed above, we believe that funds would continue to find the ability to sell securities to affiliated persons under rule 17a–9 useful under both alternatives, as well as under a combined approach. We also expect that the amendments we are making to the triggering mechanism permitting a suspension of redemptions in preparation for a fund’s liquidation under rule 22e–3 would continue to be appropriate under a combined approach as well.
• Would a combined approach have
  any significant effects on our proposed treatment of rules 17a–9 and 22e–3? Would we need to make any other changes to those rules to accommodate such a combination? Our floating NAV alternative includes a compliance period of 2 years to allow for funds to transition to a floating NAV without imposing unnecessary costs.487 We would expect that any combined approach would include a similar compliance period because funds would likely need a significant amount of time to implement a floating NAV. At the same time, we do not expect that implementing both alternatives would add substantially to the amount of time it would take to implement a floating NAV alone, and accordingly would expect to provide the same compliance period if we were to combine the approaches.
• Should we provide the same
  compliance period under a combined approach? If not, should the compliance period be longer or shorter? Should we consider a grandfathering approach instead of or in addition to a compliance period? Under both of the alternatives that we are proposing today, we are also including a variety of proposed disclosure improvements designed to improve transparency of fund risks and risk management, with the relevant disclosure tailored to each alternative. If we were to combine the two approaches, we would likely merge the disclosure reforms, and revise the disclosure requirements to take such a merger into account. We would not expect that a combined approach would require significant additional disclosure reforms not discussed under the two alternatives.
• Would a combined approach pose
  any new disclosure issues that are not currently contemplated in the discussion of disclosure reforms for each of the two alternatives? If so, what would those issues be? Would a combined approach result in any new or changed risks that investors should be informed of? We do not expect that there would be any significant additional costs from combining the two approaches that are not previously discussed in the sections discussing the costs of the two alternatives above. It is likely that implementing a combined approach would likely save some percentage over the costs of implementing each alterative separately as a result of synergies and the ability to make a variety of changes to systems at a single time. We do not expect that combining the approaches would create any new costs as a result of the combination itself. Accordingly, we estimate that the costs of implementing a combined approach would at most be the sum of the costs of each alternative, but may likely be less.

488See FSOC Proposed Recommendations, supra note 114, at section V.A. 489Under the FSOC Proposed Recommendations, Treasury money market funds would not be subject to a NAV buffer or a minimum balance at risk. See FSOC Proposed Recommendations, supra note 114, at sections V.B and V.C for a full discussion of these two alternatives. This section of the Release provides a summary based on those sections of the FSOC Proposed Recommendation. 490See FSOC Proposed Recommendations, supra note 114, at section V.B. 491Under the Internal Revenue Code, each year, mutual funds, including money market funds, must distribute to shareholders at least 90% of their annual earnings or lose the ability to deduct dividends paid to their shareholders. See, e.g., Comment Letter of the Investment Company Institute (May 16, 2012) (available in File No. 4– 619). We note that the retained earnings method is similar to how some money market funds paid for insurance that was provided by ICI Mutual Insurance Company from 1993 to 2003. This insurance covered losses on money market fund portfolio assets due to defaults and insolvencies but not from events such as a security downgrade or a rise in interest rates. Coverage was limited to $50 million per fund, with a deductible of the first 10 to 40 basis points of any loss. Premiums ranged from 1 to 3 basis points. See PWG Report, supra note 111, at n.24 and accompanying text. Because of the tax disadvantages of this funding method, it would take a long time for a NAV buffer of any size to build, particularly in the current low interest rate environment. 492This funding method also could have the greatest competitive impacts on the money market fund industry, as larger bank-affiliated sponsors would have less costly access to funding for the NAV buffer than independent asset management firm sponsors. See, e.g., Systemic Risk Council FSOC Comment Letter, supra note 363 (‘‘Capital requirements would likely encourage money market fund consolidation—particularly toward larger bank-affiliated sponsors (who traditionally have, and can access, more capital than traditional, independent asset managers). If so, this could further concentrate systemic risk from these institutions, and create conflicts of interest in the short-term financing markets (as fewer money funds would control a larger share of the short-term lending markets).’’). 493See FSOC Proposed Recommendations, supra note 114, at section V.C. 494See id, at section V.C. We request comment on the costs of combining the two approaches.

• Would there be any new costs
  associated with combining the two approaches that are not already discussed separately under each alternative? If so, what would they be?
• Would there be a reduction in costs
  as a result of implementing both alternatives at the same time? If so, how much savings would there be? D. Certain Alternatives Considered In addition to the proposed reforms and alternatives described elsewhere in this Release, it is important to note that in coming to this proposal, we and our staff considered a number of additional alternative options for regulatory reform in this area. For example, we considered each option discussed in the PWG Report and the FSOC Proposed Recommendations. We currently are not pursuing certain of these other options because we believe, after considering the comments we received on the PWG Report and that FSOC received on the FSOC Proposed Recommendations and the economic analysis set forth in this Release, that they would not achieve our regulatory goals as well as what we propose today. We discuss below these options, and our principal reasons for not pursuing them further at this time.

1. Alternatives in the FSOC Proposed
   Recommendations
   As discussed in section II.D.3 above, in November 2012, FSOC proposed to recommend that we undertake structural reforms of money market funds. FSOC proposed three alternatives for consideration, which, it stated, could be implemented individually or in combination. The first option 488— requiring that money market funds use a floating NAV—is part of our proposal. The other two options in the FSOC Proposed Recommendations each would require that money market funds maintain a NAV buffer. One option would require that most money market funds have a risk-based NAV buffer of up to 1% to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV and that this NAV buffer be combined with a ‘‘minimum balance at risk.’’ 489 The required minimum size of a fund’s NAV buffer would be determined based on the composition of the money market fund’s portfolio according to the following formula:

• No buffer requirement for cash,
  Treasury securities, and repos collateralized solely by cash and Treasury securities (‘‘Treasury repo’’);
• A 0.75% buffer requirement for
  other daily liquid assets (or weekly liquid assets, in the case of tax-exempt money market funds); and
• A 1% buffer requirement for all
  other assets.
  A fund whose NAV buffer fell below the required minimum amount would be required to limit its new investments to cash, Treasury securities, and Treasury repos until its NAV buffer was restored. A fund that completely exhausted its NAV buffer would be required to suspend redemptions and liquidate or could continue to operate with a floating NAV indefinitely or until it restored its NAV buffer. A money market fund could use any funding method or combination of methods to build the NAV buffer, and could vary these methods over time. The FSOC Proposed Recommendations identified three funding methods that would be possible with Commission relief from certain provisions of the Investment Company Act: (1) An escrow account that a money market fund’s sponsor established and funded and that was pledged to support the fund’s stable share price; (2) the money market fund’s issuance of a class of subordinated, non￾redeemable equity securities (‘‘buffer shares’’) that would absorb first losses in the funds’ portfolios; and (3) the money market fund’s retention of some earnings that it would otherwise distribute to shareholders (subject to certain tax limitations).490 We believe that the first funding method would be the most likely approach for funding the buffer given the complexity of a fund offering a new class of buffer shares (and the uncertainty of an active, liquid market for buffer shares developing) and the tax limitations on the third method.491 We note, however, that we believe this funding method is the most expensive of the three because of the opportunity costs the fund’s sponsor will bear to the extent that the firms redirect this funding from other essential activities, as further discussed below.492 The minimum balance at risk (‘‘MBR’’) would require that the last 3% of a shareholder’s highest account value in excess of $100,000 during the previous 30 days (the shareholder’s MBR or ‘‘holdback shares’’) be redeemable only with a 30-day delay.493 All shareholders may redeem 97% of their holdings immediately without being restricted by the MBR. If the money market fund suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed (i.e., their MBRs would be ‘‘subordinated’’). The extent of subordination of a shareholder’s MBR would be approximately proportionate to the shareholder’s cumulative net redemptions during the prior 30 days— in other words, the more the shareholder redeems, the more their holdback shares become ‘‘subordinated holdback shares.’’ The last option in the FSOC Proposed Recommendations would require money market funds to have a risk-based NAV buffer of up to 3% (which otherwise would have the same structure as discussed above), and this larger NAV buffer could be combined with other measures.494 The alternative measures discussed in the FSOC Proposed Recommendations include more stringent investment diversification requirements (which are proposed or
  discussed in section III.J below), increased minimum liquidity levels

495The FSOC Proposed Recommendations asked the Commission to consider increasing minimum weekly liquidity requirements from 30% of total assets to 40% of total assets. The justification provided by FSOC was that most funds already have weekly liquidity in excess of this 40% minimum level. We do not consider this alternative for two reasons. There is no evidence that current liquidity requirements are inadequate. For example, the RSFI Study notes that the heightened redemption activity in the summer of 2011 did not place undue burdens on MMFs when they sold assets to meet redemption requests. No fund lost more than 50 basis points during this period nor did their shadow NAVs deviate significantly from amortized cost. See RSFI Study, supra note 21. Based on these considerations, we have preliminarily determined not to address additional minimum liquidity requirements. 496Even commenters in favor of a buffer showed concern that FSOC’s proposed buffer size of 1% or 3% may be inadequate. See, e.g., Federal Reserve Bank Presidents FSOC Comment Letter, supra note 38, at 5 (‘‘For a poorly diversified fund with portfolio assets that carry relatively more credit risk, a 3% (maximum) NAV buffer may not be sufficient.’’); Harvard Business School FSOC Comment Letter, supra note 24 (‘‘For a well￾diversified portfolio, we estimate that MMFs should hold 3 to 4% capital against unsecured paper issued by financial institutions, the primary asset held by MMFs. For more concentrated portfolios, we estimate that the amount of capital should be considerably higher.’’); Better Markets FSOC Comment Letter, supra note 67 (‘‘The primary shortcoming of [FSOC’s proposed buffer] is its low level of 1 or 3 percent. . . . [Any buffer] must be set at a level that is sufficient to cover all of these factors: Projected and historical losses; additional costs in the form of liquidity damages or government backstops; and investor psychology in the face of possible financial shocks or crises. [. . . .] Historical examples alone . . . indicate that MMF losses have risen as high as 3.9 percent. This serves only as a floor regarding actual potential losses, clearly indicating that the necessary buffer must be substantially higher than 3.9 percent.’’); Occupy the SEC FSOC Comment Letter, supra note 42 (arguing that FSOC’s proposed buffer does not go far enough in accounting for potential risks in a fund’s portfolio. Instead, the approach should be a two-layer buffer, with a first layer of up to 3% depending on the portfolio’s credit rating and a second layer to be sized according to the concentration of the portfolio). 497While the second alternative in the FSOC Proposed Recommendation only includes a NAV buffer of up to 1%, it was combined with a 3% MBR, which would effectively provide the fund with a 4% buffer before non-redeeming shareholders in the fund suffered losses. 498For example, beginning in September 2008, money market funds that chose to participate in the Treasury
Temporary Guarantee Program were required to file with the Treasury their weekly shadow price if it was below $0.9975. Our staff has reviewed the data, and found that through October 17, 2008, only three funds carried losses larger than four percent, and only five funds carried losses larger than three percent. Reported shadow prices excluded the value of any capital support agreements in place at the time, but in some cases included sponsor-provided capital contributions to the fund. Not every money market fund that applied to participate in the program reported shadow price data for every day during the period between September 1, 2008 and October 17, 2008. See also Patrick E. McCabe et al., The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds, at 31, Table 2 Federal Reserve Bank of New York Staff Report No. 564, July 2012 (providing additional statistical analysis of shadow price information reported by money market funds filing under the Treasury Temporary Guarantee Program). During that period there were over 800 money market funds based on Form N–SAR data. 499There is another potential adverse effect of requiring large NAV buffers for money market funds to address risk from systemic events. According to the FSOC Proposed Recommendations, outflows from institutional prime money market funds following the Lehman Brothers bankruptcy tended to be larger among money market funds with sponsors that were themselves under stress, indicating that investors redeemed shares when concerned about sponsors’ potential inability to support ailing funds. But these sponsors were the ones most likely to need funding dedicated to the buffer for other purposes. As a result, larger buffers may negatively affect other important activities of money market fund sponsors and cause them to fail faster. 500See FSOC Proposed Recommendations, supra note 114, at section V.B. 501See, e.g., Occupy the SEC FSOC Comment Letter, supra note 42. (which we have not proposed), and more robust disclosure requirements (which are generally proposed in sections III.F and III.G below).495 In the sections that follow, we discuss our evaluation of a NAV buffer requirement and an MBR requirement for money market funds. We also discuss comments FSOC received on these recommendations. For the reasons discussed below, the Commission is not pursuing these alternatives because we presently believe that the imposition of either a NAV buffer combined with a minimum balance at risk or a stand￾alone NAV buffer, while advancing some of our goals for money market fund reform, might prove costly for money market fund shareholders and could result in a contraction in the money market fund industry that could harm the short-term financing markets and capital formation to a greater degree than the proposals under consideration. a. NAV Buffer In considering a NAV buffer such as those recommended by FSOC as a potential reform option for money market funds, we
considered the benefits that such a buffer could provide, as well as its costs. Our evaluation of what could be a reasonable size for a NAV buffer also factored into our analysis of the advantages and disadvantages of these options. A buffer can be designed to satisfy different potential objectives. A large buffer could protect shareholders from losses related to defaults, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy. However, if complete loss absorption is the objective, a substantial buffer would be required, particularly given that money market funds can hold up to 5% of their assets in a single security.496 Alternatively, if a buffer were not intended for complete loss absorption, but rather designed primarily to absorb day-to-day variations in the market￾based value of money market funds’ portfolio holdings under normal market conditions, this would allow a fund to hold a significantly smaller buffer. Accordingly, the relatively larger buffers contemplated in the FSOC Proposed Recommendations 497 must have been designed to absorb daily price fluctuations as well as relatively large security defaults.498 In fact, a 3% buffer would accommodate all but extremely large losses, such as those experienced during the crisis. However, a buffer that was designed to absorb such large losses may be too high and too costly because the opportunity cost of this capital would be borne at all times even though it was likely to be drawn upon to any degree only rarely. Accordingly, a buffer of the size contemplated by either alternative in the FSOC Proposed Recommendations appears to be too costly to be practicable.499
i. Benefits of a NAV Buffer
The FSOC Proposed
Recommendations discusses a number of potential benefits that a NAV buffer could provide to money market funds and their investors, many of which we discuss below.500 It would preserve money market funds’ stable share price and potentially increase the stability of the funds, but would likely reduce the yields (and in the option that combines a 1% NAV buffer with an MBR, the liquidity) that money market funds currently offer to investors. Like our proposed reforms, the NAV buffer presents trade-offs between stability, yield, and liquidity. In effect, depending on the size of the buffer, a buffer could provide various levels of coverage of losses due to both the illiquidity and credit deterioration of portfolio securities. Money market funds that are supported by a NAV buffer would be more resilient to redemptions and credit or liquidity changes in their portfolios than stable value money market funds without a buffer (the current baseline).501 As long as the NAV buffer is funded at necessary levels, each $1.00 in money market fund shares is backed by $1.00 in fund assets, eliminating the incentive of shareholders to redeem at $1.00 when the market-based value of their shares is worth less. This reduces shareholders’ incentive to redeem shares quickly in response to small losses or concerns about the quality and liquidity of the money market fund portfolio, discussed in section II.B above, particularly during

502See, e.g., Harvard Business School FSOC Comment Letter, supra note 24 (‘‘Capital buffers also mean that there is an investor class that explicitly bears losses and has incentives to curb ex ante risk taking.’’). 503See, e.g., J.P. Morgan FSOC Comment Letter, supra note 342 ([W]here capital support is utilized as a first loss position upon liquidation, the level of capital can be tied to a MMF’s highest asset levels. This can result in a structure whereby, as redemptions accelerate and cause the unrealized loss per share to increase further, the amount of capital support available per share increases accordingly, providing further capital support to the remaining shareholders that do not redeem their shares.’’). 504See, e.g., Systemic Risk Council FSOC Comment Letter, supra note 363 (stating that capital is difficult to set and is imperfect, that ‘‘[g]iven the lack of data and impossibility of modeling future events, even [a 3% NAV buffer] runs the risk of being too high, or too low to protect the system in the future’’ and that ‘‘too little capital could provide a false sense of security in a crisis’’). See also infra note 512 and accompanying discussion. 505But see, e.g., U.S. Chamber Jan. 23, 2013 FSOC Comment Letter, supra note 248 (arguing that ‘‘a NAV buffer is likely to incentivize sponsors to reach for yield.’’); Vanguard FSOC Comment Letter, supra note 172 (‘‘Capital buffers are also likely to carry unintended consequences, as some funds may purchase riskier, higher-yielding securities to compensate for the reduction in yield. As a result, capital buffers are likely to provide investors with a false sense of security.’’); Comment Letter of Federated Investors, Inc. (Re: Alternative 3) (Jan. 25.
2013) (available in File No. FSOC–2012–0003) (‘‘If
anything, creating a junior class of equity puts earnings pressure on an MMF to alter its balance sheet to decrease near-term liquid assets to generate investment returns available from longer-term, higher risk investments in order to either build capital through retained earnings or to compensate investors who have invested in the new class of subordinated equity capital of the MMF.’’). 506The opportunity costs would represent the net present value of these forgone opportunities, an amount that cannot be estimated without relevant data about each firm’s productive opportunities. However, a number of FSOC commenters have already cautioned that a NAV buffer could make money market funds unprofitable. See, e.g., Angel FSOC Comment Letter, supra note 60 (stating that ‘‘in today’s low yield environment, even five basis points [of cost associated with a NAV buffer] would push most money market funds into negative yield territory.’’); BlackRock FSOC Comment Letter, supra note 204 (‘‘[A]ny capital over 0.75% will make the MMF product uneconomical for sponsors to offer.’’); Federated Investors Feb. 15 FSOC Comment Letter, supra note 192 (calculating that ‘‘prime MMFs would no longer be economically viable products’’ based on cost estimates provided by the ICI.). periods when the underlying portfolio has significant unrealized capital losses and the fund has not broken the buck. As long as the expected effect on the portfolio from potential losses is smaller than the NAV buffer, investors would be protected—they would continue to receive a stable value for their shares. A second benefit is that a NAV buffer would force money market funds to provide explicit capital support rather than the implicit and uncertain support that is permitted under the current regulatory baseline. This would require funds to internalize some of the cost of the discretionary capital support sometimes provided to money market funds, and to define in advance how losses will be allocated. In addition, a NAV buffer could reduce fund managers’ incentives to take risk beyond what is desired by fund shareholders because investing in less risky securities reduces the probability of buffer depletion.502 Another potential benefit is that a NAV buffer might provide counter￾cyclical capital to the money market fund industry. This is because once a buffer is funded it remains in place regardless of redemption activity. With a buffer, redemptions increase the relative size of the buffer because the same dollar buffer now supports fewer assets.503 As an example, consider a fund with a 1% NAV buffer that experiences a 25 basis point portfolio loss, which then triggers redemptions of 20% of its assets. The NAV buffer, as a proportion of fund assets and prior to any replenishment, will increase from 75 basis points after the loss to 93.75 basis points after the redemptions. This illustrates how the NAV buffer strengthens the ability of the fund to absorb further losses, reducing investors’
incentive to redeem shares. This result contrasts to the current regulatory baseline under rule 2a–7 where redemptions amplify the impact of losses by distributing them over a smaller investor base. For example, suppose a fund with a shadow price of $1.00 (i.e., no embedded losses) experiences a 25 basis point loss, which causes its shadow price to fall to $0.9975. If 20% of the fund’s shares are then redeemed at $1.00, its shadow price will fall to $0.9969, reflecting a loss which is 24% greater than the loss precipitating the redemptions. Finally, by allowing money market funds to absorb small losses in portfolio securities without affecting their ability to transact at a stable price per share, a NAV buffer may facilitate and protect capital formation in short-term financing markets during periods of modest stress. Currently, money market fund portfolio managers are limited in their ability to sell portfolio securities when markets are under stress because they have little ability to absorb losses without causing a fund’s shadow NAV to drop below $1.00 (or embed losses in the fund’s market-based NAV per share). As a result, managers tend to avoid trading when markets are strained, contributing to further illiquidity in the short-term financing markets in such circumstances. A NAV buffer should enable funds to absorb small losses and thus could reduce this tendency. Thus, by adding resiliency to money market funds and enhancing their ability to absorb losses, a NAV buffer may benefit capital formation in the long term. A more stable money market fund industry may produce more stable short￾term financing markets, which would provide more reliability as to the demand for short-term credit to the economy.
ii. Costs of a NAV Buffer
There are significant ongoing costs associated with a NAV buffer. They can be divided into direct costs that affect money market fund sponsors or investors and indirect costs that impact capital formation. In addition, a NAV buffer does not protect shareholders completely from the possibility of heightened rapid redemption activity during periods of market stress, particularly in periods where the buffer is at risk of depletion. As the buffer becomes impaired (or if shareholders believe the fund may suffer a loss that exceeds the size of its NAV buffer), shareholders have an incentive to redeem shares quickly because, once the buffer fails, the fund will no longer be able to maintain a stable value and shareholders will suddenly lose money on their investment.504 Such rapid severe redemptions could impair the fund’s business model and viability. Another possible implication of this facet of NAV buffers is that money market funds with buffers may avoid holding riskier short-term debt securities (like commercial paper) and instead hold a higher amount of low yielding investments like cash, Treasury securities, or Treasury repos. This could lead money market funds to hold more conservative portfolios than investors may prefer, given tradeoffs between principal stability, liquidity, and yield.505 The most significant direct cost of a NAV buffer is the opportunity cost associated with maintaining a NAV buffer. Those contributing to the buffer essentially deploy valuable scarce resources to maintain a NAV buffer rather than being able to use the funds elsewhere. The cost of diverting funds for this purpose represents a significant incremental cost of doing business for those providing the buffer funding. We cannot provide estimates of these opportunity costs because the relevant data is not currently available to the Commission.506 The second direct cost of a NAV buffer is the equilibrium rate of return that a provider of funding for a NAV buffer would demand. An entity that