
[Federal Register Volume 79, Number 157 (Thursday, August 14, 2014)]
[Rules and Regulations]
[Pages 47735-47983]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17747]



[[Page 47735]]

Vol. 79

Thursday,

No. 157

August 14, 2014

Part II





 Securities and Exchange Commission





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17 CFR Parts 230, 239, et al.





 Money Market Fund Reform; Amendments to Form PF; Final Rule

  Federal Register / Vol. 79 , No. 157 / Thursday, August 14, 2014 / 
Rules and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 270, 274 and 279

[Release No. 33-9616, IA-3879; IC-31166; FR-84; File No. S7-03-13]
RIN 3235-AK61


Money Market Fund Reform; Amendments to Form PF

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting amendments to the rules that govern money market 
mutual funds (or ``money market funds'') under the Investment Company 
Act of 1940 (``Investment Company Act'' or ``Act''). The amendments are 
designed to address money market funds' susceptibility to heavy 
redemptions in times of stress, 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, 
their benefits. The SEC is removing the valuation exemption that 
permitted institutional non-government money market funds (whose 
investors historically have made the heaviest redemptions in times of 
stress) to maintain a stable net asset value per share (``NAV''), and 
is requiring those 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'' NAV. The SEC also is adopting amendments that will give 
the boards of directors of money market funds new tools to stem heavy 
redemptions by giving them discretion to impose a liquidity fee if a 
fund's weekly liquidity level falls below the required regulatory 
threshold, and giving them discretion to suspend redemptions 
temporarily, i.e., to ``gate'' funds, under the same circumstances. 
These amendments will require all non-government money market funds to 
impose a liquidity fee if the fund's weekly liquidity level falls below 
a designated threshold, unless the fund's board determines that 
imposing such a fee is not in the best interests of the fund. In 
addition, the SEC is adopting amendments designed to make money market 
funds more resilient by increasing the diversification of their 
portfolios, enhancing their stress testing, and improving transparency 
by requiring money market funds to report additional information to the 
SEC and to investors. Finally, the amendments require investment 
advisers to certain large unregistered liquidity funds, which can have 
many of the same economic features as money market funds, to provide 
additional information about those funds to the SEC.

DATES: Effective Date: October 14, 2014.
    Compliance Dates: The applicable compliance dates are discussed in 
section III.N. of the Release titled ``Compliance Dates.''

FOR FURTHER INFORMATION CONTACT: Adam Bolter, Senior Counsel; Amanda 
Hollander Wagner, Senior Counsel; Andrea Ottomanelli Magovern, Senior 
Counsel; Erin C. Loomis, Senior Counsel; Kay-Mario Vobis, Senior 
Counsel; Thoreau A. Bartmann, Branch Chief; Sara Cortes, Senior Special 
Counsel; or Sarah G. ten Siethoff, Assistant Director, 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 adopting 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], 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\
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    \1\ Unless 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 Part 270.
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Table of Contents

I. Introduction
II. Background
    A. Role of Money Market Funds
    B. Certain Economic Features of Money Market Funds
    1. Money Market Fund Investors' Desire To Avoid Loss
    2. Liquidity Risks
    3. Valuation and Pricing Methods
    4. Investors' Misunderstanding About the Actual Risk of 
Investing in Money Market Funds
    C. Effects on Other Money Market Funds, Investors, and the 
Short-Term Financing Markets
    D. The Financial Crisis
    E. Examination of Money Market Fund Regulation Since the 
Financial Crisis
    1. The 2010 Amendments
    2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 
2011 and 2013
    3. Continuing Consideration of the Need for Additional Reforms
III. Discussion
    A. Liquidity Fees and Redemption Gates
    1. Analysis of Certain Effects of Fees and Gates
    2. Terms of Fees and Gates
    3. Exemptions to Permit Fees and Gates
    4. Amendments to Rule 22e-3
    5. Operational Considerations Relating to Fees and Gates
    6. Tax Implications of Liquidity Fees
    7. Accounting Implications
    B. Floating Net Asset Value
    1. Introduction
    2. Summary of the Floating NAV Reform
    3. Certain Considerations Relating to the Floating NAV Reform
    4. Money Market Fund Pricing
    5. Amortized Cost and Penny Rounding for Stable NAV Funds
    6. Tax and Accounting Implications of Floating NAV Money Market 
Funds
    7. Rule 10b-10 Confirmations
    8. Operational Implications of Floating NAV Money Market Funds
    9. Transition
    C. Effect on Certain Types of Money Market Funds and Other 
Entities
    1. Government Money Market Funds
    2. Retail Money Market Funds
    3. Municipal Money Market Funds
    4. Implications for Local Government Investment Pools
    5. Unregistered Money Market Funds Operating Under Rule 12d1-1
    6. Master/Feeder Funds--Fees and Gates Requirements
    7. Application of Fees and Gates to Other Types of Funds and 
Certain Redemptions
    D. Guidance on the Amortized Cost Method of Valuation and Other 
Valuation Concerns
    1. Use of Amortized Cost Valuation
    2. Other Valuation Matters
    E. Amendments to Disclosure Requirements
    1. Required Disclosure Statement
    2. Disclosure of Tax Consequences and Effect on Fund 
Operations--Floating NAV
    3. Disclosure of Transition to Floating NAV
    4. Disclosure of the Effects of Fees and Gates on Redemptions
    5. Historical Disclosure of Liquidity Fees and Gates
    6. Prospectus Fee Table
    7. Historical Disclosure of Affiliate Financial Support
    8. Economic Analysis
    9. Web site Disclosure
    F. Form N-CR
    1. Introduction
    2. Part B: Defaults and Events of Insolvency
    3. Part C: Financial Support
    4. Part D: Declines in Shadow Price

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    5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees 
and Gates
    6. Part H: Optional Disclosure
    7. Timing of Form N-CR
    8. Economic Analysis
    G. Amendments to Form N-MFP Reporting Requirements
    1. Amendments Related to Rule 2a-7 Reforms
    2. New Reporting Requirements
    3. Clarifying Amendments
    4. Public Availability of Information
    5. Operational Implications of the N-MFP Amendments
    H. Amendments to Form PF Reporting Requirements
    1. Overview of Proposed Amendments to Form PF
    2. Utility of New Information, Including Benefits, Costs, and 
Economic Implications
    I. Diversification
    1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's 
Five Percent Issuer Diversification Requirement
    2. ABS--Sponsors Treated as Guarantors
    3. The Twenty-Five Percent Basket
    J. Amendments to Stress Testing Requirements
    1. Overview of Current Stress Testing Requirements and Proposed 
Amendments
    2. Stress Testing Metrics
    3. Hypothetical Events Used in Stress Testing
    4. Board Reporting Requirements
    5. Dodd-Frank Mandated Stress Testing
    6. Economic Analysis
    K. Certain Macroeconomic Consequences of the New Amendments
    1. Effect on Current Investors in Money Market Funds
    2. Efficiency, Competition and Capital Formation Effects on the 
Money Market Fund Industry
    3. Effect of Reforms on Investment Alternatives, and the Short-
Term Financing Markets
    L. Certain Alternatives Considered
    1. Liquidity Fees, Gates, and Floating NAV Alternatives
    2. Alternatives in the FSOC Proposed Recommendations
    3. Alternatives in the PWG Report
    M. Clarifying Amendments
    1. Definitions of Daily Liquid Assets and Weekly Liquid Assets
    2. Definition of Demand Feature
    3. Short-Term Floating Rate Securities
    4. Second Tier Securities
    N. Compliance Dates
    1. Compliance Date for Amendments Related to Liquidity Fees and 
Gates
    2. Compliance Date for Amendments Related to Floating NAV
    3. Compliance Date for Rule 30b1-8 and Form N-CR
    4. Compliance Date for Diversification, Stress Testing, 
Disclosure, Form PF, Form N-MFP, and Clarifying Amendments
IV. Paperwork Reduction Act
    A. Rule 2a-7
    1. Asset-Backed Securities
    2. Retail and Government Funds
    3. Board Determinations--Fees and Gates
    4. Notice to the Commission
    5. Stress Testing
    6. Web Site Disclosure
    7. Total Burden for Rule 2a-7
    B. Rule 22e-3
    C. Rule 30b1-7 and Form N-MFP
    1. Discussion of Final Amendments
    2. Current Burden
    3. Change in Burden
    D. Rule 30b1-8 and Form N-CR
    1. Discussion of New Reporting Requirements
    2. Estimated Burden
    E. Rule 34b-1(a)
    F. Rule 482
    G. Form N-1A
    H. Advisers Act Rule 204(b)-1 and Form PF
    1. Discussion of Amendments
    2. Current Burden
    3. Change in Burden
V. Regulatory Flexibility Act Certification
VI. Update to Codification of Financial Reporting Policies
VII. Statutory Authority
Text of Rules and Forms

I. Introduction

    Money market funds are a type of mutual fund registered under the 
Investment Company Act and regulated pursuant to rule 2a-7 under the 
Act.\2\ Money market funds generally pay dividends that reflect 
prevailing short-term interest rates, are redeemable on demand, and, 
unlike other investment companies, seek to maintain a stable 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, 2014, there were approximately 559 money market 
funds registered with the Commission, and these funds collectively held 
over $3.0 trillion of assets.\4\
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    \2\ Money market funds are also sometimes called ``money market 
mutual funds'' or ``money funds.''
    \3\ See 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 NAV of $1.00, but 
a few seek to maintain a stable NAV of a different amount, e.g., 
$10.00. For convenience, throughout this Release, the discussion 
will simply refer to the stable NAV of $1.00 per share.
    \4\ Based 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.
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    Absent an exemption, as required by the Investment Company Act, all 
registered mutual funds must price and transact in their shares at the 
current NAV, calculated 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 (i.e., use 
a floating NAV).\5\ In 1983, the Commission codified an exemption to 
this requirement allowing money market funds 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 NAV 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 in its portfolio.\9\ 
Other types of mutual funds not regulated by rule 2a-7 generally must 
calculate their daily NAVs using market-based factors and cannot use 
penny rounding.
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    \5\ 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 Accounting Series Release No. 219, Valuation 
of Debt Instruments by Money Market Funds and Certain Other Open-End 
Investment Companies, Financial Reporting Codification (CCH) section 
404.05.a and .b (May 31, 1977) (``ASR 219''). We further discuss the 
use of amortized cost valuation by mutual funds in section III.B.5 
below.
    \6\ See 1983 Adopting Release, supra note 3. Section 6(c) of the 
Investment Company Act provides the Commission with broad authority 
to exempt persons, securities or transactions from any provision of 
the Investment Company Act, or the regulations thereunder, if, and 
to the extent that such exemption is 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. 
See Commission Policy and Guidelines for Filing of Applications for 
Exemption, SEC Release No. IC-14492 (Apr. 30, 1985).
    \7\ See current rule 2a-7(a)(2). See also supra note 5. 
Throughout this Release when we refer to a rule as it exists prior 
to any amendments we are making today it is described as a ``current 
rule'' while references to a rule as amended (or one that is not 
being amended today) are to ``rule.''
    \8\ See current rule 2a-7(a)(20).
    \9\ Today, money 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 place like other mutual funds, and use 
the amortized cost method so that they need not strike a daily 
market-based NAV to facilitate intra-day transactions. See infra 
section III.A.1.a.
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    When the Commission initially established the regulatory framework 
allowing money market funds to

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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 focused on minimizing dilution of assets and returns for 
shareholders.\10\ At that time, the Commission was persuaded that 
deviations of a magnitude that would cause material dilution generally 
would not occur given the risk-limiting conditions of the exemptive 
rule.\11\ As discussed throughout this Release, our historical 
experience with these funds, and the events of the 2007-2009 financial 
crisis,\12\ has led us to re-evaluate the exemptive relief provided 
under rule 2a-7, including the exemption from the statutory floating 
NAV for some money market funds.
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    \10\ 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.'').
    \11\ See id., at nn.41-42 and accompanying text (noting that 
witnesses from the original money market fund exemptive order 
hearings testified 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).
    \12\ Throughout this Release, unless indicated otherwise, when 
we use the term ``financial crisis'' we are referring to the 
financial crisis that took place between 2007 and 2009.
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    Under rule 2a-7, 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. In exchange for the ability to rely on the exemptions 
provided by rule 2a-7, money market funds are subject to conditions 
designed to limit deviations between the fund's $1.00 stable share 
price and the market-based NAV of the fund's portfolio.\13\ Rule 2a-7 
requires that money market funds maintain a significant amount of 
liquid assets and invest in securities that meet the rule's credit 
quality, maturity, and diversification requirements.\14\ For example, a 
money market fund's portfolio securities must meet certain credit 
quality standards, such as posing minimal credit risks.\15\ The rule 
also places restrictions 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, 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.\16\ Money market funds also 
must maintain sufficient liquidity to meet reasonably foreseeable 
redemptions, 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, as 
defined under the rule.\17\ 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.\18\
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    \13\ Throughout 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.
    \14\ See current rule 2a-7(c)(2), (3), (4), and (5).
    \15\ See current rule 2a-7(a)(12), (c)(3)(i).
    \16\ Current rule 2a-7(c)(2).
    \17\ See current rule 2a-7(c)(5). As we discussed when we 
amended rule 2a-7 in 2010, the 10% daily liquid asset requirement 
does not apply to tax-exempt funds. See Money Market Fund Reform, 
Investment Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 
10060 (Mar. 4, 2010)] (``2010 Adopting Release''). See infra section 
III.E.3.
    \18\ See current rule 2a-7(c)(4). Because of limited 
availability of the securities in which they invest, tax-exempt 
funds have different diversification requirements under rule 2a-7 
than other money market funds.
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    Rule 2a-7 also includes certain procedural standards 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'') \19\ 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 taken 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'').\20\
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    \19\ See current rule 2a-7(c)(8)(ii)(A).
    \20\ See current 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. Current 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 NAV. See rule 2a-7(c)(1).
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    Different types of money market funds have been introduced to meet 
the different needs of money market fund investors. Historically, most 
investors have invested in ``prime money market funds,'' which 
generally hold a variety of taxable short-term obligations issued by 
corporations and banks, as well as repurchase agreements and asset-
backed commercial paper.\21\ ``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 their 
holdings to 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.\22\
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    \21\ See Investment Company Institute, 2014 Investment Company 
Fact Book, at 196, Table 37 (2014), available at http://www.ici.org/pdf/2014_factbook.pdf.
    \22\ Unless the context indicates otherwise, references to 
``prime funds'' throughout this Release include funds that are often 
referred to as ``tax-exempt'' or ``municipal'' funds. We discuss the 
particular features of such tax-exempt funds and why they are 
included in our reforms in detail in section III.C.3.
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    We first 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.\23\ We

[[Page 47739]]

then discuss money market funds' experience during the 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 2011 and 2013 U.S. debt ceiling impasses.
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    \23\ Throughout this Release, we generally refer to ``short-term 
financing markets'' to describe the markets for short-term financing 
of corporations, banks, and governments.
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    We used the analyses available to us, including the critically 
important analyses contained in the report responding to certain 
questions posed by Commissioners Aguilar, Paredes, and Gallagher 
(``DERA Study''),\24\ in designing the reform proposals that we issued 
in 2013 for additional regulation of money market funds.\25\ The 2013 
proposal sought to address certain features in money market funds that 
can make them susceptible to heavy redemptions, by providing money 
market funds with better tools to manage and mitigate potential 
contagion from high levels of redemptions, increasing the transparency 
of their risks, and improving risk sharing among investors, and also to 
preserve the ability of money market funds to function as an effective 
and efficient cash management tool for investors.\26\
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    \24\ See 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. The Division of Risk, Strategy, and Financial Innovation 
(``RSFI'') is now known as the Division of Economic and Risk 
Analysis (``DERA''), and accordingly we are no longer referring to 
this study as the ``RSFI Study'' as we did in the Proposing Release, 
but instead as the ``DERA Study.''
    \25\ See Money Market Fund Reform; Amendments to Form PF, 
Release Nos. 33-9408; IA-3616; IC-30551 (June 5, 2013) [78 FR 36834, 
(June 19, 2013)] (``Proposing Release'').
    \26\ The 2013 proposal also included amendments that would apply 
under each alternative, with additional changes to money market fund 
disclosure, diversification limits, and stress testing, among other 
reforms. See Proposing Release, supra note 25. We discuss these 
amendments below.
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    We received over 1,400 comments \27\ on the proposal from a variety 
of interested parties including money market funds, investors, banks, 
investment advisers, government representatives, academics, and 
others.\28\ As discussed in greater detail in each section of this 
Release below, these commenters expressed a diversity of views. Many 
commenters expressed concern about the consequences of requiring a 
floating NAV for certain money market funds, suggesting, among other 
reasons, that it was a significant reform that would remove one of the 
most desirable features of these funds, and would impose numerous costs 
and operational burdens. However, others expressed support, noting that 
it was a targeted solution aimed at curbing the risks associated with 
the money market funds most susceptible to destabilizing runs. Most 
commenters supported requiring the imposition of liquidity fees and 
redemption gates in certain circumstances, suggesting that they would 
prevent runs at a minimal cost. However, commenters also noted that 
fees and gates alone would not resolve certain of the features of money 
market funds that can incentivize heavy redemptions. Many commenters 
opposed combining the two alternatives into a single package, arguing 
that requiring money market funds to implement both reforms could 
decrease the utility of money market funds to investors. Commenters 
generally supported many of the other reforms we proposed, such as 
enhanced disclosure, new portfolio reporting requirements for large 
unregistered liquidity funds, and amendments to fund diversification 
requirements.
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    \27\ Of these, more than 230 were individualized letters, and 
the rest were one of several types of form letters.
    \28\ Unless otherwise stated, all references to comment letters 
in this Release are to letters submitted on the Proposing Release in 
File No. S7-03-13 and are available at http://www.sec.gov/comments/s7-03-13/s70313.shtml.
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    Today, after consideration of the comments received, we are 
removing the valuation exemption that permits institutional non-
government money market funds (whose investors have historically made 
the heaviest redemptions in times of market stress) to maintain a 
stable NAV, and are requiring those funds to sell and redeem their 
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'' NAV. We also are adopting 
amendments that will give the boards of directors of money market funds 
new tools to stem heavy redemptions by giving them discretion to impose 
a liquidity fee of no more than 2% if a fund's weekly liquidity level 
falls below the required regulatory amount, and are giving them 
discretion to suspend redemptions temporarily, i.e., to ``gate'' funds, 
under the same circumstances. These amendments will require all non-
government money market funds to impose a liquidity fee of 1% if the 
fund's weekly liquidity level falls below 10% of total assets, unless 
the fund's board determines that imposing such a fee is not in the best 
interests of the fund (or that a higher fee up to 2% or a lower fee is 
in the best interests of the fund). In addition, we are adopting 
amendments designed to make money market funds more resilient by 
increasing the diversification of their portfolios, enhancing their 
stress testing, and increasing transparency by requiring them to report 
additional information to us and to investors. Finally, the amendments 
require investment advisers to certain large unregistered liquidity 
funds, which can have similar economic features as money market funds, 
to provide additional information about those funds to us.\29\
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    \29\ We note that we have consulted and coordinated with the 
Consumer Financial Protection Bureau regarding this final rulemaking 
in accordance with section 1027(i)(2) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.
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II. Background

A. Role of Money Market Funds

    As we discussed in the Proposing Release, 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.\30\ Money market funds' 
ability to maintain a stable share price contributes to their 
popularity. The funds' stable share price facilitates their 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.\31\ Due to their 
popularity with investors, money market fund assets have grown over 
time, providing them with substantial amounts of cash to invest. As a 
result, money market funds have become an important source of financing 
in certain segments of the short-term financing markets. As a result, 
rule 2a-7, in addition to

[[Page 47740]]

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.\32\
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    \30\ See Proposing Release supra note 25, at section II.A. 
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 money market fund managers' expertise. See infra 
notes 63-64 and accompanying text.
    \31\ See, e.g., Comment Letter of UBS Global Asset Management 
(Sept. 16, 2013) (``UBS Comment Letter'') (``Historically, money 
funds have offered both retail and institutional investors a means 
of achieving a market rate of return on short-term investment 
without having to sacrifice stability of principal. The stable NAV 
per share also allows investors the convenience of not having to 
track immaterial gains and losses, and helps facilitate investment 
processes, such as sweep account arrangements . . .'').
    \32\ See, e.g., Comment Letter of the Investment Company 
Institute (Sept. 17, 2013) (``ICI Comment Letter'') (``Today over 61 
million retail investors, as well as corporations, municipalities, 
and institutional investors rely on the $2.6 trillion money market 
fund industry as a low cost, efficient cash management tool that 
provides a high degree of liquidity, stability of principal value, 
and a market based yield.'').
---------------------------------------------------------------------------

    In order for money market funds to use techniques to value and 
price their shares generally not permitted to other mutual funds, rule 
2a-7 imposes additional protective conditions on money market 
funds.\33\ As discussed in the Proposing Release, these additional 
conditions are designed to make money market funds' use of the 
valuation and 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.
---------------------------------------------------------------------------

    \33\ See, e.g., ICI Comment Letter (``Money market funds owe 
their success, in large part to the stringent regulatory 
requirements to which they are subject under federal securities 
laws, including most notably Rule 2a-7 under the Investment Company 
Act.'').
---------------------------------------------------------------------------

    We understand, and considered when developing the final amendments 
we are adopting 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 
designed these amendments to make the funds more resilient, as 
discussed throughout this Release, while preserving, to the extent 
possible, the benefits of money market funds. But as discussed in 
section III.K.1 below, we recognize that these reforms may make certain 
money market funds less attractive to some investors.

B. Certain Economic Features of Money Market Funds

    As discussed in detail in the Proposing Release, the combination of 
several features of money market funds can create an incentive for 
their shareholders to redeem shares heavily in periods of market 
stress. We discuss these factors below, as well as the harm that can 
result from such heavy redemptions in money market funds.
1. Money Market Fund Investors' Desire To Avoid Loss
    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 less tolerant 
of incurring even small losses, even at the cost of forgoing higher 
expected returns.\34\ Such investors may be loss averse for many 
reasons, including general risk tolerance, legal or investment 
restrictions, or short-term cash needs. These overarching 
considerations may create incentives for money market fund investors to 
redeem and would be expected to persist, even if the other incentives 
discussed below, such as those created by money market fund valuation 
and pricing, are addressed.
---------------------------------------------------------------------------

    \34\ See, e.g., PWG Comment Letter of Investment Company 
Institute (Apr. 19, 2012) (available in File 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 decisions and 64% ranked safety of 
principal as the ``primary driver'' of their money market fund 
investment).
---------------------------------------------------------------------------

    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 DERA 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.\35\
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    \35\ One 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/files/Documents/Centers/CFP/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 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'').
---------------------------------------------------------------------------

2. Liquidity Risks
    When investors begin to redeem a substantial amount of shares, a 
fund can experience a loss of liquidity. Money market funds, which 
offer investors the ability to redeem shares upon demand, often will 
first use internal liquidity to satisfy substantial redemptions. 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.\36\ And because the secondary 
market for many portfolio securities is not deeply liquid, funds may 
have to sell securities at a discount from their amortized cost value, 
or even at fire-sale prices,\37\ thereby incurring additional losses 
that may have been avoided if the funds had sufficient internal 
liquidity.\38\ This alone 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 the fund is left with fewer 
liquid assets, necessitating the sale of less liquid assets, 
potentially at a discount, to meet further redemption requests.\39\ 
Knowing that such liquidity costs may occur, money market fund

[[Page 47741]]

investors may have an incentive to redeem quickly in times of stress to 
avoid realizing these potential liquidity costs, leaving remaining 
shareholders to bear these costs.
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    \36\ See, e.g., Comment Letter of Goldman Sachs Asset Management 
L.P. (Sept. 17, 2013) (``Goldman Sachs Comment Letter'') (``A money 
fund faced with heavy redemptions could suffer a loss of liquidity 
that would force the untimely sale of portfolio securities at 
losses.''). We note that, although the Investment Company Act 
permits a money market fund to borrow money from a bank, see section 
18(f) of the Investment Company Act, 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.''
    \37\ Money market funds normally meet redemptions by disposing 
of their more liquid assets, rather than selling a pro rata slice of 
all their holdings. See, e.g., 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'').
    \38\ The DERA 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. DERA Study, supra note 24, 
at 37.
    \39\ See, e.g., Comment Letter of MSCI Inc. (Sept. 17, 2013) 
(``MSCI Comment Letter'') (``The need to provide liquidity provides 
another set of incentives, as early redeemers may exhaust the fund's 
internal sources of liquidity (cash on hand, cash from maturing 
securities, etc.), leaving possibly distressed security sales as the 
only source of liquidity for late redeemers.'').
---------------------------------------------------------------------------

3. 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 for their entire portfolios. 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 in its 
portfolio, and thus to maintain a stable $1.00 share price under most 
market 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 when market conditions shift 
due to changes in interest rates, credit risk, and liquidity.\40\ 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.\41\ Today, unless the fund ``breaks 
the buck,'' market value differences are reflected only in a fund's 
shadow price, and not the share price at which the fund satisfies 
purchase and redemption transactions.
---------------------------------------------------------------------------

    \40\ 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 most portfolio securities 
such as commercial paper, repos, and certificates of deposit are not 
actively traded in a secondary market. Accordingly, most money 
market fund portfolio securities are valued largely through ``mark-
to-model'' or ``matrix pricing'' estimates, which often use market 
inputs, as well as other factors in their pricing models. See 
Proposing Release, supra note 25, at n.27. See also infra section 
III.D.2.
    \41\ The credit quality standards in rule 2a-7 are designed to 
minimize the likelihood of such a default or credit deterioration.
---------------------------------------------------------------------------

    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. But 
if 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 
reversed 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 and the tax 
requirements for these funds.\42\
---------------------------------------------------------------------------

    \42\ In practice, a money market fund cannot use future 
portfolio earnings to restore its shadow price because Subchapter M 
of the Internal Revenue Code requires money market funds to 
distribute virtually all of their earnings to investors. These tax 
requirements can cause permanent reductions in shadow prices to 
persist over time, even if a fund's other portfolio securities are 
otherwise unimpaired.
---------------------------------------------------------------------------

    If a money market fund's shadow price deviates far enough from its 
stable $1.00 share price, investors may have an economic incentive to 
redeem their shares. For example, investors may have an incentive to 
redeem shares when a fund's shadow price is less than $1.00.\43\ 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 the remaining, 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.\44\ In times of stress, this 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.\45\
---------------------------------------------------------------------------

    \43\ See, e.g., Comment Letter of the Systemic Risk Council 
(Sept. 16, 2013) (``Systemic Risk Council Comment Letter'') (``If 
the fund's assets are worth less than a $1.00--and you can redeem at 
$1.00--the remaining shareholders are effectively paying first 
movers to run. This embeds permanent losses in the fund for the 
remaining holders.'').
    \44\ See, e.g., MSCI Comment Letter (``[W]hen a fund's market-
based NAV falls significantly below its stable NAV, an early 
redeemer not only benefits from this price discrepancy, but also 
puts downward pressure on the market-based NAV for the remaining 
investors (as the realized losses on the fund's assets must be 
shared across a smaller investor base).'').
    \45\ For an example illustrating this incentive, see Proposing 
Release, supra note 25, at text following n.31.
---------------------------------------------------------------------------

    We note that although defaults in assets held by money market funds 
are low probability events, the resulting losses can lead to a fund 
breaking the buck 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.\46\ And as discussed further in section III.C.2.a of this 
Release, money market funds hold significant numbers of such larger 
positions.\47\
---------------------------------------------------------------------------

    \46\ For a detailed discussion of the financial crises, see 
generally DERA Study, supra note 24, at section 4.A.
    \47\ The Financial Stability Oversight Council (``FSOC''), 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., Comment Letter of Harvard Business School 
Professors Samuel Hanson, David Scharfstein, & Adi Sunderam (Jan. 8, 
2013) (``Harvard Business School FSOC Comment Letter'') (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'').
---------------------------------------------------------------------------

4. Investors' Misunderstanding About the Actual Risk of Investing in 
Money Market Funds
    Lack of investor understanding and lack of complete transparency 
concerning the risks posed by particular money market funds can 
contribute to heavy redemptions during periods of stress. This lack of 
investor understanding and complete transparency can come from several 
different sources.
    First, 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.\48\ 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. Investors may respond by initiating 
redemptions to avoid potential rather than actual losses in a ``flight 
to transparency.\49\''

[[Page 47742]]

Because 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 
the same or highly correlated positions.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., DERA Study, supra note 24, 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''). As discussed in section III.E.9.c, a number of money 
market funds have begun voluntarily disclosing information about 
their portfolio assets, liquidity, and shadow NAV on a more frequent 
basis than required, in part to address investor concerns regarding 
the staleness of information about fund holdings. The final 
amendments we are adopting today include a number of regulatory 
requirements designed to enhance transparency of money market risks, 
including daily disclosure of liquid assets, shareholder flows, 
current NAV and shadow NAV on fund Web sites, and elimination of the 
60 day lag on public disclosure of Form N-MFP data. See infra 
section III.G.1.
    \49\ See 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.'').
    \50\ See Comment Letter of Federal Reserve of Boston (Sept. 12, 
2013) (``Boston Federal Reserve Comment Letter'') (``Investors in 
other MMMFs may in turn run if they perceive that their funds are 
similar (e.g. similar portfolio composition, similar maturity 
profile, similar investor concentration) to the fund that 
experienced the initial run.''); see infra notes 58-59 and 
accompanying text. Based on Form N-MFP data as of February 28, 2014, 
there were 27 different issuers whose securities were held by more 
than 100 prime money market funds.
---------------------------------------------------------------------------

    Second, money market funds' sponsors on a number of occasions have 
voluntarily chosen to provide financial support for their money market 
funds.\51\ The reasons that sponsors have done so include keeping a 
fund from re-pricing below its stable value, protecting the sponsors' 
reputations or brands, and increasing a fund's shadow price if its 
sponsor believes investors avoid funds that have low shadow prices. 
Prior to the changes that we are adopting today, funds were not 
required to disclose instances of sponsor support outside of financial 
statements; as a result, sponsor support has not been fully transparent 
to investors and this, in turn, may have lessened some investors' 
understanding of the risk in money market funds.\52\
---------------------------------------------------------------------------

    \51\ In the Proposing Release we requested comment on amending 
rule 17a-9 (which allows for discretionary support of money market 
funds by their sponsors and other affiliates) to potentially 
restrict the practice of sponsor support, but did not propose any 
specific changes. Most commenters who addressed our request for 
comment on amending rule 17a-9 opposed making any changes to rule 
17a-9, arguing that the transactions facilitated by the rule are in 
the best interests of the shareholders. See Comment Letter of the 
Investment Company Institute (Sept 17, 2013) (``ICI Comment 
Letter''); Comment Letter of the Dreyfus Corporation (Sept. 17, 
2013) (``Dreyfus Comment Letter''); Comment Letter of American Bar 
Association Business Law Section (Sept. 30, 2013) (``ABA Business 
Law Comment Letter''). One commenter supported amending rule 17a-9, 
arguing that these transactions can result in shareholders having 
unjustified expectations of future support being provided by 
sponsors. Comment Letter of HSBC Global Asset Management (Sept. 17, 
2013) (``HSBC Comment Letter''). In light of these comments, we are 
not amending rule 17a-9 at this time. See also infra section 
III.E.7.a.
    \52\ See, e.g., HSBC Comment Letter (``[A] level of ambiguity 
about who owns the risk when investing in a MMF has developed 
amongst some investors. Some investors have been encouraged to 
expect sponsors to support their MMFs. Such expectations cannot be 
enforced, since managers are under no obligation to support their 
funds, and consequently leads some investors to misunderstand and 
misprice the risks they are subject to.'') (emphasis in original).
---------------------------------------------------------------------------

    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 support).\53\ 
But the financial crisis is not the only instance in which some money 
market funds have come under strain, although it is unique in the 
number of money market funds that requested or received sponsor 
support.\54\ As noted in the Proposing Release, since 1989, 11 other 
financial events have been sufficiently adverse that certain fund 
sponsors chose to provide support or to seek staff no-action assurances 
in order to provide support, potentially affecting 158 different money 
market funds.\55\
---------------------------------------------------------------------------

    \53\ Our 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 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. 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. 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 not necessary. See, e.g., Comment 
Letter of the Dreyfus Corporation (Aug. 7, 2012) (available in File 
No. 4 619) (``Dreyfus III Comment Letter'') (stating that no-action 
relief to provide sponsor support ``was sought by many money funds 
as a precautionary measure'').
    \54\ See Moody's Investors Service Special Comment, Sponsor 
Support Key to Money Market Funds (Aug. 9, 2010) (``Moody's Sponsor 
Support Report''). Interest rate changes, issuer defaults, and 
credit rating downgrades can lead to significant valuation losses 
for individual funds.
    \55\ See Proposing Release, supra note 25, at section II.B.3. We 
note, as discussed more fully in the Proposing Release, 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 and because sponsor support 
prevented any funds from breaking the buck.
---------------------------------------------------------------------------

    Finally, the government assistance provided to money market funds 
during the financial crisis may have contributed to investors' 
perceptions that the risk of loss in money market funds is low.\56\ If 
investors perceive that money market funds have an implicit government 
guarantee, they may believe that money market funds are safer 
investments than they in fact are and may underestimate the potential 
risk of loss.\57\
---------------------------------------------------------------------------

    \56\ For a further discussion of issues related to money market 
fund sponsor support and its effect on investors' perception, see 
Proposing Release, supra note 25, at nn.60-61 and accompanying text.
    \57\ See, e.g., HSBC Comment Letter.
---------------------------------------------------------------------------

C. Effects on Other Money Market Funds, Investors, and the Short-Term 
Financing Markets

    In this section, we discuss how stress at one money market fund can 
be positively correlated across money market 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.\58\ Any resulting decline 
in the shadow prices of other funds could, in turn, lead to a contagion 
effect that could spread even further as investors run from money 
market funds in general. For example, some 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 shadow prices.\59\
---------------------------------------------------------------------------

    \58\ See 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 37; Markus 
Brunnermeier, et al., The Fundamental Principles of Financial 
Regulation, in Geneva Reports on the World Economy 11 (2009).
    \59\ See, e.g., Boston Federal Reserve Comment Letter 
(discussing the relative homogeneity of money market funds holdings, 
and noting that as of the end of June 2013, the 20 largest corporate 
issuers accounted for approximately 44 percent of prime money market 
funds' assets); Comment Letter of Americans for Financial Reform 
(Sept. 17, 2013) (``Americans for Fin. Reform Comment Letter'') 
(discussing a study estimating that 97 percent of non-governmental 
assets of prime money market funds consists of financial sector 
commercial paper); 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.'').
---------------------------------------------------------------------------

    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 fund that could 
own the security (e.g., redeeming from all prime funds).\60\ A

[[Page 47743]]

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.
---------------------------------------------------------------------------

    \60\ See, e.g., Wermers Study, supra note 35 (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.'').
---------------------------------------------------------------------------

    As was experienced by money market funds during the financial 
crisis, 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 the short-term financing 
markets.\61\ Indeed, money market funds had experienced steady growth 
before the financial crisis, driven in part by growth in the size of 
institutional cash pools, which grew from under $100 billion in 1990 to 
almost $4 trillion just before the financial crisis.\62\ Money market 
funds' suitability for cash management operations also has made them 
popular among corporate treasurers, municipalities, and other 
institutional investors, some of which 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 the expertise of money market fund managers.\63\ For 
example, according to one survey, approximately 16% of organizations' 
short-term investments were allocated to money market funds (and, 
according to this survey, 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 expired at the end of 2012).\64\
---------------------------------------------------------------------------

    \61\ See infra section III.K.3 for statistics on the types and 
percentages of outstanding short-term debt obligations held by money 
market funds.
    \62\ See Proposing Release supra note 25, at nn.70-71.
    \63\ See, 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'') (Kathryn L. Hewitt, 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.''); see also Proposing 
Release supra note 25, at n.72.
    \64\ See 2013 Association for Financial Professionals Liquidity 
Survey, at 15, available at http://www.afponline.org/liquidity 
(subscription required) (``2013 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, almost 30% in the 2011 survey, and 16% in the 2012 
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 50% of organizations' short-term 
investment allocations in the 2013 survey. The 2012 survey noted 
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 in which 
assets have remained despite the expiration of the insurance. See 
2013 AFP Liquidity Survey. As of February 28, 2014, approximately 
67% 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.
---------------------------------------------------------------------------

    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 other markets. 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.\65\ 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 financial crisis illustrates the impact of heavy 
redemptions, as we discuss in more detail below.
---------------------------------------------------------------------------

    \65\ See supra text preceding and accompanying note 36. 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 as a stressed fund 
may be unlikely to be receiving significant investor purchases 
during such a time.
---------------------------------------------------------------------------

    Heavy redemptions in money market funds may disproportionately 
affect slow-moving shareholders because, as discussed further below, 
redemption data from the financial crisis show that some institutional 
investors are likely to redeem from distressed money market funds far 
more quickly than other investors and to redeem a greater percentage of 
their prime fund holdings.\66\ This likely is because some 
institutional investors generally have more capital at stake, along 
with sophisticated tools and professional staffs to monitor risk. 
Because of their proportionally larger investments, just a few 
institutional investors submitting redemption requests may have a 
significant effect on a money market fund's liquidity, while it may 
take many more retail investors, with their typically smaller 
investments sizes, to cause similar negative consequences. 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 to obtain liquidity to satisfy redemption requests. In both 
cases, redemptions leave the fund's portfolio more likely to lose 
value, to the detriment of slower-to-redeem investors.\67\ 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.\68\
---------------------------------------------------------------------------

    \66\ See Money Market Fund Reform, Investment Company Act 
Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] 
(``2009 Proposing Release''), at nn.46-48 and 178 and accompanying 
text.
    \67\ See, e.g., DERA Study, supra note 24, at 10 (``Investor 
redemptions during the 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.'').
    \68\ As 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 Department 
of Treasury's (``Treasury Department'') temporary guarantee program 
for money market funds, which may have prevented heavier shareholder 
redemptions among generally slower-to-redeem retail investors. See 
infra note 80.
---------------------------------------------------------------------------

D. The Financial Crisis

    The financial crisis in many respects demonstrates the various 
considerations discussed above in sections B and C, including the 
potential implications and harm associated with heavy redemption

[[Page 47744]]

from money market funds.\69\ On September 16, 2008, the day after 
Lehman Brothers Holdings Inc. announced its bankruptcy, The Reserve 
Fund announced that 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.\70\ At the same time, there was turbulence in the market for 
financial sector securities as a result of other financial company 
stresses, including, for example, the near failure of American 
International Group (``AIG''), whose commercial paper was held by many 
prime money market funds.\71\
---------------------------------------------------------------------------

    \69\ See generally DERA Study, supra note 24, at section 3. See 
also 2009 Proposing Release supra note 66, at section I.D.
    \70\ See also 2009 Proposing Release, supra note 66, 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. See, e.g., 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). A class 
action suit brought on behalf of the Reserve Fund shareholders was 
settled in 2013. See Nate Raymond, Settlement Reached in Reserve 
Primary Fund Lawsuit, Reuters (Sept. 7, 2013) available at http://www.reuters.com/article/2013/09/07/us-reserveprimary-lawsuit-idUSBRE98604Q20130907.
    \71\ In addition to Lehman Brothers and AIG, there were other 
stresses in the market as well, as discussed in greater detail in 
the DERA Study. See generally DERA Study, supra note 24, at section 
3.
---------------------------------------------------------------------------

    Heavy redemptions in the Reserve Primary Fund were followed by 
heavy redemptions from other Reserve money market funds,\72\ and soon 
other institutional prime money market funds also began to experience 
heavy redemptions.\73\ During the week of September 15, 2008 (the week 
that Lehman Brothers announced it was filing for bankruptcy), investors 
withdrew approximately $300 billion from prime money market funds or 
14% of the assets in those funds.\74\ 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.\75\ 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.\76\
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    \72\ See 2009 Proposing Release, supra note 66, at section I.D.
    \73\ See DERA Study, supra note 24, at section 3.
    \74\ See Investment Company Institute, Report of the Money 
Market Working Group, at 62 (Mar. 17, 2009), available athttp://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 financial 
crisis was over 64% of the fund's assets.
    \75\ See 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/~/media/
projects/bpea/spring%202009/2009a--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.
    \76\ See 2009 Proposing Release, supra note 66, 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). 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 financial 
crisis. See, e.g., Comment Letter of Investment Company Institute 
(Jan. 24, 2013) (available in File No. FSOC-2012-0003) (``ICI Jan. 
24 FSOC Comment Letter'').
---------------------------------------------------------------------------

    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 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.\77\ The aggregate level of retail 
investor redemption activity, in contrast, was not particularly high 
during September and October 2008, as shown in Figure 1.\78\
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    \77\ As discussed in section III.C.1 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 have lower credit default risk and greater liquidity 
than non-government portfolio securities typically held by money 
market funds.
    \78\ We 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, which does not necessarily correlate with how we define 
retail funds in this Release.

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[[Page 47745]]

[GRAPHIC] [TIFF OMITTED] TR14AU14.000

    On September 19, 2008, the U.S. Department of the Treasury 
(``Treasury Department'') 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.\79\ These programs successfully slowed 
redemptions in prime money market funds and provided additional 
liquidity to money market funds. As discussed in the Proposing Release, 
the disruptions to the short-term markets detailed above could have 
continued for a longer period of time but for these programs.\80\
---------------------------------------------------------------------------

    \79\ See 2009 Proposing Release, supra note 66, 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.
    \80\ See Proposing Release supra note 25 at n.91.
---------------------------------------------------------------------------

E. Examination of Money Market Fund Regulation Since the Financial 
Crisis

1. The 2010 Amendments
    After the events of the financial crisis, in March 2010, we adopted 
a number of amendments to rule 2a-7.\81\ These amendments were designed 
to make money market funds more resilient by reducing the interest 
rate, credit, and liquidity risks of fund asset portfolios.\82\ More 
specifically, the amendments decreased money market funds' credit risk 
exposure by further restricting the amount of lower quality securities 
that funds can hold.\83\ The amendments, for the first time, also 
required that money market funds maintain liquidity buffers in the form 
of specified levels of daily and weekly liquid assets.\84\ These 
liquidity buffers provide a source of internal liquidity and are 
intended to help funds withstand high levels of redemptions during 
times of market illiquidity. The amendments also reduce money market 
funds' exposure to interest rate risk by decreasing the maximum 
weighted average maturities of fund portfolios from 90 to 60 days.\85\
---------------------------------------------------------------------------

    \81\ 2010 Adopting Release, supra note 17.
    \82\ Commenters have noted the importance of the 2010 reforms in 
enhancing the resiliency of money market funds. See, e.g., Comment 
Letter of Invesco Ltd. (Sept. 17, 2013) (``Invesco Comment Letter'') 
(``In evaluating the reforms contained in the Proposed Rule it is 
also important to take into account the significant impact of the 
reforms implemented by the Commission in 2010, which amounted to a 
comprehensive overhaul of the regulatory framework governing 
MMFs.'').
    \83\ Specifically, 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 current rule 2a-7(a)(24) (defining ``second tier 
security''); current rule 2a-7(a)(12) (defining ``eligible 
security''); current rule 2a-7(a)(23) (defining ``requisite 
NRSROs''). Today, in a companion release, we are also re-proposing 
to remove NRSRO rating references from rule 2a-7 and Form N-MFP.
    \84\ The 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 current 
rule 2a-7(c)(5)(ii) and (iii).
    \85\ The 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 
current rule 2a-7(c)(2)(ii) and (iii).
---------------------------------------------------------------------------

    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 
Commission monthly information on their portfolio holdings using Form 
N-MFP.\86\ 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 also 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.\87\
---------------------------------------------------------------------------

    \86\ See current rule 30b1-7.
    \87\ See current rule 2a-7(c)(12).
---------------------------------------------------------------------------

    Finally, the 2010 amendments require money market funds to undergo 
stress tests under the direction of the board of

[[Page 47746]]

directors on a periodic basis.\88\ 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.\89\
---------------------------------------------------------------------------

    \88\ See current rule 2a-7(c)(10)(v).
    \89\ See 2009 Proposing Release, supra note 66, at section 
II.C.3.
---------------------------------------------------------------------------

2. The Eurozone Debt Crisis and U.S. Debt Ceiling Impasses of 2011 and 
2013
    Several significant market events since our 2010 reforms have 
permitted us to evaluate the efficacy of those reforms. Specifically, 
in the summer of 2011, the Eurozone sovereign debt crisis and an 
impasse over the U.S. Government's debt ceiling unfolded, and during 
the fall of 2013 another U.S. Government debt ceiling impasse occurred.
    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 needed to re-price below its stable 
$1.00 share price. As discussed in greater detail in the Proposing 
Release, as a result of concerns about exposure to European financial 
institutions, in the summer of 2011, prime money market funds began 
experiencing substantial redemptions.\90\ But unlike September 2008, 
money market funds did not experience meaningful capital losses in the 
summer of 2011 (or as discussed below, in the fall of 2013), and the 
funds' shadow prices did not deviate significantly from the funds' 
stable share prices. Also unlike in 2008, money market funds had 
sufficient liquidity to satisfy investors' redemption requests, which 
were submitted at a lower rate and over a longer period than in 2008, 
suggesting that the 2010 amendments acted as intended to enhance the 
resiliency of money market funds.\91\
---------------------------------------------------------------------------

    \90\ See Proposing Release supra note 25, at section II.D.2; 
DERA Study, supra note 24, at 32. Assets held by prime money market 
funds declined by approximately $100 billion (or 6%) during a three-
week period beginning June 14, 2011. Some prime money market funds 
had redemptions of almost 20% of their assets in each of June, July, 
and August 2011, and one fund had redemptions of 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. 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. See Proposing Release supra note 25, at section II.D.2.
    \91\ DERA Study, supra note 24, at 33-34. We note that 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 DERA Study, which discusses a number of possible 
explanations for redemptions during the financial crisis. Id. at 7-
13.
---------------------------------------------------------------------------

    In 2013, another debt ceiling impasse took place,\92\ although over 
a longer time period and without the Eurozone crisis as a backdrop. 
During the worst two-week period of the 2013 crisis, October 3rd 
through October 16th, government and treasury money market funds 
experienced combined outflows of $54.4 billion, which was 6.1% of total 
assets, with approximately 1.5% of assets flowing out of these funds on 
October 11th, the single worst day for outflows of the 2013 impasse. 
Importantly, despite these outflows, fund shadow prices were largely 
unaffected during this time period. Once the impasse was resolved, 
assets flowed back into these funds, returning government and treasury 
money market funds to a pre-crisis asset level before the end of the 
year, indicating their resiliency.\93\
---------------------------------------------------------------------------

    \92\ See, e.g., Money-Market Funds Shine During Debt Limit 
Crisis (10/25/2013), available at http://www.imoneynet.com/news/280.aspx.
    \93\ These statistics are based on an analysis of information 
from Crane Data. See also infra section III.C.1.
---------------------------------------------------------------------------

    Although money market funds' experiences differed in 2008 and in 
the Eurozone crisis, the heavy redemptions money market funds 
experienced in both periods appear to have negatively affected the 
markets for short-term financing in similar ways. Academics researching 
these issues have found, as detailed in the DERA 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.'' \94\ 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. Again, despite these similar effects, the 
2010 reforms demonstrated that money market funds are potentially more 
resilient today than in 2008.
---------------------------------------------------------------------------

    \94\ DERA Study, supra note 24, 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).
---------------------------------------------------------------------------

3. Continuing Consideration of the Need for Additional Reforms
    As discussed in greater detail in the Proposing Release, when we 
adopted the 2010 amendments, we acknowledged that money market funds' 
experience during the financial crisis raised questions of whether more 
fundamental changes to money market funds might be warranted.\95\ The 
DERA Study, discussed throughout this Release, has informed our 
consideration of the risks that may be posed by money market funds and 
our formulation of today's final rules and rule amendments. The DERA 
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 2011 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.\96\
---------------------------------------------------------------------------

    \95\ See 2009 Proposing Release, supra note 66, at section III; 
2010 Adopting Release, supra note 17, at section I.
    \96\ See generally DERA Study, supra note 24, at section 4.

---------------------------------------------------------------------------

[[Page 47747]]

    In particular, the DERA 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.\97\ 
For example, funds in 2011 had sufficient liquidity to withstand 
investors' redemptions during the summer of 2011.\98\ 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 DERA 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%.\99\ The DERA 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.\100\ Based on the DERA Study, we believe that, 
although 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 and the fall of 
2013), these reforms do not sufficiently address the potential future 
situations when credit losses may cause a fund's portfolio to lose 
value or when the short-term financing markets more generally come 
under stress.
---------------------------------------------------------------------------

    \97\ Id. at 30.
    \98\ Id. at 34.
    \99\ 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.
    \100\ To further illustrate the point, the DERA Study noted that 
the Reserve Primary Fund ``would have broken the buck even in the 
presence of the 2010 liquidity requirements.'' Id. at 37.
---------------------------------------------------------------------------

    After consideration of this data, as well as the comments we 
received on the proposal, we believe that the reforms we are adopting 
today should further help 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

A. Liquidity Fees and Redemption Gates

    Today, we are adopting amendments to rule 2a-7 that will authorize 
new tools for money market funds to use in times of stress to stem 
heavy redemptions and avoid the type of contagion that occurred during 
the financial crisis. These amendments provide money market funds with 
the ability to impose liquidity fees and redemption gates (generally 
referred to herein as ``fees and gates'') in certain 
circumstances.\101\ Today's amendments will allow a money market fund 
to impose a liquidity fee of up to 2%, or temporarily suspend 
redemptions (also known as ``gate'') for up to 10 business days in a 
90-day period, if the fund's weekly liquid assets fall below 30% of its 
total assets and the fund's board of directors (including a majority of 
its independent directors) determines that imposing a fee or gate is in 
the fund's best interests.\102\ Additionally, under today's amendments, 
a money market fund will be required to impose a liquidity fee of 1% on 
all redemptions if its weekly liquid assets fall below 10% of its total 
assets, 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 interests of the fund.\103\
---------------------------------------------------------------------------

    \101\ Under the amendments we are adopting today, government 
funds are permitted, but not required, to impose fees and gates, as 
discussed below. See infra section III.C.1 of this Release.
    \102\ If, at the end of a business day, a fund has invested 30% 
or more of its total assets in weekly liquid assets, the fund must 
cease charging the liquidity fee or imposing the redemption gate, 
effective as of the beginning of the next business day. See rule 2a-
7(c)(2)(i)(A) and (B), and (ii)(B).
    \103\ The board also may determine that a lower or higher fee 
would be in the best interests of the fund. See rule 2a-
7(c)(2)(ii)(A); see also infra section III.A.2.c.
---------------------------------------------------------------------------

    These amendments differ in some respects from the fees and gates 
that we proposed, which would have required funds to impose a 2% 
liquidity fee on all redemptions, and would have permitted the 
imposition of redemption gates for up to 30 days in a 90-day period, 
after a fund's weekly liquid assets fell below 15% of its total assets. 
In addition, under our proposal, a fund's board (including a majority 
of independent directors) could have determined not to impose the 
liquidity fee or to impose a lower fee. A large number of commenters 
supported, to varying degrees and with varying caveats, our fees and 
gates proposal.\104\ Many other commenters, on the other hand, 
expressed their opposition to fees and gates.\105\ Comments on the 
proposal are discussed in more detail below.
---------------------------------------------------------------------------

    \104\ See, e.g., Form Letter Type A; Comment Letter of Fidelity 
Investments (Sept. 16, 2013) (``Fidelity Comment Letter''); Comment 
Letter of Federated Investors, Inc. (Re: Alternative 2) (Sept. 16, 
2013) (``Federated V Comment Letter''); Comment Letter of Northern 
Trust Corporation (Sept. 16, 2013) (``Northern Trust Comment 
Letter'').
    \105\ See, e.g., Comment Letter of Capital Advisors Group (Sept. 
3, 2013) (``Capital Advisors Comment Letter''); Comment Letter of 
Americans for Financial Reform (Sept. 17, 2013) (``Americans for 
Fin. Reform Comment Letter''); Comment Letter of Edward D. Jones and 
Co., L.P. (Sept. 20, 2013) (``Edward Jones Comment Letter'').
---------------------------------------------------------------------------

1. Analysis of Certain Effects of Fees and Gates \106\
---------------------------------------------------------------------------

    \106\ See infra section III.K (discussing further the economic 
effects of the fees and gates amendments).
---------------------------------------------------------------------------

a. Background
    As discussed previously, shareholders redeem money market fund 
shares for a number of reasons.\107\ Shareholders may redeem shares 
because the current rounding convention in money market fund valuation 
and pricing can create incentives for shareholders to redeem shares 
ahead of other investors when the market-based NAV per share of a fund 
is lower than $1.00 per share.\108\ Shareholders also may flee to 
quality, liquidity, or transparency (or combinations thereof) during 
adverse economic events or financial market conditions.\109\ 
Furthermore, in times of stress, shareholders may simply need or want 
to withdraw funds for unrelated reasons. In any case, money market 
funds may have to absorb quickly high levels of redemptions that exceed 
internal sources of liquidity. In these instances, funds will need to 
sell portfolio securities, perhaps at a loss either because they incur 
transitory liquidity costs or they must sell assets at ``fire sale'' 
prices.\110\ If fund managers deplete their funds' most liquid assets 
first, this may impose future liquidity costs (that are not reflected 
in a $1.00 share price based on current amortized cost valuation) on 
the non-redeeming shareholders because later redemption requests must 
be met by selling less liquid assets. These effects may be heightened 
if many funds sell assets at the same time, lowering asset prices. 
During the financial crisis, for example, securities sales to meet 
heavy redemptions in money market funds and sales of assets by other 
investors

[[Page 47748]]

created downward price pressure in the market.\111\
---------------------------------------------------------------------------

    \107\ See Proposing Release, supra note 25, at 156-172; DERA 
Study, supra note 24, at 2-4.
    \108\ As discussed in section III.B, the floating NAV amendments 
help mitigate this incentive for institutional prime funds by 
causing redeeming shareholders to receive the market value of 
redeemed shares.
    \109\ See Proposing Release, supra note 25, at n.340.
    \110\ See Proposing Release, supra note 25, at n.341.
    \111\ See supra section II.D herein (discussing the financial 
crisis); see also Proposing Release, supra note 25 at 32-33; DERA 
Memorandum Regarding Liquidity Cost During Crisis Periods, dated 
March 17, 2014 (``DERA Liquidity Fee Memo''), available at http://www.sec.gov/comments/s7-03-13/s70313-321.pdf.
---------------------------------------------------------------------------

    Liquidity fees and redemption gates have been used successfully in 
the past by certain non-money market fund cash management pools to stem 
redemptions during times of stress.\112\ Liquidity fees provide 
investors continued access to their liquidity (albeit at a cost) while 
also reducing the incentives for shareholders to redeem shares. 
Liquidity fees, however, will not outright stop redemptions. In 
contrast to fees, redemption gates stop redemptions altogether, but do 
not offer the flexibility of fees.\113\ Because redemption gates 
prevent investors from accessing their investments for a period of 
time, a fund may choose to first impose a liquidity fee and then, if 
needed, impose a redemption gate.
---------------------------------------------------------------------------

    \112\ A Florida local government investment pool experienced 
heavy redemptions in 2007 due to its holdings in SIV securities. The 
pool suspended redemptions and ultimately reopened but only after 
the pool (and each shareholder's interest) had been split into two 
separate pools: one holding the more illiquid securities previously 
held by the pool (``Fund B'') and one holding the remaining 
securities of the pool (``Fund A''). Fund A reopened, but limited 
redemptions to up to 15% of an investor's holdings or $2 million 
without penalty, and imposed a 2% redemption fee on any additional 
redemptions. Fund B remained closed. When Fund A reopened, it 
experienced withdrawals, but according to state officials, the 
withdrawals were manageable. See Dealbook, NY Times, Florida Fund 
Reopens, and $1.1 Billion is Withdrawn; 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); see also infra note 114 (discussing 
the successful use by some European enhanced cash funds of fees or 
gates during the financial crisis).
    \113\ See Institutional Money Market Funds Association, IMMFA 
Recommendations for Redemption Gates and Liquidity Fees, available 
at http://www.immfa.org/publications/policy-positions.html 
(``Redemption gates and/or a liquidity fee are methods by which a 
fund manager, if experiencing difficulty due to extreme market 
circumstances, can control redemptions in order to ensure that all 
investors are treated fairly and that no `first-mover' advantage 
exists.''); cf. 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.
---------------------------------------------------------------------------

    The fees and gates amendments we are adopting today are designed to 
address certain issues highlighted by the financial crisis. In 
particular, the amendments should allow funds to moderate redemption 
requests by allocating liquidity costs to those shareholders who impose 
such costs on funds through their redemptions and, in certain cases, 
stop heavy redemptions in times of market stress by providing fund 
boards with additional tools to manage heavy redemptions and improve 
risk transparency. We understand that based on the level of redemption 
activity that occurred during the financial crisis, many money market 
funds would have faced liquidity pressures sufficient to cross the 
liquidity thresholds we are adopting today that would allow the use of 
fees and gates. Although no one can predict with certainty what would 
have happened if money market funds had operated with fees and gates 
during the financial crisis, we believe that money market funds would 
have been better able to manage the heavy redemptions that occurred and 
limit contagion, regardless of the reason for the redemptions.\114\
---------------------------------------------------------------------------

    \114\ See, e.g., Comment Letter of Mutual Fund Directors Forum 
(Sept. 16, 2013) (``MFDF Comment Letter'') (stating, with respect to 
the proposed fee and gates amendments, ``we concur that this 
approach has the potential to reduce runs during times of stress or 
crisis''); UBS Comment Letter (``We agree that liquidity fees and 
gates would help money funds address heavy redemptions in an 
effective manner and limit the spread of contagion . . .''); Form 
Letter Type D. We also note that some European enhanced cash funds 
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_1.pdf?465916d4816580065dfafb92059615b6.
---------------------------------------------------------------------------

    Fees and gates are just one aspect of the overall package of 
reforms we are adopting today. We recognize that fees and gates do not 
address all of the factors that may lead to heavy redemptions in money 
market funds. For example, fees and gates do not fully eliminate the 
incentive to redeem ahead of other investors in times of stress \115\ 
or fully prevent investors from redeeming shares (except during the 
duration of a temporary gate) to invest in securities with higher 
quality, better liquidity, or increased transparency.\116\ Fees and 
gates also do not address the shareholder dilution that results when a 
shareholder is able to redeem at a stable NAV that is higher than the 
market value of the fund's underlying portfolio securities.\117\ 
Nonetheless, for the reasons discussed in this Release, fees and gates 
provide funds and their boards with additional tools to stem heavy 
redemptions and avoid the type of contagion that occurred during the 
financial crisis by allocating liquidity costs to those shareholders 
who impose such costs on funds and by stopping runs.
---------------------------------------------------------------------------

    \115\ However, as discussed in section III.B herein, under 
today's amendments, institutional prime funds will be required to 
float their NAV. This reform is designed, in part, to address the 
incentive to redeem ahead of other investors in certain money market 
funds because of current money market fund valuation and pricing 
methods.
    \116\ Fees and gates lessen but do not fully eliminate the 
incentive for investors to redeem quickly in times of stress because 
redeeming shareholders will retain an economic advantage over 
shareholders who remain in a fund when liquidity costs are high, but 
before the fund has imposed fees or gates.
    \117\ In contrast, the floating NAV requirement for 
institutional prime funds will address this issue. See infra section 
III.B.1.
---------------------------------------------------------------------------

i. Liquidity Fees
    During the financial crisis, some funds experienced heavy 
redemptions. Shareholders who redeemed shares early bore none of the 
economic consequences of their redemptions. Shareholders who remained 
in the funds, however, faced a declining NAV and an increased 
probability that their funds would ``break the buck.'' As discussed in 
the Proposing Release and suggested by commenters, investors may have 
re-assessed their redemption decisions during the crisis if money 
market funds had imposed liquidity fees because they would have been 
required to pay at least some of the costs of their redemptions.\118\ 
It is possible that some investors would have made the economic 
decision not to redeem because the liquidity fees imposed by the fund 
and incurred by an investor would have been certain, whereas potential 
future losses would have been uncertain.\119\
---------------------------------------------------------------------------

    \118\ See, e.g., Comment Letter of U.S. Chamber of Commerce, 
Center for Capital Markets Competitiveness (Sept. 17, 2013) 
(``Chamber II Comment Letter'') (``[I]f shareholders were to be 
charged a fee when a MMF's liquidity costs are at a premium, they 
may be discouraged from redeeming their shares at that time, which 
would have the effect of slowing redemptions in the MMF.''); Comment 
Letter of Charles Schwab Investment Management, Inc. (Sept. 12, 
2013) (``Schwab Comment Letter'') (``[W]e agree that the proposed 
liquidity fee of 2% would be a strong disincentive to redeem during 
a crisis . . .'').
    \119\ See HSBC Comment Letter; see also infra note 152-153 and 
accompanying text. We acknowledge (as we did in the Proposing 
Release) that liquidity fees may not always effectively stave off 
high levels of redemptions in a crisis; however, liquidity fees, 
once imposed, should help reduce the incentive to redeem shares 
because investors will pay a fee in connection with their 
redemptions. See Proposing Release, supra note 25, at 161.
---------------------------------------------------------------------------

    In addition, liquidity fees would have helped offset the costs of 
the liquidity provided to redeeming shareholders and potentially 
protected the funds' NAVs because the cash raised from liquidity

[[Page 47749]]

fees would create new liquidity for the funds.\120\ Additionally, to 
the extent that liquidity fees imposed during the crisis could have 
reduced redemption requests at the margin, they would have allowed 
funds to generate liquidity internally as assets matured. By imposing 
liquidity costs on redeeming shareholders, liquidity fees, as noted by 
commenters, also treat holding and redeeming shareholders more 
equitably.\121\
---------------------------------------------------------------------------

    \120\ Fees paid by investors that redeem shares should help 
prevent a fund's NAV from becoming impaired based on liquidity 
costs, as long as the liquidity fee imposed reflects the liquidity 
cost of redeeming shares. Fees should also generate additional 
liquidity to help funds meet redemption requests.
    \121\ See, e.g., Invesco Comment Letter (``Liquidity fees would 
provide an appropriate and effective means to ensure that the extra 
costs associated with raising liquidity to meet fund redemptions 
during times of market stress are borne by those responsible for 
them.''); Comment Letter of J.P. Morgan Asset Management (Sept. 17, 
2013) (``J.P. Morgan Comment Letter''); UBS Comment Letter; but see, 
e.g., Comment Letter of U.S. Bancorp Asset Management, Inc. (Sept. 
16, 2013) (``U.S. Bancorp Comment Letter'') (suggesting that 
liquidity fees harm those that redeem after the fees are imposed and 
that gates harm those that remain in the fund after the gate is in 
place).
---------------------------------------------------------------------------

    Liquidity fees, which we believe would rarely be imposed under 
normal market conditions, are designed to preserve the current benefits 
of principal stability, liquidity, and a market yield, but reduce the 
likelihood that, in times of market stress, costs that ought to be 
attributed to a redeeming shareholder are externalized on remaining 
shareholders and on the wider market.\122\ Even if a liquidity fee is 
imposed, fund investors continue to have the flexibility to access 
liquidity (albeit at a cost). The Commission believes, and commenters 
suggested, that if funds could have imposed liquidity fees during the 
crisis, they would likely have been better able to manage redemptions, 
thereby ameliorating their impact and reducing contagion effects.\123\
---------------------------------------------------------------------------

    \122\ See Proposing Release, supra note 25, at n.343.
    \123\ See Proposing Release, supra note 25, at 155; see also, 
e.g., Comment Letter of Wells Fargo Funds Management, LLC (Sept. 16, 
2013) (``Wells Fargo Comment Letter'') (``Prime money market fund 
investors, the short-term markets and businesses that rely on funds 
for financing would each benefit from the ability of [f]ees and 
[g]ates, during distressed market conditions, to reduce the 
susceptibility of subject funds to runs and blunt the spread of 
deleterious contagion effects.''); but see, e.g., U.S. Bancorp 
Comment Letter (suggesting that liquidity fees would not deter 
redemptions in times of market stress or prevent contagion because 
``investors will choose to pay the [fee] now rather than wait for 
the wind-down of a fund to be completed.'').
---------------------------------------------------------------------------

ii. Redemption Gates
    We believe that funds also could have benefitted from the ability 
to impose redemption gates during the crisis.\124\ Like liquidity fees, 
gates are designed to preserve the current benefits of money market 
funds under most market conditions; however, if approved and monitored 
by their boards, funds can use gates to respond to a run by directly 
halting redemptions. If funds had been able to impose redemption gates 
during the crisis, they would have had available to them a tool to stop 
temporarily mounting redemptions,\125\ which if used could have 
generated additional internal liquidity while gates were in place.\126\ 
In addition, gates may have allowed funds to invest the proceeds of 
maturing assets in short-term securities for the duration of the gate, 
protecting the short-term financing market, and supporting capital 
formation for issuers. Gates also would have allowed funds to directly 
and fully control redemptions during the crisis, providing time for 
funds to better communicate the nature of any stresses to shareholders 
and thereby possibly mitigating incentives to redeem shares.\127\
---------------------------------------------------------------------------

    \124\ See Comment Letter of Arnold & Porter LLP on behalf of 
Federated Investors [Overview] (Sept. 11, 2013) (``Federated II 
Comment Letter'') (noting that gates have ``been demonstrated to 
address runs in a crisis. . . .''); Comment Letter of BlackRock, 
Inc. (Sept. 12, 2013) (``BlackRock II Comment Letter'') (``Standby 
liquidity fees and gates would ``stop the run'' in crisis 
scenarios.''); see also supra note 114 (noting that European 
enhanced cash funds successfully used fees or gates during the 
financial crisis to stem redemptions); The Need to Focus a Light on 
Shadow Banking is Nigh, Mark Carney, Financial Times (June 15, 
2014), available at http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``Money 
market funds are being made less susceptible to runs. . .by 
establishing an ability for funds to use, for example, temporary 
suspensions of withdrawals. . . .''); The Age of Asset Management?, 
Andrew Haldane (Apr. 4, 2014), available at http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech723.pdf (suggesting gates may be a ``suitable'' tool to 
``tackle market failures''); but see, e.g., Comment Letter of 
Deutsche Investment Management Americas (Sept. 17, 2013) (``Deutsche 
Comment Letter'') (suggesting that gates can exacerbate a run).
    \125\ See, e.g., U.S. Bancorp Comment Letter (suggesting that 
redemption gates would be the ``most effective option in addressing 
run risk''); Chamber II Comment Letter (stating that ``a redemption 
gate would stop a `run' in [its] tracks'').
    \126\ See, e.g., Chamber II Comment Letter (``[A] redemption 
gate also gives [a money market fund] time for issues in the market 
to subside and for securities in the portfolio to mature, which 
would increase the [money market fund's] liquidity levels.''); Form 
Letter Type D (suggesting that redemption gates ``would give funds 
time to stabilize''). Internal liquidity generated while a gate is 
in place could prevent funds from having to immediately sell assets 
at fire sale prices.
    \127\ See, e.g., Invesco Comment Letter (``Redemption gates have 
been proven to be an effective means of preventing runs and 
providing a `cooling off' period to mitigate the effects of short-
term investor panic.'')
---------------------------------------------------------------------------

b. Benefits of Fees and Gates
i. Fees and Gates Address Concerns Related to Heavy Redemptions
    As noted above, a large number of commenters supported our fees and 
gates proposal.\128\ The primary benefit cited by commenters in favor 
of fees and/or gates is that they would address run risk and/or 
systemic contagion risk.\129\ Commenters also argued that fees and 
gates would protect the interests of all fund shareholders, 
particularly non- or late-redeeming shareholders, treating them more 
equitably.\130\ Commenters supported our view that redemption 
restrictions could provide a ``cooling off'' period to temper the 
effects of short-term investor panic,\131\ and that fees or gates could

[[Page 47750]]

preserve and help restore the liquidity levels of a money market fund 
that has come under stress.\132\ Commenters also echoed our view that 
fees and/or gates could reduce or eliminate the likelihood that funds 
would be forced to sell otherwise desirable assets and engage in ``fire 
sales.'' \133\ Additionally, commenters noted that gates would provide 
boards and advisers with crucial additional time to find the best 
solution in a crisis, instead of being forced to make decisions in 
haste.\134\
---------------------------------------------------------------------------

    \128\ We note that many participants in the money market fund 
industry have previously expressed support for imposing some form of 
a liquidity fee or redemption gate when a fund comes under stress as 
a way of reducing, in a targeted fashion, the fund's susceptibility 
to heavy redemptions. See Proposing Release, supra note 25, at 
n.358.
    \129\ See, e.g., Form Letter Type A; U.S. Bancorp Comment 
Letter; Comment Letter of Davenport & Company LLC (Sept. 13, 2013) 
(``Davenport Comment Letter''); MFDF Comment Letter; Comment Letter 
of Treasury Strategies, Inc. (Mar. 31, 2014) (``Treasury Strategies 
III Comment Letter'') (``We found that [f]ees and [g]ates can stop 
and prevent runs. . . . We find that highly effective run prevention 
is attainable within the approaches contemplated by the [Proposing] 
Release, while requiring that fund boards be given discretion to 
take protective action. This is the mechanism by which [f]ees/
[g]ates cause [money market funds] to internalize the cost of 
investor protection, while preserving the utility of current CNAV 
vehicles.''); see also The Need to Focus a Light on Shadow Banking 
is Nigh, Mark Carney, Financial Times (June 15, 2014), available at 
http://www.ft.com/intl/cms/s/0/3a1c5cbc-f088-11e3-8f3d-00144feabdc0.html?siteedition=intl#axzz35rCMZLTy (``By establishing 
common policy standards and arrangements for co-operation, the 
reforms [including temporary gates] will help to avoid a 
fragmentation of the global financial system.''); but see, e.g., 
Boston Federal Reserve Comment Letter (suggesting fees or gates do 
not address run risk); Systemic Risk Council Comment Letter; Comment 
Letter of American Bankers Association (Sept. 17, 2013) (``American 
Bankers Ass'n Comment Letter'').
    \130\ See, e.g., Form Letter Type D (noting that gates would 
``give funds time to stabilize or, in the event a fund cannot resume 
redemptions without breaking the buck, ensure that the funds [sic] 
shareholders are treated equally in a distribution of the funds 
[sic] assets upon dissolution''); Invesco Comment Letter 
(``Liquidity fees would provide an appropriate and effective means 
to ensure that the extra costs associated with raising liquidity to 
meet fund redemptions during times of market stress are borne by 
those responsible for them.''); Comment Letter of Independent 
Directors Council (Sept. 17, 2013) (``IDC Comment Letter''); J.P. 
Morgan Comment Letter. We recognize, however, that our fees and 
gates reform does not address other shareholder equity concerns, 
including shareholder dilution, that arise as a result of the 
structural features in current rule 2a-7 that promote a first-mover 
advantage. Our floating NAV reform is designed to address this 
concern for institutional prime money market funds. See infra 
section III.B.
    \131\ See, e.g., Form Letter Type D; Invesco Comment Letter; 
Comment Letter of Reich & Tang Asset Management, LLC (Sept. 17, 
2013) (``Reich & Tang Comment Letter'').
    \132\ See, e.g., HSBC Comment Letter; Deutsche Comment Letter; 
ICI Comment Letter.
    \133\ See, e.g., MSCI Comment Letter; Federated V Comment 
Letter; Comment Letter of Treasury Strategies, Inc. (Sept. 12, 2013) 
(``Treasury Strategies Comment Letter''). We also believe that 
reducing or eliminating the likelihood of fire sales would in turn 
help protect other market participants that need to sell assets in 
the market or perhaps mark asset values to market.
    \134\ See, e.g., ICI Comment Letter; UBS Comment Letter; IDC 
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------

    We are adopting reforms that will give a fund the ability to impose 
either a liquidity fee or a redemption gate because we believe, and 
some commenters suggested, that fees and gates, while both aimed at 
helping funds to better and more systematically manage high levels of 
redemptions, do so in different ways and thus with somewhat different 
tradeoffs.\135\ Accordingly, we believe that both fees and gates should 
be available to funds and their boards to provide maximum flexibility 
for funds to manage heavy redemptions.\136\ Liquidity fees are designed 
to reduce shareholders' incentives to redeem shares when it is 
abnormally costly for funds to provide liquidity by requiring redeeming 
shareholders to bear at least some of the liquidity costs associated 
with their redemption (rather than transferring all of those costs to 
remaining shareholders).\137\ Liquidity fees increase the cost of 
redeeming shares, which may reduce investors' incentives to sell them. 
Likewise, fees help reduce investors' incentives to redeem shares ahead 
of other investors, especially if fund managers deplete their funds' 
most liquid assets first to meet redemptions, leaving later redemption 
requests to be met by selling less liquid assets.
---------------------------------------------------------------------------

    \135\ See, e.g., Invesco Comment Letter (suggesting that gates 
provide ``the most direct, simple and effective method'' to prevent 
runs and contagion as well as ``a `cooling off' period to mitigate 
the effects of short-term investor panic,'' while fees ``mitigate 
the `first-mover advantage' '' and ``provide an appropriate and 
effective means to ensure that the extra costs associated with 
raising liquidity to meet fund redemptions during times of market 
stress are borne by those responsible for them.'')
    \136\ See Treasury Strategies III Comment Letter (``Fees enable 
investors to access their liquidity, but at a price . . . , but that 
is the cost of being able to assure that a stable NAV product will 
not cause contagion or fire sales during such periods. Gates do not 
impose an extra [f]ee on shareholders, which is appealing to many 
shareholders, but have the undesirable effect of restricting access 
to liquidity during critical periods. Together, [f]ees and [g]ates 
provide fund boards with powerful tools to prevent a run from 
materializing, to stop a run in progress, and to assure that a 
stress event does not cause contagion or fire sales.'').
    \137\ See, e.g., Dreyfus Comment Letter (``We also agree that 
liquidity fees can deter net redemption activity while also 
providing an appropriate ``cost of liquidity'' for investors 
choosing to exercise the option to redeem over the option to hold. . 
. .); see also 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 a 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'').
---------------------------------------------------------------------------

    Several commenters noted that liquidity fees could ``re-mutualize'' 
risk-taking among investors and provide a way to recover costs of 
liquidity in times of stress.\138\ This is because liquidity fees 
allocate at least some of the costs of providing liquidity to redeeming 
rather than non-redeeming shareholders and protect fund liquidity by 
requiring redeeming shareholders to repay funds for liquidity costs 
incurred.\139\ To the extent liquidity fees 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.'' \140\ This explicit pricing of liquidity 
costs in money market funds should offer significant benefits to funds 
and the broader short-term financing market in times of potential 
stress because it should lessen both the frequency and effect of 
shareholder redemptions, which might otherwise result in the sale of 
fund securities at ``fire sale'' prices.\141\
---------------------------------------------------------------------------

    \138\ See, e.g., HSBC Comment Letter; Invesco Comment Letter; 
IDC Comment Letter.
    \139\ We note that investors owning securities directly--as 
opposed to through a money market fund--naturally bear liquidity 
costs. They bear these costs both because they bear any losses if 
they have to sell a security at a discount 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.
    \140\ See Proposing Release, supra note 25, at 160 n.352 (citing 
ICI Jan. 24 FSOC Comment Letter).
    \141\ See Chamber II Comment Letter (``[I]f shareholders were to 
be charged a fee when an MMF's liquidity costs are at a premium, 
they may be discouraged from redeeming their shares at that time, 
which would have the effect of slowing redemptions in the MMF.'').
---------------------------------------------------------------------------

    In contrast, redemption gates will provide fund boards with a 
direct and immediate tool for stopping heavy redemptions in times of 
stress.\142\ Unlike liquidity fees, gates are designed to directly stop 
a run by delaying redemptions long enough to allow (1) fund managers 
time to assess the condition of the fund and determine the appropriate 
strategy to meet redemptions, (2) liquidity buffers to grow organically 
as securities in the portfolio (many of which are very short-term) 
mature and produce cash, and (3) shareholders to assess the liquidity 
and value of portfolio holdings in the fund and for any shareholder or 
market panic to subside.\143\ As contemplated by today's amendments, 
gates definitively stop runs for funds that impose them by blocking all 
redemptions for their duration.
---------------------------------------------------------------------------

    \142\ See, e.g., Chamber II Comment Letter (``[A] redemption 
gate would stop a `run' in [its] tracks, because shareholders would 
be prohibited from redeeming their shares while the gate is in 
place.'')
    \143\ See Proposing Release, supra note 25, at n.348.
---------------------------------------------------------------------------

    We recognize that redemption gates, if they are ever imposed, will 
inhibit the full, unfettered redeemability of money market fund shares, 
a principle embodied in section 22(e) of the Investment Company 
Act.\144\ However, as discussed in section III.A.3 below, section 22(e) 
of the Investment Company Act is aimed at preventing funds and their 
advisers from interfering with shareholders' redemption rights for 
improper purposes, such as preservation of management fees. Consistent 
with that aim, redemption gates under today's amendments are designed 
to benefit the fund and its shareholders and may be imposed only when a 
fund's board determines that doing so is in the best interests of the 
fund.\145\ We also note that, in response to commenter concerns 
regarding investor access to their investments and the proposed 
duration of redemption gates, under today's amendments, gates will be 
limited to up to 10 business days in any 90-day period (rather than 30 
days in a 90-day period as proposed).\146\ As such, the extent to which 
today's amendments inhibit the redeemability of money market fund 
shares is limited.
---------------------------------------------------------------------------

    \144\ See section 22(e).
    \145\ See rule 2a-7(c)(2)(i).
    \146\ See rule 2a-7(c)(2)(i)(B); see also, infra section 
III.A.2.d (discussing the duration of redemption gates).
---------------------------------------------------------------------------

    In fact, we note that money market funds are currently permitted to 
delay payments on redemptions for up to

[[Page 47751]]

seven days.\147\ In addition, money market funds currently may suspend 
redemptions after obtaining an exemptive order from the 
Commission,\148\ or in accordance with rule 22e-3, which requires a 
fund's board of directors to determine that the fund is about to 
``break the buck'' (specifically, that the extent of deviation between 
the fund's amortized cost price per share and its current market-based 
NAV per share may result in material dilution or other unfair results 
to investors).\149\ Under today's amendments, money market fund boards 
will be able to temporarily suspend redemptions after a fund falls 
below the same threshold that funds must cross for boards to impose 
liquidity fees.\150\ Accordingly, we believe that the gating allowed by 
today's amendments extends and formalizes the existing gating 
framework, clarifying for investors when a money market fund 
potentially may use a gate as a tool to manage heavy redemptions and 
thus prevents any investor confusion on when gating may apply.
---------------------------------------------------------------------------

    \147\ See section 22(e).
    \148\ There 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 or delay payment on redemptions for more than 
seven days, 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 the Commission determines by rule or regulation) 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).
    \149\ Rule 22e-3(a)(1). Unlike under today's amendments, a fund 
that imposes redemptions gates pursuant to rule 22e-3 must do so 
permanently and in anticipation of liquidation.
    \150\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    Fees and gates also may have different levels of effectiveness 
under different stress scenarios.\151\ For example, we expect that the 
imposition of liquidity fees when a fund faces heavy redemptions should 
be able to reduce the harm to non-redeeming shareholders and thus the 
likelihood of additional redemptions that might have been made in 
response to that harm. To the extent that a fund does not need to 
engage in fire sales and depress prices because of the imposition of 
fees, the possibility of broader market contagion is reduced. We also 
note that 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 the option that 
involves only possible losses rather than the option that involves 
certain losses, even when the amount of possible loss is significantly 
higher than the certain loss.\152\ Unlike gates, which temporarily 
prevent shareholders from redeeming shares altogether, once imposed, 
liquidity fees will present investors with an economic decision as to 
whether to redeem or remain in a fund. Investors fearing that a money 
market fund may suffer losses may prefer to stay in the fund and avoid 
paying a liquidity fee (despite the possibility that the fund might 
suffer a future loss) rather than redeem and lock in payment of the 
liquidity fee.\153\
---------------------------------------------------------------------------

    \151\ We note that under today's amendments, a fund's board may 
determine that it is in the best interests of a fund to impose a fee 
and then later determine to lift the fee and impose a gate, or vice 
versa, subject to the limitations on the duration of fees and gates. 
See rule 2a-7(c)(2)(i) and (ii).
    \152\ See, e.g., Proposing Release, supra note 25, at n.355 
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter (``A 
liquidity fee would force early redeemers to pay for the costs of 
their redemption, without knowing whether the fund was actually 
going to experience losses or not. This is a powerful 
disincentive.''); but see Comment Letter of Melanie L. Fein Law 
Offices (Sept. 10, 2013) (``Fein Comment Letter'') (suggesting 
liquidity fees are unlikely to ``prevent institutional [money market 
fund] investors from reallocating their assets in a crisis'').
    \153\ See, e.g., Proposing Release, supra note 25, at n.355 
(citing Daniel Kahneman, Thinking, Fast and Slow (2011), at 278-
288); see also HSBC Comment Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    It is possible, however, that liquidity fees might not be fully 
effective during a market-wide crisis because, for example, 
shareholders might redeem shares irrespective of the level of their 
fund's true liquidity costs and the imposition of a liquidity fee.\154\ 
In those cases, gates will be able to function as circuit breakers, 
creating time for funds to rebuild their own internal liquidity and 
shareholders to reconsider whether redemptions are still desired or 
warranted.\155\
---------------------------------------------------------------------------

    \154\ See DERA Study, supra note 24, at 7-14 (discussing 
different possible explanations for why shareholders may redeem from 
money market funds in times of stress).
    \155\ See, e.g., Comment Letter of Department of the Treasury, 
Commonwealth of Virginia (Sept. 17, 2013) (``Va. Treasury Comment 
Letter''); Chamber II Comment Letter; Dreyfus Comment Letter.
---------------------------------------------------------------------------

ii. Management-Related Advantages
    We are also mindful that permitting fund boards to impose fees and/
or gates after a fund has fallen below a particular threshold, and 
requiring funds to impose liquidity fees at a lower designated 
threshold (absent a board finding that the fee is not in the best 
interests of the fund), may offer certain benefits to funds with 
respect to management of liquidity and redemption activity. Some 
commenters suggested that, even during non-stress periods, fees and 
gates could provide fund managers with an incentive to carefully 
monitor shareholder concentration and shareholder flow to lessen the 
chance that the fund might have to impose fees or gates (because larger 
redemptions are more likely to cause the fund to breach the 
threshold).\156\ The fees and gates amendments also may have the 
additional effect of encouraging portfolio managers to more closely 
monitor fund liquidity and hold more liquid securities to increase the 
level of daily and weekly liquid assets in the fund, as it would tend 
to lessen the likelihood of a fee or gate being imposed.\157\ Such an 
approach could also lead to greater investor participation in money 
market funds to the extent investors seek to invest in a product with 
low liquidity risk, thereby increasing the supply of capital available 
to invest in commercial paper. We recognize, however, that such an 
approach could perhaps shrink the market for riskier or longer-term 
commercial paper, or have a negative effect on yield.\158\
---------------------------------------------------------------------------

    \156\ See, e.g., Comment Letter of Securities Industry and 
Financial Markets Association (Sept. 17, 2013) (``SIFMA Comment 
Letter'') (stating that some members ``believe the existence of the 
liquidity trigger for the fee and gate will motivate fund managers 
to maintain fund liquidity well in excess of the trigger level, to 
avoid triggering the fee or gate. That is to say, the mere existence 
of the potential for the fee or gate will result in enhanced 
liquidity in money market funds.''); BlackRock II Comment Letter; 
Comment Letter of Hester Peirce and Robert Greene (Sept. 17, 2013) 
(``Peirce & Greene Comment Letter''); see also HSBC Global Asset 
Management, Liquidity Fees; a proposal to reform money market funds 
(Nov. 3, 2011) (``HSBC 2011 Liquidity Fees Letter'') (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); 
Comment Letter of BlackRock, Inc. (Dec. 13, 2012) (available in File 
No. FSOC-2012-0003) (``BlackRock FSOC Comment Letter'') (``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.'').
    \157\ See, e.g., Proposing Release, supra note 25, at n.365.
    \158\ See infra section III.K.
---------------------------------------------------------------------------

    We also note that funds may take alternate approaches to managing 
liquidity and imposing fees and gates,

[[Page 47752]]

which may differentially affect the short-term funding markets. For 
example, a fund that imposes a fee or gate may decide to immediately 
build liquidity by investing all maturing securities in highly liquid 
assets, particularly if the fund wants to remove the fee or gate as 
soon as possible. Another fund may plan to impose a fee or gate for a 
set period of time, in which case, there would be no reason to stop 
investing in less liquid short-term commercial paper provided it 
matured while the fee or gate was in place. The first strategy would 
likely have the capital formation effect of lowering participation in 
short-term funding markets, whereas the second strategy may defer the 
impact until a later time, possibly after market conditions have 
improved.
iii. Transparency
    We recognize, and certain commenters noted,\159\ that the prospect 
of fees and gates being implemented when a fund is under stress should 
help make the risk of investing in money market funds more salient and 
transparent to investors, which may help sensitize them to the risks of 
investing in money market funds. On the other hand, we note that other 
commenters argued that fees and gates would not improve transparency of 
risk for investors.\160\ Having considered these comments, however, we 
believe that there will be an appreciable increase in transparency as a 
result of our fees and gates amendments. The disclosure amendments we 
are adopting today will require funds to provide disclosure to 
investors regarding the possibility of fees and gates being imposed if 
a fund's liquidity is impaired. We believe such disclosure will benefit 
investors by informing them further of the risks associated with money 
market funds, particularly that money market funds' liquidity may, at 
times, be impaired.\161\ In addition, as noted above, fees and gates 
also could encourage shareholders to monitor funds' liquidity levels 
and exert market discipline over the fund to reduce the likelihood that 
the imposition of fees or gates will become necessary in that 
fund.\162\
---------------------------------------------------------------------------

    \159\ See, e.g., ICI Comment Letter; Comment Letter of Myra Page 
(July 19, 2013) (``Page Comment Letter'').
    \160\ See, e.g., Comment Letter of Thrivent Financial for 
Lutherans (Sept. 17, 2013) (``Thrivent Comment Letter) (``The 
imposition of a liquidity fee or gate will always be a surprise to 
the investors that do not redeem quickly enough to avoid it. The 
need to impose such a fee or gate will not be transparent to the 
investor unless redemption activity is disclosed in a timely manner 
providing sufficient time for investors to react.''); Capital 
Advisors Comment Letter. Two commenters also expressed concern that 
the ability to impose fees and gates would perpetuate shareholder 
reliance on sponsor support. See Capital Advisors Comment Letter; 
Thrivent Comment Letter. As discussed herein, we believe fees and 
gates and the disclosure associated with fees and gates will provide 
investors certain benefits, including informing investors further of 
the risks associated with money market funds. We further believe 
that the disclosure requirements adopted today regarding sponsor 
support should help ameliorate concerns regarding shareholder 
reliance on sponsor support. See infra sections III.E.7, III.E.9.g 
and III.F.3.
    \161\ We recognize that the level of board discretion in the 
fees and gates amendments may make it more difficult for investors 
to predict when fees and/or gates will imposed; however, we are 
adopting certain thresholds and maximums that we believe will 
provide investors with notice as to the possible imposition of fees 
and gates. Additionally, today we are adopting a requirement that 
funds disclose their percentage of weekly liquid assets on a daily 
basis on their Web sites and, thus, shareholders should be aware 
when a fund is approaching these thresholds. See rule 2a-
7(h)(10)(ii)(B).
    \162\ See Proposing Release, supra note 25, at n.366. The 
disclosure of fees and gates also could advantage larger funds and 
fund groups if the ability to provide financial support reduces or 
eliminates the need to impose fees and/or gates (whose imposition 
may be perceived to be a competitive detriment).
---------------------------------------------------------------------------

c. Concerns Regarding Fees and Gates
i. Pre-Emptive Runs and Broader Market Concerns
    We acknowledge the possibility that, in market stress scenarios, 
shareholders might pre-emptively redeem shares if they fear the 
imminent imposition of fees or gates (either because of the fund's 
situation or because other money market funds have imposed redemption 
restrictions).\163\ A number of commenters suggested investors would do 
so.\164\ Some commenters also suggested that sophisticated investors in 
particular might be able to predict that fees and gates may be imposed 
and may redeem shares before this occurs.\165\
---------------------------------------------------------------------------

    \163\ See, e.g., Proposing Release, supra note 25, at 163-167, 
n.361.
    \164\ See, e.g., Comment Letter of Novelis (July, 16, 2013) 
(``Novelis Comment Letter''); Comment Letter of State Investment 
Commission, Commonwealth of Kentucky (Sept. 9, 2013) (``Ky. Inv. 
Comm'n Comment Letter''); Boston Federal Reserve Comment Letter; 
Comment Letter of Hester Peirce and Robert Greene, Working Paper: 
Opening the Gate to Money Market Fund Reform (Apr. 8, 2014) 
(``Peirce & Greene II Comment Letter''). Some commenters were 
concerned that news of one money market fund imposing a redemption 
restriction could trigger a system-wide run by investors in other 
money market funds. See, e.g., Samuel Hanson, David Scharfstein, and 
Adi Sunderam (Sept. 16, 2013) (``Hanson et al. Comment Letter''); 
Deutsche Comment Letter; Boston Federal Reserve Comment Letter 
(suggesting further that ``because of the relative homogeneity in 
many [money market funds' holdings], the imposition of a liquidity 
fee or redemption gate on one fund may incite runs on other funds 
which are not subject to such measures'') (citation omitted). In 
addition, one commenter, drawing an analogy to banks prior to the 
adoption of federally insured deposits, noted that although 
withdrawal suspensions were commonly used by banks in response to 
fleeing depositors, the specter of suspensions themselves were often 
the cause of such investor flight. See, e.g., Comment Letter of 
Committee on Capital Markets Regulation (Sept. 17, 2013) (``Comm. 
Cap. Mkt. Reg. Comment Letter'').
    \165\ See, e.g., MFDF Comment Letter; Va. Treasury Comment 
Letter; Goldman Sachs Comment Letter.
---------------------------------------------------------------------------

    While we recognize that there is risk of pre-emptive redemptions, 
the benefits of having effective tools in place to address runs and 
contagion risk leads us to adopt the proposed fees and gates reforms, 
with some modifications. We believe several of the changes we are 
making in our final reforms will mitigate this risk and dampen the 
effects on other money market funds and the broader markets if pre-
emptive redemptions do occur.
    As discussed below, the shorter maximum time period for the 
imposition of gates and the smaller size of the default liquidity fee 
that we are adopting in these final amendments, as compared to what we 
proposed, are expected to lessen further the risk of pre-emptive 
runs.\166\ We understand that the potential for a longer gate or higher 
liquidity fee before a restriction is in place may increase the 
incentive for investors to redeem at the first sign of any potential 
stress at a fund or in the markets.\167\ We believe that by limiting 
the maximum time period that gates may be imposed to 10 business days 
in any 90-day period (down from the proposed 30 days), investor 
concerns regarding an extended loss of access to cash from their 
investment should be mitigated. Indeed, some money market funds today 
retain the right to delay payment on redemption requests for up to 
seven days, as all registered investment companies are permitted to do 
under the Investment Company Act, and we are not aware that this 
possibility has led to any pre-emptive runs historically.\168\ In 
addition, we note that under section 22(e), the Commission also has the 
authority to, by order, suspend the right of redemption or allow the 
postponement of payment of redemption requests for more than seven 
days. The Commission used this authority, for example, with

[[Page 47753]]

respect to the Reserve Primary Fund. To our knowledge, this authority 
also has not historically led to pre-emptive redemptions. We believe 
that the gating allowed by today's amendments extends and formalizes 
this existing gating framework, clarifying for investors when a money 
market fund potentially may use a gate as a tool to manage heavy 
redemptions and thus prevents any investor confusion on when gating may 
apply.
---------------------------------------------------------------------------

    \166\ See Comment Letter of Federated Investors, Inc. (Apr. 25. 
2014) (``Federated XI Comment Letter'').
    \167\ See J.P. Morgan Comment Letter (``The potential of total 
loss of access to liquidity for up to thirty (30) days will be a 
concern for investors, and could exacerbate a pre-emptive run.''); 
Federated V Comment Letter (``Shareholders will find it increasingly 
difficult to compensate for their loss of liquidity the longer the 
suspension of redemptions continues. It is therefore important for 
Alternative 2 to limit the suspension of redemptions to a period in 
which the potential benefits to shareholders of delaying redemptions 
outweigh the potential disruptions caused by the delay.'').
    \168\ See section 22(e).
---------------------------------------------------------------------------

    We believe that the maximum 10 business day gating period we are 
adopting today is a similarly short enough period of time (as compared 
to the seven days a fund may delay payment on redemption requests) that 
many investors may not be unduly burdened by such a temporary loss of 
liquidity.\169\ Thus, these investors may have less incentive to redeem 
their investments pre-emptively before the imposition of a gate. For 
similar reasons, the reduction in the default liquidity fee to 1% (down 
from the proposed 2%), discussed further below, may also lessen 
shareholders' incentives to redeem pre-emptively as fewer investors may 
consider it likely that a liquidity fee will result in an unacceptable 
loss on their investment.\170\
---------------------------------------------------------------------------

    \169\ See, e.g., Federated V Comment Letter (stating that 10 
calendar days ``would be a significantly shorter period than 
proposed by the Commission, while still allowing prime [money market 
funds] more than a week to address whatever problem led to the 
suspension of redemptions. This would also be consistent with the 
comments of some of the investors who indicated to Federated that 
they probably could not go more than two weeks without access to the 
cash held in their [money market fund].''); see also infra section 
III.A.2.d (discussing the maximum duration of temporary redemption 
gates under today's amendments).
    \170\ We note that under our final amendments, the 1% default 
liquidity may be raised by a fund's board (up to 2%) if it is in the 
best interests of the fund. See rule 2a-7(c)(2)(ii)(A). However, 
given the empirical information regarding liquidity costs in money 
market fund eligible securities in the financial crisis, as 
discussed in the DERA Liquidity Fee Memo, which supported the 
reduction in the size of the default liquidity fee to 1%, money 
market fund shareholders may estimate that a fee as high as 2% will 
be unlikely and that depending on the circumstances, a fee of less 
than 1% could be appropriately determined by the board of directors. 
See DERA Liquidity Fee Memo, supra note 111.
---------------------------------------------------------------------------

    In addition, we expect that the additional discretion we are 
granting fund boards to impose a fee or gate at any time after a fund's 
weekly liquid assets have fallen below the 30% required minimum, a much 
higher level of remaining weekly liquid assets than proposed, should 
mitigate the risk of pre-emptive redemptions. This board discretion 
should reduce the incentive of shareholders from trying to pre-
emptively redeem because they will be able to less accurately predict 
specifically when, and under what circumstances, fees and gates will be 
imposed.\171\ Board discretion also should allow boards to act 
decisively if they become concerned liquidity may become impaired and 
to react to expected, as well as actual, declines in liquidity levels, 
given their funds' investor base and other characteristics.
---------------------------------------------------------------------------

    \171\ See Wells Fargo Comment Letter (``The ability for fund 
investors to frequently and aggressively `game' and avoid the 
potential imposition of Fees or Gates is undermined by the element 
of uncertainty inherent in a fund board's discretion to impose a Fee 
or a Gate.''); see also Proposing Release, supra note 25, at n.362. 
Additionally, we believe that requiring investors in institutional 
prime funds to redeem their shares at floating NAV should lower the 
incentive to run pre-emptively when investors anticipate that a gate 
will be imposed as a result of a credit event. See infra section 
III.B for a discussion of the floating NAV requirement.
---------------------------------------------------------------------------

    Likewise, increased board discretion should lessen the likelihood 
that sophisticated investors can preferentially predict when a fee or 
gate is going to be imposed because sophisticated investors, like any 
other investor, will not know what specific circumstances a fund board 
will deem appropriate for the imposition of fees or gates.\172\ We 
recognize that sophisticated investors may monitor the weekly liquid 
assets of funds and seek to redeem before a fund drops below the 30% 
weekly liquid asset threshold. We believe, however, that a 
sophisticated investor may be dissuaded from redeeming in these 
circumstances because the fund still has a substantial amount of 
internal liquidity. In addition, redemptions when the fund still has 
this much internal liquidity would not lead to fire sales or other such 
adverse effects.
---------------------------------------------------------------------------

    \172\ Although funds' Web site disclosure will indicate when a 
fund is approaching the weekly liquid asset thresholds for imposing 
a fee or gate, investors will not know the circumstances under which 
a board will deem such a restriction to be in the best interests of 
the fund. See rule 2a-7(h)(10)(ii)(B).
---------------------------------------------------------------------------

    We also believe that increased board flexibility will reduce the 
occurrence of pre-emptive redemptions by shareholders who seek to 
redeem because another money market fund has imposed a fee or gate. 
Increased board flexibility will likely result in different funds 
imposing different redemption restrictions at different times, 
particularly considering that after crossing the 30% threshold each 
fund's board will be required to make a best interests determination 
with respect to the imposition of a fee or gate.\173\ As such, it will 
be less likely that investors can predict whether any particular fund 
will impose a fee or gate, even if another fund has done so, and thus 
perhaps less likely they will redeem assuming that one fund imposing 
such a restriction means other funds may soon do so.
---------------------------------------------------------------------------

    \173\ Boards will also be required to make a best interests 
determination if they determine to change the level of the default 
liquidity fee or to not impose the default fee. See rule 2a-
7(c)(2)(ii).
---------------------------------------------------------------------------

    Moreover, we believe that funds' ability to impose fees and gates 
once weekly liquid assets drop below 30% will substantially mitigate 
the broader effects of pre-emptive runs, should they occur. A money 
market fund that imposes a fee or gate with substantial remaining 
internal liquidity is in a better position to bear those redemptions 
without a broader market impact because it can satisfy those redemption 
requests through existing or internally generated cash and not through 
asset sales (other than perhaps sales of government securities that 
tend to increase in value and liquidity in times of stress). Thus, pre-
emptive runs, if they were to occur, under these circumstances are less 
likely to generate adverse contagion effects on other money market 
funds or the short-term financing markets.
    We note some commenters suggested that concerns about pre-emptive 
run risks from fees and gates are likely overstated.\174\ One commenter 
noted that the ``element of uncertainty inherent in a board's 
discretion to impose a fee or gate'' would diminish any possible gaming 
by investors.\175\ Another commenter further noted that ``appropriate 
portfolio construction and daily transparency'' would reduce the 
likelihood of anticipatory redemptions.\176\ For example, as discussed 
below, our amendments require that each money market fund disclose 
daily on its Web site its level of weekly liquid assets. This means 
that if one money market fund imposes a fee or gate, investors in other 
money market funds will have the benefit of full transparency on 
whether the money market fund in which they are invested is similarly 
experiencing liquidity stress and thus is likely to impose a fee or 
gate. Pre-emptive redemptions and contagion effects due to a lack of 
transparency

[[Page 47754]]

(which may have occurred in the crisis) may therefore be reduced. Some 
commenters also have previously indicated that a liquidity fee or gate 
should 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.\177\
---------------------------------------------------------------------------

    \174\ See, e.g., SIFMA Comment Letter; Wells Fargo Comment 
Letter; Dreyfus Comment Letter; see also Chamber II Comment Letter 
(stating that ``unlike with the current conditions of [r]ule 22e-3 
under the [Investment Company Act], a redemption gate would allow 
the MMF to remain in operation after the gate is lifted. This, in 
turn, will provide MMF investors with comfort regarding the ultimate 
redemption of their investment and make any large-scale redemptions 
less likely.''); Comment Letter of Artie Green (Aug. 29, 2013) 
(``Green Comment Letter'') (``Fund shareholders would be less likely 
to panic if they know they will have access to their assets when the 
fund reopens after a short suspension of redemptions.'').
    \175\ See Wells Fargo Comment Letter.
    \176\ See Dreyfus Comment Letter.
    \177\ See, e.g., Proposing Release, supra note 25, at n.364.
---------------------------------------------------------------------------

    Additionally, we note that while many European money market funds 
are able to suspend redemptions and/or impose fees on redemptions, we 
are not aware that their ability to do so has historically led to pre-
emptive runs. Most European money market funds are subject to 
legislation governing Undertakings for Collective Investment in 
Transferable Securities (``UCITS''), which also covers other collective 
investments, and which permits them to suspend temporarily redemptions 
of units.\178\ For example, in Ireland, UCITS are permitted to 
temporarily suspend redemptions ``in exceptional cases where 
circumstances so require and suspension is justified having regard to 
the interest of the unit-holders.'' \179\ Similarly, many money market 
funds in Europe are also permitted to impose fees on redemptions.\180\
---------------------------------------------------------------------------

    \178\ See, e.g., UCITS IV Directive, Article 84 (permitting a 
UCITS to, in accordance with applicable national law and its 
instruments of incorporation, temporarily suspend redemption of its 
units); Articles L. 214-19 and L. 214-30 of the French Monetary and 
Financial Code (providing that under exceptional circumstances and 
if the interests of the UCITS units holders so demand, UCITs may 
temporarily suspend redemptions); see also Coll. 7.2R United Kingdom 
Financial Conduct Authority Handbook (allowing the temporary 
suspension of redemptions ``where due to exceptional circumstances 
it is in the interest of all the unitholders in the authorized 
fund'').
    \179\ See Regulation 104(2)(a) of S.I. No. 352 of 2011.
    \180\ See, e.g., HSBC Comment Letter (``We are in the process of 
rolling out the ability for the Board of Directors to impose trigger 
based liquidity fees in our [money market funds] where current 
regulation allows. At this time we are working on implementation in 
our flagship ``Global Liquidity Fund'' range domiciled in 
Dublin.'').
---------------------------------------------------------------------------

    We also note that a commenter discussed a paper by the staff of the 
Federal Reserve Bank of New York (``FRBNY'') entitled ``Gates, Fees, 
and Preemptive Runs.'' \181\ The FRBNY staff paper constructs a 
theoretical model of fees or gates used by a financial intermediary and 
finds ``that rather than being part of the solution, redemption fees 
and gates can be part of the problem.'' \182\ This commenter argued 
that this paper fails to consider numerous restrictions in bank 
products similar to fees and gates that do not appear to have triggered 
pre-emptive runs on banks.\183\ In particular, the commenter noted that 
all banks are required ``to retain contractual authority as to most 
deposits to postpone withdrawals (gating) or impose early redemption 
fees and to reserve the right to impose restrictions--either gates or 
fees or both--on redemptions of all bank deposits other than demand 
deposit accounts. . . .'' \184\
---------------------------------------------------------------------------

    \181\ See Federated XI Comment Letter.
    \182\ See Gates, Fees and Preemptive Runs, Federal Reserve Bank 
of New York Staff Report No. 670 (Apr. 2014), available at http://www.newyorkfed.org/research/staff_reports/sr670.pdf.
    \183\ See Federated XI Comment Letter.
    \184\ See id. (citations omitted). The commenter states that, 
other than with respect to demand deposit accounts, ``banks (1) are 
required . . . to reserve the right to require seven days' advance 
notice of a withdrawal from [money market deposit accounts], NOW 
accounts and other savings accounts; (2) are not required to allow 
early withdrawal from [certificates of deposit] and other time 
deposits; and (3) are allowed to impose early withdrawal fees on 
time deposits if they choose to permit an early withdrawal from a 
time deposit.''
---------------------------------------------------------------------------

    We note that the model of fees or gates in the FRBNY staff paper 
has a number of features and assumptions different than the reforms we 
are adopting today. For example, the paper's model assumes the fees or 
gates are imposed only when liquid assets are fully depleted. In 
contrast, under our reforms fees or gates may be imposed while the fund 
still has substantial liquid assets and, as discussed above, we believe 
investors may be dissuaded from pre-emptively redeeming from funds with 
substantial internal liquidity because the fund is more likely to be 
able to readily satisfy redemptions without adversely impacting the 
fund's pricing.\185\ Moreover, under our reforms (unlike the model), a 
fund board has discretion in the decision of when to impose fees or 
gates, which as discussed above should reduce the incentive for 
investors to run, because they will be able to less accurately predict 
specifically when, and under what circumstances, fees or gates will be 
imposed.\186\ Another significant difference is that our reforms 
include a floating NAV for institutional prime money market funds, 
which constitute a sizeable portion of all money market funds, but the 
model assumes a stable NAV. As discussed below, we believe the floating 
NAV requirement may encourage those investors who are least able to 
bear risk of loss to redirect their investments to other investment 
opportunities (e.g., government money market funds), and this may have 
the secondary effect of removing from the funds those investors most 
prone to redeem should a liquidity event occur for which fees or gates 
could be imposed. Furthermore, the paper also assumes that no investor 
could foresee the possibility of a shock to a money market fund that 
reduces the fund's value or liquidity despite the events of 2008 that 
should have informed investors that fund NAVs can change over time and 
that liquidity levels may fluctuate. In addition, under our floating 
NAV reforms, price levels of institutional prime money market funds 
likely will fluctuate, and today's reforms will also require additional 
disclosures that will convey important information to investors about 
the fund's value which in turn may help prevent run behavior to the 
extent it is based on uninformed decision-making.
---------------------------------------------------------------------------

    \185\ See supra at text following note 172.
    \186\ See supra notes 171-173 and accompanying text.
---------------------------------------------------------------------------

    These differences in our reforms as compared to the model in the 
FRBNY staff paper, along with the additional disclosures that we are 
adopting today that will convey important information to investors 
about the fund's value, should in our view significantly mitigate any 
potential for substantial investor runs before fees and gates are 
imposed. Accordingly, the FRBNY staff paper's findings regarding the 
risks of pre-emptive redemptions, because they rely on different facts 
and assumptions than are being implemented in today's reforms, are not 
likely to apply to money market funds following today's reforms.
    As noted above, the new daily transparency to shareholders on 
funds' levels of weekly liquid assets should provide additional 
benefits, including helping shareholders to understand if their fund's 
liquidity is at risk and thus a fee or gate more likely and, therefore, 
should lessen the chance of contagion from shareholders redeeming 
indiscriminately in response to another fund imposing a fee or gate. 
Investors will be able to benefit from this disclosure when assessing 
each fund's circumstances, rather than having to infer information 
from, or react to, the problems observed at other funds. Nevertheless, 
investors might mimic other investors' redemption strategies even when 
those other investors' decisions are not necessarily based on superior 
information.\187\ General stress

[[Page 47755]]

in the short-term markets or fear of stress at a particular fund could 
trigger redemptions as shareholders try to avoid a fee or gate. As 
noted above, however, even if investors redeem, their redemptions 
eventually could cause a fee or gate to come down, thereby lessening or 
halting redemptions and mitigating contagion risk.\188\ In sum, we are 
persuaded that fees and gates are important tools that can be used to 
halt redemptions and prevent contagion during periods of market stress.
---------------------------------------------------------------------------

    \187\ See Proposing Release, supra note 25, at n.363; see also 
Hanson et al. Comment Letter (``news that one [money market fund] 
has initiated redemption restrictions could set off a system-wide 
run by investors who are anxious to redeem their shares before other 
funds also initiate such fees or restrictions''); Boston Federal 
Reserve Comment Letter (``[B]ecause of the relative homogeneity in 
many [money market funds'] holdings, the imposition of a liquidity 
fee or redemption gate on one fund may incite runs on other funds 
which are not subject to such measures'' (citation omitted)).
    \188\ See SIFMA Comment Letter (``[Some] members point out that 
if a fund's liquidity breaches the trigger level, the gate and fee, 
themselves, will stem any exodus and damper its effect.'').
---------------------------------------------------------------------------

ii. Impact on a Fund After Imposing a Fee or Gate
    Commenters have suggested that once fees and gates are imposed, 
they may not be easily lifted without triggering a run.\189\ Similarly, 
other commenters warned that imposing a fee or gate would not help a 
fund recover from a crisis but rather force it into liquidation because 
investors would lose trust in the fund and seek to invest in a money 
market fund that has not imposed a fee or gate.\190\ We acknowledge 
that there is a risk that investors may redeem from a fund after a fee 
or gate is lifted. We believe this is less likely following the 
imposition of a fee, however, because investors will continue to have 
the ability to redeem while a fee is in place and, therefore, may 
experience less disruption and potentially less loss in trust. In any 
event, we believe that it is important that money market funds have 
these tools to give funds the ability to obtain additional liquidity in 
an orderly fashion if a liquidity crisis occurs, notwithstanding the 
risk that the imposition of a fee or gate may cause some subsequent 
loss in trust in a fund or may lead to a resumption in heavy 
redemptions once a fee or gate is lifted. Further, we think it is 
important to observe that whenever a fee or gate is imposed, the fund 
may already be under stress from heavy redemptions that are draining 
liquidity, and the purpose of the fees and gates amendments is to give 
the fund's board additional tools to address this external threat when 
the board determines that using one or both of the tools is in the 
fund's best interests.
---------------------------------------------------------------------------

    \189\ See, e.g., Comment Letter of T. Rowe Price Associates, 
Inc. (Sept. 17, 2013) (``T. Rowe Price Comment Letter'').
    \190\ See, e.g., Schwab Comment Letter (``[W]e have a hard time 
seeing how any fund that actually imposed fees and/or redemption 
gates would ever be able to recover and be a viable fund again. 
Investor trust in that fund would be lost.''); Goldman Sachs Comment 
Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    Further, to the extent that commenters' concerns about potential 
loss in trust or risk of a run when a fee or gate is lifted is tied to 
investor concerns about the sufficiency of the fund's liquidity levels, 
we note that, under today's amendments, funds will be required to 
disclose information regarding their liquidity (e.g., daily and weekly 
liquid assets) on a daily basis. Such disclosure, assuming adequate 
liquidity, may help ameliorate concerns that investors will run or 
shift their investment elsewhere after a fund lifts its redemption 
restrictions because investors will be able to see that a fund is 
sufficiently liquid. To the extent heavy redemptions resume after a 
fund lifts a fee or gate, we also note that a fund board may again 
impose a fee, or gate if the fund has not yet exceeded the 10 business 
day maximum gating period, if it is in the best interests of the 
fund.\191\ Additionally, while we recognize that fees and gates may 
cause some investors to leave a fund once it has lifted a fee or gate 
(or, in the case of a fee, while the fee is in place), which may affect 
efficiency, competition, and capital formation, we believe it is 
possible that some investors, particularly those that were not seeking 
to redeem during the imposition of the fee or gate, may choose to stay 
in the fund. In this regard, we note that, as discussed above, a 
liquidity fee would benefit those investors who were not seeking to 
redeem while a fund's liquidity was under stress by more equitably 
allocating liquidity costs among redeeming and non-redeeming 
shareholders.\192\ In addition, to the extent a fund's drop in weekly 
liquid assets was the result of an external event, if such event 
resolves while a fee or gate is place, some investors may choose to 
stay in the fund after the fee or gate is lifted.
---------------------------------------------------------------------------

    \191\ See rule 2a-7(c)(2)(i)(B) (limiting the imposition of 
gates to 10 business days in any 90-day period).
    \192\ See supra note 121 and accompanying text.
---------------------------------------------------------------------------

    In addition, we recognize that a fund board may determine to close 
a fund and liquidate after the fund has imposed a fee or temporary gate 
(or instead of imposing a fee or temporary gate) pursuant to amended 
rule 22e-3.\193\ We note, however, that even if a fund ultimately 
liquidates, its disposition is likely to be more orderly and efficient 
if it previously imposed a fee or gate. In fact, imposing a fee or gate 
should give a fund more time to generate greater liquidity so that it 
will be able to liquidate with less harm to shareholders. Additionally, 
to the extent a fund's board determines to close the fund and liquidate 
after the fund has imposed a fee or temporary gate, we anticipate that 
this would more commonly occur because the imposition of the fee or 
gate was the result of idiosyncratic stresses on the fund.\194\ In this 
regard, we note that at least one commenter who suggested that a money 
market fund would likely be forced to liquidate after imposing a fee or 
gate, also noted that ``in a systemic crisis'' where many funds may be 
faced with heavy redemptions and thus the possibility of imposing fees 
and gates, money market funds ``may have a greater likelihood of 
avoiding liquidation after the systemic crisis [has] subsided.'' \195\
---------------------------------------------------------------------------

    \193\ See infra section III.A.4 herein discussing amendments to 
rule 22e-3 that will allow a board to close and liquidate a fund if 
the fund's weekly liquid assets have dropped below 10%.
    \194\ See infra note 195 and accompanying text.
    \195\ See J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

iii. Investors' Liquidity Needs
    A number of commenters expressed concern that fees or gates could 
impair money market funds' use as liquid investments, in particular 
because redemption restrictions (especially gates) would limit or deny 
shareholders ready access to their funds.\196\ Commenters noted such a 
lack of liquidity could have detrimental consequences for investors, 
including, for example, corporations and institutions using liquidity 
accounts for cash management,\197\ retail investors needing immediate 
access to cash such as in a medical emergency or when purchasing a 
home,\198\ and state and local governments that need to make payroll or 
service bond payments when due.\199\
---------------------------------------------------------------------------

    \196\ See, e.g., Comment Letter of the Boeing Company (Sept. 9, 
2013) (``Boeing Comment Letter''); Boston Federal Reserve Comment 
Letter; BlackRock II Comment Letter.
    \197\ See, e.g., Boeing Comment Letter; Capital Advisors Comment 
Letter.
    \198\ See, e.g., Comment Letter of the SPARK Institute, Inc. 
(Sept. 16, 2013) (``SPARK Comment Letter''); Comment Letter of 
Vanguard (Sept. 17, 2013) (``Vanguard Comment Letter'').
    \199\ See, e.g., Comment Letter of Chief Financial Officer, 
State of Florida (Sept. 12, 2013) (``Fla. CFO Comment Letter''); 
Comment Letter of Treasurer and Comptroller, St. Louis, Missouri 
(Sept. 17, 2013) (``St. Louis Treasurer Comment Letter'').
---------------------------------------------------------------------------

    We recognize that liquidity fees and redemption gates could affect 
shareholders by potentially limiting, partially or fully (as 
applicable), the redeemability of money market fund shares under 
certain conditions, a principle embodied in the Investment

[[Page 47756]]

Company Act.\200\ In our view, however, these reforms should not 
unreasonably impede the use of money market funds as liquid 
investments. First, under normal circumstances, when a fund's liquidity 
is not under stress, the fees and gates amendments will not affect 
money market funds or their shareholders. Fees and gates are tools for 
funds to use in times of severe market or internal stress. Second, even 
when a fund experiences stress, the fees and gates amendments we are 
adopting today do not require money market funds to impose fees and 
gates when it is not in the best interests of the fund. Accordingly, we 
believe these tools can assist funds facing liquidity shortages during 
periods of unusual stress, while preserving the benefits of money 
market funds for investors and the short-term funding markets by not 
affecting the day-to-day operations of a fund in periods without 
stress. In fact, a number of commenters observed that fees and gates 
would be the most effective option of achieving the Commission's reform 
goals,\201\ and would preserve as much as possible the current benefits 
of money market funds and/or be less onerous day-to-day on funds and 
investors.\202\
---------------------------------------------------------------------------

    \200\ See infra Section III.A.3 (discussing the rationale for 
the exemptions from the Investment Company Act).
    \201\ See, e.g., Fidelity Comment Letter; Deutsche Comment 
Letter; Comment Letter of SunTrust Bank and SunTrust Investment 
Services (Sept. 16, 2013) (``SunTrust Comment Letter'').
    \202\ See, e.g., Comment Letter of Plan Investment Fund, Inc. 
(Sept. 16, 2013) (``Plan Inv. Fund Comment Letter''); IDC Comment 
Letter; HSBC Comment Letter.
---------------------------------------------------------------------------

    With respect to liquidity fees, we also note that investors will 
not be prohibited from redeeming their investments; rather, they may 
access their investments at any time, but their redemptions will be 
subject to a fee that is designed to make them bear at least some of 
the costs associated with their access to liquidity rather than 
externalizing those costs to the remaining fund shareholders. With 
respect to gates, we recognize that they will temporarily prevent 
investors from redeeming their investments when imposed. However, we 
believe gates (as well as fees) will rarely be imposed in normal market 
conditions. In our view, in those likely rare situations where a gate 
would be imposed, investors would (in the absence of the gating 
mechanism) potentially be left in worse shape if the fund were, for 
example, forced to engage in the sale of assets and thus incur 
permanent losses; or worse, if the fund were forced to liquidate 
because of a severe liquidity crisis. Thus, we believe that allowing 
fund boards to impose gates should not be viewed as detrimental to 
funds, but rather should be viewed as an interim measure boards can 
employ in worse case scenarios where the alternative would likely be a 
result potentially more detrimental to investors' overall interests. To 
the extent that some investors may be sufficiently concerned about 
their ability to access their investment to meet certain obligations, 
such as payroll or bills, we believe they may choose to manage their 
money market fund investments so as to be able to meet these 
obligations if a redemption gate should be imposed.\203\
---------------------------------------------------------------------------

    \203\ We recognize that some investors may choose to move their 
money out of affected money market funds due to concern that a fee 
or gate may be imposed in the future. For a discussion of investor 
movement out of money market funds, see infra section III.K.
---------------------------------------------------------------------------

    While we recognize these commenter concerns regarding liquidity, we 
believe that the overall benefits and protections that are provided by 
the fees and gates amendments to all investors in these money market 
funds outweigh these concerns. Furthermore, we note that the final 
amendments have been modified and tailored to mitigate some potentially 
disruptive consequences of fees and gates. For example, under the final 
amendments, gates cannot be imposed for more than 10 business days in 
any 90-day period, so, to the extent an investor's access to his/her 
money is inhibited, it is for a limited period of time, which may allow 
an investor to better prepare for and withstand a possible gate. We 
also note, as discussed above, that funds are currently permitted to 
impose permanent redemption gates in certain circumstances.\204\ 
Therefore, we believe that the gating allowed by today's amendments 
extends and formalizes the existing gating framework, clarifying for 
investors when a money market fund potentially may use a gate as a tool 
to manage heavy redemptions and thus prevents any investor confusion on 
when gating may apply. While we recognize that the permanent redemption 
gates allowed under rule 22e-3 have not yet been used by money market 
funds, we note that investors have widely utilized money market funds 
as cash management vehicles even with the possibility of these 
permanent gates under an existing rule. Moreover, to the extent an 
investor wants to invest in a money market fund without the possibility 
of fees and/or gates, it may choose to invest in a government money 
market fund, which is not subject to the fees and gates 
requirements.\205\
---------------------------------------------------------------------------

    \204\ See rule 22e-3.
    \205\ See infra section III.C.1.
---------------------------------------------------------------------------

iv. Investor Movement Out of Money Market Funds
    Some commenters expressed concern that the possibility of fees and 
gates being imposed could result in diminished investor appeal and/or 
utility of affected money market funds, and could cause investors to 
either abandon or severely restrict use of affected money market 
funds.\206\ For example, commenters suggested that fees and gates would 
drive sweep account money out of money market funds.\207\ Commenters 
warned that fees and gates may cause investors to shift investments 
into other assets, government money market funds, FDIC-insured accounts 
and other bank products, riskier and/or less regulated investments, or 
other alternative stable value products.\208\ Conversely, other 
commenters predicted only minor effects on investor demand and/or that 
investor demand would decrease less under the proposed fees and gates 
alternative than under the proposed floating NAV alternative.\209\
---------------------------------------------------------------------------

    \206\ See, e.g., Ky. Inv. Comm'n Comment Letter; Boeing Comment 
Letter; Schwab Comment Letter; American Bankers Ass'n, Comment 
Letter.
    \207\ See Fin. Info. Forum Comment Letter (``Charging a 
liquidity fee and imposing gates effectively removes money market 
funds as a sweep vehicle since these accounts are designed to be a 
liquidity product and firms will no longer be able to guarantee 
liquidity.''); Comment Letter of M&T Banking Corporation (Oct. 1, 
2013) (``M&T Bank Comment Letter'') (suggesting fees and gates would 
``drive most commercial banking clients from prime money market fund 
sweep accounts''); SIFMA Comment Letter.
    \208\ See, e.g., Northern Trust Comment Letter; M&T Bank Comment 
Letter; Schwab Comment Letter; but see Invesco Comment Letter 
(suggesting that investor opposition to fees and gates could be 
addressed in part by greater education regarding the circumstances 
in which the gates would be imposed); Peirce and Greene Comment 
Letter (suggesting that to the extent gates in particular make money 
market funds less attractive to certain investors, this would be ``a 
positive step toward helping them find appropriate investments for 
their needs.''); see also Comment Letter of Fidelity Investments 
(Apr. 22, 2014) (``Fidelity DERA Comment Letter''); Comment Letter 
of BlackRock, Inc. (Apr. 23, 2014) (``BlackRock DERA Comment 
Letter'').
    \209\ See, e.g., Comment Letter of Cathy Santoro (Sept. 17, 
2013) (``Santoro Comment Letter''); Comment Letter of Arnold & 
Porter LLP on behalf of Federated Investors (Costs of Implementing 
the Proposals) (Sept. 17, 2013) (``Federated X Comment Letter'').
---------------------------------------------------------------------------

    We recognize that, as suggested by certain commenters, our 
amendments could cause some shareholders to redeem their prime money 
market fund shares and move their assets to alternative products that 
do not have the ability to impose fees or gates because the potential 
imposition of a fee or gate could make investment in a money market 
fund less attractive due to less

[[Page 47757]]

certain liquidity.\210\ As noted above, this could affect efficiency, 
competition, and capital formation. We agree with one commenter that 
suggested it is difficult to estimate the extent to which assets might 
shift from prime funds to government funds or other alternatives.\211\ 
As discussed above, some investors may determine they are comfortable 
investing in money market funds that may impose fees and gates, because 
fees and gates will likely be imposed only during times of stress and 
should not affect the daily operations of money market funds during 
normal market conditions.\212\ Other investors, however, may reallocate 
their assets to investment alternatives that are not subject to fees 
and gates, such as government money market funds.\213\
---------------------------------------------------------------------------

    \210\ See Comment Letter of SunGard Institutional Brokerage Inc. 
(Sept. 13, 2013) (``SunGard Comment Letter'') (finding in a survey 
of its corporate, government and pension plan customers that 76% of 
respondents would decrease their use of money market funds 
substantially or entirely, but that only 22% of respondents would 
stop using money market funds entirely); Comment Letter of Fidelity 
(Feb. 3, 2012) (available in File No. 4-619) (``Fidelity Feb. 3 
Comment Letter'') (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); 
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'') (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 Invesco Comment Letter (suggesting 
that investor opposition to fees and gates could be addressed in 
part by greater education regarding the circumstances in which the 
gates would be imposed).
    \211\ See Comment Letter of Federated Investors, Inc. (Demand 
and Supply of Safe Assets) (Apr. 23, 2014) (``Federated DERA I 
Comment Letter'') (suggesting an ``inability to predict how many 
assets might shift from prime and municipal MMFs to government MMFs 
in response to adoption [of] [a]lternative 1 or 2, or a combination 
thereof'' and recommending that the Commission consider a ``range of 
outcomes'' when analyzing a possible shift out of prime money market 
funds and into government money market funds). The commenter also 
noted that it has ``not found any basis for estimating the extent to 
which prime and municipal MMF shareholders would prefer bank 
instruments to government MMFs.'' See id.
    \212\ See, e.g., Invesco Comment Letter (``[W]e believe that 
additional education about the purpose and operation of the proposed 
liquidity fees and redemptions gates and the circumstances in which 
they might be implemented would increase greatly MMF investors' 
willingness to accept them.''); Goldman Sachs Comment Letter 
(``[S]ome of our investors have told us that they could accept the 
prospect of liquidity fees and gates. . . .''); Comment Letter of 
Tom Garst (Aug. 30, 2013) (``Garst Comment Letter'') (suggesting 
that gates would be the ``most acceptable alternative'' out of those 
proposed); Capital Advisors Comment Letter (``[W]e think 
shareholders may accept a cost of liquidity in a stressful 
situation. . . .''). We note that, under today's amendments, 
institutional prime funds will be subject to the fees and gates 
requirements as well as a floating NAV requirement, and that 
investor acceptance of fees and gates for these funds may be 
different. See, e.g., ICI Comment Letter (suggesting a fund that is 
subject to fees and gates and a floating NAV will be ``a fund which 
nobody will want''); see also infra section III.B for a discussion 
of the floating NAV requirement and any investor movement out of 
money market funds as result of such requirement.
    \213\ Government money market funds also will not be subject to 
the floating NAV requirement adopted today. See infra section 
III.C.1. In addition, as noted above, all money market funds today 
have the option to impose a permanent redemption gate and liquidate 
under rule 22e-3 under the Investment Company Act. While we 
recognize that these permanent redemption gates have not yet been 
used by money market funds, we note that they have not led to the 
migration of investors away from money market funds.
---------------------------------------------------------------------------

    One potential issue related to market efficiency that several 
commenters raised was a potential shortage of eligible government 
securities if investors reallocate assets from funds that are subject 
to fees and gates into government funds.\214\ We anticipate that any 
increase in demand for eligible government securities because of the 
fees and gates requirement would likely be accompanied by an additional 
increase in demand arising from investors that reallocate assets from 
institutional prime funds because of the floating NAV requirement. As 
such, we discuss the reforms' joint impact on the demand for eligible 
government securities and possible repercussions on the economy and 
capital formation in section III.K below.
---------------------------------------------------------------------------

    \214\ See, e.g., Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    In addition, a number of commenters noted that a possible shift out 
of affected money market funds could ultimately lead to a decrease in 
the funding of, or other adverse effects on, the short-term financing 
markets.\215\ The Commission recognizes the expected benefits from 
today's amendments may be accompanied by adverse effects on issuers 
that access the short-term financing markets with consequent effects on 
competition and capital formation. As discussed in greater detail in 
section III.K below, the magnitude of these effects, including any 
effects on competition, efficiency, and capital formation, will depend 
on the extent to which investors reallocate their investments within or 
outside the money market fund industry and which alternatives investors 
choose.
---------------------------------------------------------------------------

    \215\ See, e.g., MFDF Comment Letter; Comment Letter of Arizona 
Association of County Treasurers (Sept. 16, 2013) (``Ariz. Ass'n of 
County Treasurers Comment Letter''); Northern Trust Comment Letter.
---------------------------------------------------------------------------

    Some commenters also suggested that fees and gates could motivate 
money market funds to hold securities of even shorter-term duration, 
which could encourage issuers to fund themselves with shorter-term 
debt.\216\ Shortening debt maturity would increase the frequency at 
which issuers would need to refinance, leaving both issuers and the 
broad financial system more vulnerable to refinancing risk.\217\ One 
such commenter further noted that basing the threshold for fees and 
gates on weekly liquid assets will ``discourage[e] prime money market 
funds from drawing down on their buffers of liquid assets [due to fear 
of crossing below the fees and gates thresholds] precisely when they 
should do so from a system-wide perspective, i.e., in a system-wide 
liquidity and funding crisis.'' \218\ In addition, some commenters were 
concerned about a loss of funding or other adverse impacts on state and 
local governments as a result of the fees and gates amendments.\219\ We 
discuss these concerns in section III.K below.
---------------------------------------------------------------------------

    \216\ See Hanson et al. Comment Letter; Deutsche Comment Letter.
    \217\ See generally Hanson et al. Comment Letter; Deutsche 
Comment Letter.
    \218\ See, e.g., Hanson et al. Comment Letter.
    \219\ See, e.g., Comment Letter of Governor, Commonwealth of 
Massachusetts (Deval L. Patrick) (Sept. 17, 2013) (``Mass. Governor 
Comment Letter''); Comment Letter of Office of the Governor, State 
of New Hampshire (Oct. 4, 2013) (``NH Governor Letter''); Comment 
Letter of Treasurer, State of North Carolina (Sept. 19, 2013) (``NC 
Treasurer Comment Letter''); Comment Letter of 42 Members of U.S. 
Congress (Oct. 28, 2013) (``42 Members of U.S. Congress Comment 
Letter''). Some commenters cited the role of municipal money market 
funds as a funding mechanism for state and local governments, 
arguing such role might be endangered by the proposed reforms. See, 
e.g., Fidelity Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

2. Terms of Fees and Gates
    As discussed above, we are adopting provisions that, unlike the 
proposal, will allow a money market fund the flexibility to impose fees 
(up to 2%) \220\ and/or gates (up to 10 business days in a 90-day 
period) \221\ after the fund's weekly liquid assets have crossed below 
30% of its total assets, if the fund's board of directors (including a 
majority of its independent directors) determines that doing so is in 
the best interests of the fund.\222\ We are also adopting amendments 
that will require a money market fund, if its weekly liquid assets fall 
below 10% of its total assets, to impose a 1% liquidity fee on each 
shareholder's redemption, unless the fund's board of directors 
(including a

[[Page 47758]]

majority of its independent directors) determines that such a fee would 
not be in the best interests of the fund, or determines that a lower or 
higher fee (not to exceed 2%) would be in the best interests of the 
fund.\223\ The proposal would have required funds (absent a board 
determination otherwise) to impose a 2% liquidity fee on all 
redemptions, and would have permitted the imposition of redemption 
gates for up to 30 days in a 90-day period, after a fund's weekly 
liquid assets fell below 15% of its total assets. In addition, unlike 
in the proposal, today's amendments will allow a fund to impose a fee 
or gate at any point throughout the day after a fund's weekly liquid 
assets have dropped below 30%.\224\
---------------------------------------------------------------------------

    \220\ See infra notes 300-302 and accompanying text.
    \221\ Rule 2a-7(c)(2)(i)(B).
    \222\ Rule 2a-7(c)(2)(i). The fund must reject any redemption 
requests it receives while the fund is gated. See rule 2a-
7(c)(2)(i)(B).
    \223\ Rule 2a-7(c)(2)(ii). If a fund imposes a liquidity fee, a 
fund's board can later vary the level of the liquidity fee (subject 
to the 2% limit) if the board determines that a different fee level 
is in the best interests of the fund. Rule 2a-7(c)(2)(i)(A) and 
(ii)(B).
    \224\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    As in the proposal, any fee or gate imposed under today's 
amendments must be lifted automatically after the money market fund's 
level of weekly liquid assets rises to or above 30%, and it can be 
lifted at any time by the board of directors (including a majority of 
independent directors) if the board determines to impose a different 
redemption restriction (or, with respect to a liquidity fee, a 
different fee) or if it determines that imposing a redemption 
restriction is no longer in the best interests of the fund.\225\ As 
amended, rule 22e-3 also will permit the permanent suspension of 
redemptions and liquidation of a money market fund if the fund's level 
of weekly liquid assets falls below 10% of its total assets.\226\
---------------------------------------------------------------------------

    \225\ Rule 2a-7(c)(2)(i)(A)-(B) and (ii)(B).
    \226\ See rule 22e-3(a)(1). To mirror the proposed fees and 
gates amendments to rule 2a-7, the proposed amendments to rule 22e-3 
would have set a threshold of below 15% weekly liquid assets for a 
fund to permanently close and liquidate. For a discussion of amended 
rule 22e-3, see infra section III.A.4.
---------------------------------------------------------------------------

a. Thresholds for Fees and Gates
i. Discretionary Versus Mandatory Thresholds
    As proposed, a fund would have been required (unless the board 
determined otherwise) to impose a default liquidity fee, and would have 
been permitted to impose a gate, after the fund's weekly liquid assets 
dropped below 15% of its total assets. In addition, a fund would have 
had to wait to impose a fee or gate until the next business day after 
it crossed below the 15% threshold.
    Commenters ranged widely over whether and to what extent the 
trigger for fees and gates should be an objective test or left to the 
discretion of fund boards. On one hand, a group of commenters expressed 
concern about giving money market fund boards discretion to impose fees 
and gates.\227\ For example, some commenters noted that board 
discretion could create uncertainty among investors,\228\ and that 
boards might be reticent, due to the possible impact of the decision, 
to act in a time of crisis.\229\
---------------------------------------------------------------------------

    \227\ See, e.g., BlackRock II Comment Letter; Capital Advisors 
Comment Letter; Fidelity Comment Letter; HSBC Comment Letter; cf. 
Comment Letter of The Independent Trustees of the Fidelity Fixed-
Income and Asset Allocation Funds (Sept. 10, 2013) (``Fidelity 
Trustees Comment Letter'') (suggesting that the Commission should 
have the ability to impose a fee on prime money market funds when a 
fund's weekly liquid assets fall below 15%).
    \228\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter.
    \229\ See, e.g., Capital Advisors Comment Letter; HSBC Comment 
Letter (``[S]ome commentators have suggested that a fund board may 
be too commercially conflicted to decide whether to impose a 
liquidity fee.'').
---------------------------------------------------------------------------

    On the other hand, a large group of commenters generally argued in 
favor of giving boards more discretion over whether to impose a fee or 
gate.\230\ For example, a number of commenters expressly noted that 
fees should be at the discretion of fund boards instead of being 
automatically triggered at a particular liquidity threshold.\231\ A 
number of other commenters argued more generally that, when heavy 
redemptions are already underway or clearly foreseeable, boards should 
be able to impose fees and gates even before a set liquidity threshold 
or some other objective threshold has been crossed.\232\
---------------------------------------------------------------------------

    \230\ See, e.g., Chamber II Comment Letter; Dreyfus Comment 
Letter; Invesco Comment Letter.
    \231\ See, e.g., Federated V Comment Letter; HSBC Comment 
Letter; T. Rowe Price Comment Letter; Peirce & Green Comment Letter; 
cf., BlackRock Comment Letter (advocating a mandatory gate after 
assets dropped below 15% weekly liquid assets, but also allowing 
money market fund boards ``the ability to impose a gate before 
weekly liquid assets fell below 15% of total assets if the [b]oard 
believed this was in the best interest of the [money market 
fund]'').
    \232\ See., e.g., BlackRock II Comment Letter; Chamber II 
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that a hybrid approach that at some point 
imposes a default fee that boards can opt out of or change best ensures 
that fees and gates will be imposed when it is appropriate. Based on 
commenter feedback, however, we believe that such a hybrid approach 
could benefit from the default fee acting more as a floor for board 
consideration when liquidity has been significantly depleted and from 
additional board discretion to impose fees and gates in advance of that 
point.\233\ Thus, our final approach--while still a hybrid approach--is 
significantly more discretionary than under our proposal. As we 
indicated in the Proposing Release, we believe a hybrid approach offers 
the possibility of achieving many of the benefits of both a purely 
discretionary trigger and a fully automatic trigger. We recognize that 
a discretionary trigger allows a fund board the flexibility to 
determine when a restriction is necessary, and thus allows the board to 
trigger the fee or gate based on current market conditions and the 
specific circumstances of the fund.
---------------------------------------------------------------------------

    \233\ See supra section III.A.1.c.i (discussing the impact of 
board discretion on possible pre-emptive runs); see also Wells Fargo 
Comment Letter.
---------------------------------------------------------------------------

    A purely discretionary trigger, however, 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. As 
commenters indicated,\234\ a board may choose not to impose a fee or 
gate for commercial reasons--for example, out of fear that doing so 
would signal trouble for the individual fund or fund complex (and thus 
may incur significant negative business and reputational effects) or 
could incite redemptions in other money market funds in the fund 
complex in anticipation that fees may be imposed in those funds as 
well. We are also concerned that purely discretionary triggers could 
cause some funds to use fees and gates when they are not under stress 
and in contravention of the principles underlying the Investment 
Company Act. If, for example, a fund's NAV began to fall due to losses 
incurred in the portfolio, a board with full discretion to impose fees 
on fund redemptions could impose a fee solely to recover those losses 
and repair the fund's NAV, even if that fund's liquidity is not being 
stressed.
---------------------------------------------------------------------------

    \234\ See supra note 229.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we recognize that although 
an automatic trigger set by the Commission may mitigate some of the 
potential concerns associated with a fully discretionary trigger, it 
also may create the risk of imposing costs on shareholders, such as 
those related to board meetings or liquidity fees themselves, when 
funds are not truly distressed or when liquidity is not abnormally 
costly. As indicated by a number of commenters and discussed above, an 
automatic trigger also could result in shareholders pre-emptively 
redeeming their shares to avoid a fee or

[[Page 47759]]

gate.\235\ In addition, commenters suggested that a fund's liquidity 
could quickly evaporate once heavy redemptions begin and that a fund 
board should not have to wait until the fund's weekly liquid assets 
breach the default liquidity fee threshold or until the next business 
day in order to act.\236\
---------------------------------------------------------------------------

    \235\ See supra section III.A.1.c.i for a discussion regarding 
pre-emptive run risk and increased board discretion.
    \236\ See, e.g., Federated II Comment Letter; Dreyfus Comment 
Letter.
---------------------------------------------------------------------------

    In light of these risks and in response to the comments discussed 
above, we have determined to increase the amount of board discretion 
under the fees and gates amendments so that funds may impose fees or 
gates before the default liquidity fee threshold is reached and so they 
can better tailor the redemption restrictions to their particular 
circumstances. Additionally, the amendments will allow fund boards to 
impose fees and gates the same day that a fund experiences or foresees 
heavy redemptions and, thus, funds will not have to wait until the next 
day to act.\237\ This increased flexibility should better allow fund 
boards to prevent or stem heavy redemptions before they occur, or as 
soon as possible after they begin or are anticipated.\238\
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    \237\ Although funds will have to wait until a fund's weekly 
liquid assets drop below 30% in order to impose a fee or gate, we 
believe the higher threshold of 30% for discretionary fees and gates 
should assuage concerns about having to wait to impose redemption 
restrictions until a fund's weekly liquid assets breach the default 
liquidity fee threshold.
    \238\ See, e.g., Treasury Strategies III Comment Letter (``We 
found that [f]ees and [g]ates can stop and prevent runs, provided 
that they are implemented effectively through policy and preemptive 
action by fund boards.''). For example, if a fund board believes 
that a fund's weekly liquid assets are likely to fall below the 10% 
weekly liquid asset threshold for a default liquidity fee, it could 
choose to impose a liquidity fee prior to the fund breaching this 
threshold.
---------------------------------------------------------------------------

ii. Threshold Levels
    As discussed above, funds will be permitted to impose fees and 
gates after a fund's weekly liquid assets have dropped below 30%, and 
will be required to impose a liquidity fee after a fund's weekly liquid 
assets drop below 10%, unless the fund's board determines such fee is 
not in the best interests of the fund. As proposed, the threshold for 
the imposition of fees and gates would have been a drop below 15% 
weekly liquid assets and a fund's board could have determined that a 
fee would not be in the best interests of the fund.
    Various commenters proposed modifications or substitutes to the 
proposed 15% weekly liquid assets threshold. For example, one 
commenter, citing a survey of its members, suggested fund boards be 
given discretion to impose a liquidity fee when weekly liquid assets 
fall below a specified threshold, and that a default liquidity fee 
could be imposed at a specified lower level of weekly liquid assets 
(unless the board determines otherwise).\239\ Another commenter 
proposed a blended trigger for the imposition of gates at 30% weekly 
liquid assets or a drop in NAV below $0.995, whichever comes 
first.\240\
---------------------------------------------------------------------------

    \239\ See SIFMA Comment Letter.
    \240\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    As discussed in this section, we have been persuaded by commenters 
that boards should be allowed some flexibility to impose a fee or gate 
when heavy redemptions are underway or clearly foreseeable. As was 
suggested by a commenter,\241\ we are adopting a tiered threshold for 
the imposition of fees and gates, with a higher threshold for 
discretionary fees and gates and a lower threshold for default 
liquidity fees. We believe this tiered approach will allow boards to 
determine with greater flexibility the best line of defense against 
heavy redemptions and to tailor that defense to the specific 
circumstances of the fund. We also believe this tiered approach will 
allow boards to act quickly to stem heavy redemptions. This approach 
also recognizes, however, that at a certain point (under the amended 
rule, a drop below 10% weekly liquid assets), boards should be required 
to consider what, if any, action should be taken to address a fund's 
liquidity.
---------------------------------------------------------------------------

    \241\ See SIFMA Comment Letter; but see, e.g., Peirce & Greene 
Comment Letter (suggesting the Commission should adopt entirely 
discretionary gates).
---------------------------------------------------------------------------

    We are adopting a threshold of less than 30% weekly liquid assets 
at which fund boards will be able to impose discretionary fees and 
gates, as was suggested by a commenter.\242\ As 30% weekly liquid 
assets is the minimum required under rule 2a-7, we believe it is an 
appropriate threshold at which fund boards should be able to consider 
fees and gates as measures to stop heavy redemption activity that may 
be building in a fund.\243\ A drop in weekly liquid assets below the 
regulatory minimum could indicate current or future liquidity problems 
or forecast impending heavy redemptions, or it could be the result of 
idiosyncratic stresses that may be resolved without intervention--in 
either case, the money market fund's board, in consultation with the 
fund's investment adviser, is best suited to determine whether fees and 
gates can address the situation.\244\
---------------------------------------------------------------------------

    \242\ See Capital Advisors Comment Letter. As discussed below, 
we have not included an NAV trigger along with the weekly liquid 
assets trigger (as suggested by the commenter) because we do not 
believe that a fund's NAV is an appropriate trigger for liquidity 
fees and redemption gates. See infra note 253 and accompanying text.
    \243\ As was discussed in the Proposing Release, we considered a 
threshold based on the level of daily liquid assets rather than 
weekly liquid assets. We noted in the Proposing Release that 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. Thus, we believe that basing the 
threshold on weekly liquid assets rather than daily liquid assets 
provides a better picture of the fund's overall liquidity position. 
In addition, a fund's levels of daily liquid assets may be more 
volatile because they are typically used first to satisfy day-to-day 
shareholder redemptions, and thus more difficult to use as a gauge 
of fund distress. Commenters did not specifically suggest a 
threshold based on daily liquid assets.
    \244\ For a discussion of the factors a board may wish to 
consider in determining whether to impose fees and gates, see infra 
section III.A.2.b herein. For a discussion of the factors a board 
may wish to consider in determining the level of a liquidity fee, 
see infra section III.A.2.c herein.
---------------------------------------------------------------------------

    Some commenters recommended that the default liquidity fee 
threshold be lowered to 10% weekly liquid assets.\245\ These commenters 
generally argued that a 10% threshold, rather than a 15% threshold, 
would produce fewer ``false positives''--instances when a money market 
fund is, in fact, not experiencing stress on its liquidity but is 
nonetheless required (absent a board finding) to impose a liquidity 
fee--which should prevent unnecessary board meetings that would not be 
in the interest of shareholders or market stability.\246\ As was 
discussed in the Proposing Release, the threshold for a default 
liquidity fee should indicate distress in a fund and be a threshold few 
funds would cross in the ordinary course of business. Commission staff 
analysis shows that from March 2011 through October 2012, there was 
only one month that any funds reported weekly liquid assets below 15% 
and only one month that a fund reported weekly liquid assets below 
10%.\247\
---------------------------------------------------------------------------

    \245\ See, e.g., Federated V Comment Letter; Comment Letter of 
Chairman, Federated Funds Board of Directors (on behalf of 
Independent Trustees of Federated Funds) (Sept. 16, 2013) 
(``Federated Funds Trustees Comment Letter''); HSBC Comment Letter.
    \246\ See Federated II Comment Letter; HSBC Comment Letter.
    \247\ See Proposing Release supra note 25, at 177. Our staff 
conducted an analysis of Form N-MFP data that showed that if the 
default fee 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. The analysis further showed that during the period, there was 
one month in which funds reported weekly liquid assets below 15% 
(four funds in June 2011) and one month in which a fund reported 
weekly liquid assets below 10% (one fund in May 2011). Based on this 
data and industry comment, we proposed a default fee threshold of 
15% weekly liquid assets.

---------------------------------------------------------------------------

[[Page 47760]]

    In light of commenters' concerns and the Commission staff analysis, 
and in recognition of the increased board discretion to impose fees and 
gates that we are adopting in today's amendments, we have determined 
that a threshold of 10% weekly liquid assets (down from the proposed 
15%) is an appropriate threshold for the imposition of a default 
liquidity fee. We believe that the flexibility in today's amendments 
justifies a decrease in the default liquidity fee threshold, 
particularly because fund boards will be allowed to impose 
discretionary fees and gates, if it is in the best interests of a fund, 
at any time after a fund's weekly liquid assets drop below 30%--i.e., 
before the default liquidity fee threshold is reached.\248\ Our 
proposal, which, as noted above, set a higher threshold for the default 
liquidity fee or the imposition of a gate, did not include board 
discretion to use these tools prior to reaching this threshold. Under 
today's amendments, however, the 10% default liquidity fee threshold is 
designed effectively as a floor to require fund boards to focus on a 
fund's liquidity and to consider what action to take, if any, before 
liquidity is further depleted. Additionally, Commission staff analysis 
shows that a 10% threshold for the default liquidity fee is also a 
threshold few funds would cross in the ordinary course of 
business.\249\
---------------------------------------------------------------------------

    \248\ See rule 2a-7(c)(2)(i); cf. Treasury Strategies III 
Comment Letter (suggesting that fees and gates will better prevent a 
run if they are imposed intraday).
    \249\ See Proposing Release supra note 25, at 177 (setting forth 
a chart that show from March 2011 through October 2012, there was 
only one month that any funds reported weekly liquid assets below 
15% and only one month that a fund reported weekly liquid assets 
below 10%). Because liquidity data reported to the Commission is as 
of month end, it could be the case that more than one money market 
fund's level of weekly liquid assets fell below 10% 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 
default liquidity fee because funds may increase their risk 
management around their level of weekly liquid assets in response to 
the default liquidity fee to avoid breaching the default liquidity 
fee threshold, or that many funds may impose fees and/or gates after 
they cross the 30% threshold, allowing them to repair their 
liquidity prior to reaching the 10% threshold.
---------------------------------------------------------------------------

    Some commenters on the fees and gates threshold suggested moving 
away from weekly liquid asset levels as the triggering mechanism.\250\ 
One commenter noted that the most appropriate rules-based threshold 
would be if the shadow price fell to $0.9975 or below.\251\ Another 
commenter also suggested that, to the extent the Commission moved 
forward with a rules-based threshold, ``defaults, acts of insolvency, 
significant downgrades or determinations that a portfolio security no 
longer presents minimum credit risk'' should be added to the situations 
in which a board could impose a fee or gate.\252\
---------------------------------------------------------------------------

    \250\ But see Fidelity Comment Letter (``We also favor using the 
weekly liquid asset level as the measure because it is the best 
indicator of liquidity and is less susceptible to extraneous 
factors. In addition, the weekly liquidity structure reflects daily 
liquidity within its calculation.''). As noted in section 
III.A.2.a.i, a number of commenters argued for giving boards the 
discretion to impose redemption restrictions. See supra note 230.
    \251\ See HSBC Comment Letter; see also Comment Letter of HSBC 
Global Asset Management Ltd (Feb. 15, 2013) (available in File No. 
FSOC-2012-0003) (``HSBC FSOC Comment Letter'') (suggesting setting 
the market-based NAV trigger at $0.9975). 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.
    \252\ See Federated II Comment Letter.
---------------------------------------------------------------------------

    We do not believe a drop in a fund's NAV (or shadow price, to the 
extent the money market fund is a stable value fund), or a default, act 
of insolvency, significant downgrade or determination that a portfolio 
security no longer presents minimum credit risk, would be the 
appropriate threshold for the imposition of fees and gates. First, as 
we discussed in the Proposing Release, we are concerned that a money 
market fund being able to impose a fee only when the fund's NAV or 
shadow price has fallen by some amount may in certain cases come too 
late to mitigate the potential consequences of heavy redemptions on a 
fund's liquidity and to fully protect investors.\253\ 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. Second, the 
thresholds we are adopting today are just that--thresholds. If it is 
not in the best interests of a fund, a board is not required to impose 
a liquidity fee or redemption gate when the fund's weekly liquid assets 
have fallen below 30% or 10%, respectively. Moreover, once a fund has 
crossed below a weekly liquid asset threshold, a board is not prevented 
from taking into account whether the fund's NAV or shadow price has 
deteriorated in considering whether to impose fees or gates. Finally, 
the fees and gates amendments are intended to address the liquidity of 
the fund and its ability to meet redemptions, not to address every 
possible circumstance that may adversely affect a money market fund and 
its holdings. However, if a particular circumstance, such as a default, 
act of insolvency, significant downgrade, or increased credit risk, 
affects the liquidity of a fund such that its weekly liquid assets drop 
below the 30% threshold for imposition of fees and gates, a fund could 
then impose a fee or gate.
---------------------------------------------------------------------------

    \253\ As we also discussed in the Proposing Release, a threshold 
based on shadow price 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.'' See 
Proposing Release supra note 25, at 179-180.
---------------------------------------------------------------------------

    Another commenter suggested basing the threshold for redemption 
gates on the level at which a money market fund's liquidity would force 
it to sell assets.\254\ This particular commenter was concerned that a 
threshold based on 15% weekly liquid assets might otherwise cause funds 
close to the threshold to start selling assets to avoid crossing the 
threshold, which could have a larger destabilizing effect on the 
markets.\255\ We appreciate the commenter's concerns and believe that 
the higher weekly liquid asset threshold for the imposition of fees and 
gates and the increased board flexibility included in today's 
amendments should lessen such a risk. In particular, as discussed above 
in section III.A.1.c.i, we believe that the 30% weekly liquid assets 
threshold will allow a money market fund to impose a fee or gate while 
it still has substantial remaining internal liquidity, thus putting it 
in better position to bear redemptions without a broader market impact 
because it can satisfy redemption requests through internally generated 
cash and not through asset sales (other than perhaps sales of 
government securities that tend to increase in value and liquidity in 
times of stress). In addition, the board flexibility in today's 
amendments could result in funds imposing gates at different times and, 
thus, to the extent funds determine to dispose of their assets to raise 
liquidity, it could also result in funds disposing assets at different 
times, lessening any potential strain on the markets.
---------------------------------------------------------------------------

    \254\ Comment Letter of James Angel (Georgetown/Wharton) (Sept. 
17, 2013) (``Angel Comment Letter'').
    \255\ Angel Comment Letter.

---------------------------------------------------------------------------

[[Page 47761]]

b. Board Determinations
    In the Proposing Release, we discussed a number of factors that a 
fund's board of directors may want to consider in determining whether 
to impose a liquidity fee or redemption gate.\256\ We received a 
variety of comments related to these factors and, more generally, about 
board determinations regarding fees and gates. Some commenters 
suggested that the Commission provide additional guidance on the nature 
and scope of the findings that boards can make.\257\ A commenter asked 
the Commission to provide an expanded list of examples and a non-
exclusive list of factors to be considered by boards with respect to 
imposing a fee or gate.\258\ The commenter added that the Commission 
should clarify that boards need to consider only those factors they 
reasonably believe to be relevant, not all factors or examples that the 
Commission might generally suggest.\259\
---------------------------------------------------------------------------

    \256\ See Proposing Release, supra note 25, at 178-179.
    \257\ See, e.g., ABA Business Law Section Comment Letter; 
Comment Letter of New York City Bar Committee on Investment 
Management Regulation (Sept. 26, 2013) (``NYC Bar Committee Comment 
Letter''); Federated X Comment Letter; but see, e.g., MFDF Comment 
Letter.
    \258\ See NYC Bar Committee Comment Letter.
    \259\ Id.
---------------------------------------------------------------------------

    In contrast, another commenter, an industry group representing fund 
directors, supported the Commission providing only minimal guidance on 
what factors boards might consider.\260\ This commenter argued that 
``providing any guidance on what factors boards should consider (beyond 
the very general and non-exclusive examples in the Proposing Release) 
is likely to be counter-productive.'' \261\ The commenter also 
suggested that the Commission clarify that a ``best interests of the 
fund'' standard would not demand that boards place significant emphasis 
on the broader systemic effects of their decision.\262\
---------------------------------------------------------------------------

    \260\ See MFDF Comment Letter.
    \261\ Id.
    \262\ See id.
---------------------------------------------------------------------------

    The ``best interests'' standard in today's amendments recognizes 
that each fund is different and that, once a fund's weekly liquid 
assets have dropped below the minimum required by rule 2a-07, a fund's 
board is best suited, in consultation with the fund's adviser, to 
determine when and if a fee or gate is in the best interests of the 
fund.\263\ The factors we set forth in the Proposing Release were 
intended only as possible factors a board may consider when making a 
best interests determination. They were not meant to be a one-size-
fits-all or exhaustive list of factors. We agree with the commenter who 
suggested an exclusive list of factors could be counter-productive. We 
recognize that there are differences among funds and that the markets 
are dynamic, particularly in a crisis situation. Accordingly, an 
exhaustive list of factors may not address each fund's particular 
circumstances and could quickly become outdated. Instead, we believe a 
fund board should consider any factors it deems appropriate when 
determining whether fees and/or gates are in the best interests of a 
fund. We note that these factors may include the broader systemic 
effects of a board's decision, but point out that the applicable 
standard for a board's determination under the amended rule is whether 
a fee or gate is in the fund's best interests.
---------------------------------------------------------------------------

    \263\ For a discussion of why the Commission is adopting a 
hybrid approach to the imposition of fees and gates, see supra 
section III.A.2.a.i.
---------------------------------------------------------------------------

    Nonetheless, we believe it is appropriate to provide certain 
guideposts that boards may want to keep in mind, as applicable and 
appropriate, when determining whether a fund should impose fees or 
gates and are providing such guidance in this Release. As recognized in 
the Proposing Release, there are a number of factors a board may want 
to consider. These may include, but are not limited to: relevant 
indicators of liquidity stress in the markets and why the fund's weekly 
liquid assets have fallen (e.g., Have weekly liquid assets fallen 
because the fund is experiencing mounting redemptions during a time of 
market stress or because a few large shareholders unexpectedly redeemed 
shares for idiosyncratic reasons unrelated to current market conditions 
or the fund?); the liquidity profile of the fund and expectations as to 
how the profile might change in the immediate future, including any 
expectations as to how quickly a fund's liquidity may decline and 
whether the drop in weekly liquid assets is likely to be very short-
term (e.g., Will the decline in weekly liquid assets be cured in the 
next day or two when securities currently held in the fund's portfolio 
qualify as weekly liquid assets?); \264\ for retail and government 
money market funds, whether the fall in weekly liquid assets has been 
accompanied by a decline in the fund's shadow price; \265\ the make-up 
of the fund's shareholder base and previous shareholder redemption 
patterns; and/or the fund's experience, if any, with the imposition of 
fees and/or gates in the past.
---------------------------------------------------------------------------

    \264\ As discussed in the Proposing Release, 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. See 
Proposing Release, supra note 25, at 179.
    \265\ Likewise, a floating NAV fund's board may wish to consider 
any drops in the fund's NAV.
---------------------------------------------------------------------------

    Some commenters urged the Commission to affirm that a board's 
deliberations would be protected by the business judgment rule.\266\ 
One commenter was particularly concerned about the threat of litigation 
if boards were not protected by the rule, as it could ``chill the 
board's ability to act in a manner that would be highly 
counterproductive in times of market stress.'' \267\ While sensitive to 
this commenter's concerns, we do not believe it would be appropriate 
for us to address the application of the business judgment rule because 
the business judgment rule is a construct of state law and not the 
federal securities laws.
---------------------------------------------------------------------------

    \266\ See, e.g., Dreyfus Comment Letter; Chamber II Comment 
Letter; MFDF Comment Letter; IDC Comment Letter.
    \267\ See MFDF Comment Letter.
---------------------------------------------------------------------------

    Other commenters proposed that boards should be permitted to 
reasonably determine and commit themselves in advance to a policy to 
not allow a fee or gate to ever be imposed on a fund.\268\ We disagree. 
A blanket decision on the part of a fund board to not impose fees or 
gates, without any knowledge or consideration of the particular 
circumstances of a fund at a given time, would be flatly inconsistent 
with the fees and gates amendments we are adopting today, which, at a 
minimum, require a fund to impose a liquidity fee when its weekly 
liquid assets have dropped below 10%, unless the fund's board 
affirmatively finds that such fee is not in the best interests of the 
fund. As discussed above, we believe that when a fund falls below 10% 
weekly liquid assets, its liquidity is sufficiently stressed that its 
board should be required to consider, based on the facts and 
circumstances at that time, what, if any, action should be taken to 
address a fund's liquidity. We regard fees and gates as additional 
tools for boards to employ when necessary and appropriate to protect 
the fund and its shareholders. We note, however, that our amendments do 
not require funds to impose fees and gates when it is not in a fund's 
best interests.
---------------------------------------------------------------------------

    \268\ See Goldman Sachs Comment Letter; ABA Business Law Section 
Comment Letter. These commenters were concerned that uncertainties 
over a fee or gate could lead to pre-emptive runs. We discuss pre-
emptive runs in section III.A.1.c.i of this Release.
---------------------------------------------------------------------------

    Certain commenters cited operational challenges with respect to 
fees and gates and board quorum requirements, given that in a crisis a 
board's independent

[[Page 47762]]

board members may not be readily available on short notice.\269\ 
Commenters thus proposed that the quorum requirement be relaxed to 
require only the approval of a majority of independent directors 
available rather than of all independent directors.\270\
---------------------------------------------------------------------------

    \269\ See Comment Letter of PFM Asset Management, LLC (Sept. 17, 
2013) (``PFM Asset Mgmt. Comment Letter''); ABA Business Law Section 
Comment Letter; Comment Letter of Ropes & Gray LLP (Sept. 17, 2013) 
(``Ropes & Gray Comment Letter'').
    \270\ See id.
---------------------------------------------------------------------------

    We have not made the requested change. The requirement that a 
majority of independent directors make a determination with respect to 
a fund matter is not unique to today's amendments. This requirement is 
widely used in the Investment Company Act and its rules, including a 
number of other exemptive rules.\271\ As we have emphasized, 
independent directors are the ``independent watchdogs'' of a fund, and 
the Investment Company Act and its rules rely on them to protect 
investor interests.\272\ A determination with respect to fees and gates 
by less than a majority of independent directors would not provide the 
level of independent oversight we are seeking in today's amendments, or 
in carrying out the purposes of the Investment Company Act. The 
decision to impose redemption restrictions on a fund's investors has 
significant ramifications for shareholders, and it is one that we 
believe should be entrusted only to a fund's board, including its 
independent directors. We note, however, that today's amendments do not 
require a best interests determination to be made at an in-person 
meeting and, thus, fund boards, including their independent directors, 
could hold meetings telephonically or through any other technological 
means by which all directors could be heard.\273\
---------------------------------------------------------------------------

    \271\ See, e.g., rule 12b-1 and rule 15a-4.
    \272\ See Role of Independent Directors of Investment Companies, 
Investment Company Act Release No. 24082 (Oct. 15, 1999).
    \273\ The Commission has previously recognized that fund boards 
can hold meetings telephonically or through other technological 
means by which all directors can be heard simultaneously. See, e.g., 
rule 15a-4 (permitting the approval of an interim advisory contract 
by a fund board at a meeting in which directors may participate by 
any means of communication that allows all directors participating 
to hear each other simultaneously during the meeting).
---------------------------------------------------------------------------

    Some commenters asserted that a fund's adviser or sponsor should 
have greater input regarding the imposition of a fee or gate.\274\ For 
example, one commenter urged the Commission to recognize that ``the 
primary role of the board is oversight'' and acknowledge ``both the 
ability and practical necessity of delegating day-to-day decision-
making functions to a fund's officers and investment adviser/
administrator pursuant to procedures approved by the board.'' \275\ A 
few other commenters suggested that the Commission provide guidance 
that an adviser must provide the board certain information, guidance or 
a recommendation on whether to impose a fee or gate.\276\
---------------------------------------------------------------------------

    \274\ See, e.g., NYC Bar Committee Comment Letter; Ropes & Gray 
Comment Letter; PFM Asset Mgmt. Comment Letter.
    \275\ See Ropes & Gray Comment Letter.
    \276\ See NYC Bar Committee Comment Letter; Comment Letter of 
the Independent Trustees of the Wilmington Funds (Sept. 17, 2013) 
(``Wilmington Trustees Comment Letter''); ABA Business Law Section 
Comment Letter.
---------------------------------------------------------------------------

    We believe that a fund's board, and not its adviser, is the 
appropriate entity to determine (within the constructs of the rule) 
when and how a fund will impose liquidity fees and/or redemption gates. 
As discussed above, given the role of independent directors, a fund's 
board is in the best position to determine whether a fee or gate is in 
the best interests of the fund.\277\ The Investment Company Act and its 
rules require many other fund fees and important matters to be approved 
by a fund's board, including a majority of independent directors, and 
we do not believe that liquidity fees and redemption gates should be 
treated differently.\278\
---------------------------------------------------------------------------

    \277\ If a fund's adviser was charged with determining when to 
impose fees and gates, it could choose, irrespective of its 
fiduciary duty, to act in its own interests rather than the 
interests of fund shareholders by, for example, not imposing a fee 
or gate for fear that it would negatively impact the adviser's 
reputation. We note that the role of independent directors on a fund 
board should counteract any similar concerns on the part of 
interested directors.
    \278\ See, e.g., section 15(a)-(c); rule 12b-1 and rule 22c-2.
---------------------------------------------------------------------------

    We note that although the final rule amendments contemplate that 
information from a fund's adviser will inform the board's determination 
involving a fee or gate,\279\ we are not charging a fund's adviser with 
specific duties under today's amendments. As the board is the entity 
charged with overseeing the fund and determining whether a fee or gate 
is in the fund's best interests, we believe the board should dictate 
the information and analysis it needs from the adviser in order to 
inform its decision. Nonetheless, as a matter of course and in light of 
its fiduciary duty to the fund, an adviser should provide the board 
with necessary and relevant information to enable the board to make the 
determinations under the rule.
---------------------------------------------------------------------------

    \279\ Because a fund's adviser is responsible for managing the 
portfolio, it is the entity that will have direct access to 
information on the fund's liquidity. As noted below, a fund's 
adviser should provide the board with all necessary and relevant 
information to make the determinations under the rule.
---------------------------------------------------------------------------

c. Size of Liquidity Fee
    Today's amendments will permit a money market fund to impose a 
discretionary liquidity fee of up to 2% after its weekly liquid assets 
drop below 30% of its total assets. We are also adopting a default 
liquidity fee of 1% that must be imposed if a fund drops below 10% 
weekly liquid assets, unless a fund's board determines not to impose 
such a fee, or to impose a lower or higher fee (not to exceed 2%) 
because it is in the best interests of the fund.\280\ As proposed, the 
amendments would have required funds to impose a default liquidity fee 
of 2% after a fund's weekly liquid assets dropped below 15% of its 
total assets, although (as under our final amendments) fund boards 
could have determined not to impose the fee or to lower the fee.
---------------------------------------------------------------------------

    \280\ See rule 2a-7(c)(2)(ii)(A).
---------------------------------------------------------------------------

    We received a wide range of comments on the size and structure of 
the proposed liquidity fee.\281\ A few commenters expressly supported a 
default fee of 2%.\282\ One commenter expressed concern that a maximum 
2% fee may be insufficient in times of crisis and urged the Commission 
to permit greater flexibility in setting an even higher fee if 
necessary.\283\
---------------------------------------------------------------------------

    \281\ We note that prior to issuing the proposal, commenters had 
suggested liquidity fee levels ranging from 1% to 3% could be 
effective. See, e.g., Comment Letter of Vanguard (Jan. 15, 2013) 
(available in File No. FSOC-2012-0003) (``Vanguard FSOC Comment 
Letter'') (recommending a fee of between 1 and 3%); BlackRock FSOC 
Comment Letter (recommending a standby liquidity fee of 1%); ICI 
Jan. 24 FSOC Comment Letter (recommending a 1% fee).
    \282\ See J.P. Morgan Comment Letter; Ropes & Gray Comment 
Letter; Schwab Comment Letter; Wells Fargo Comment Letter.
    \283\ See Ropes & Gray Comment Letter.
---------------------------------------------------------------------------

    Other commenters explicitly argued against a default fee of 
2%.\284\ One commenter noted that 2% would be excessive ``since it is 
far higher than the actual cost of liquidity paid by money market funds 
even at the height of the financial crisis.'' \285\ Other commenters 
described a 2% fee as punitive \286\ and arbitrary.\287\ A number of 
commenters favored instead a default fee of 1% while also allowing 
boards discretion to set a higher or lower fee.\288\
---------------------------------------------------------------------------

    \284\ See, e.g., Fidelity Trustees Comment Letter; Fidelity 
Comment Letter; Invesco Comment Letter; Comment Letter of Financial 
Services Roundtable (Sept. 17, 2013) (``Fin. Svcs. Roundtable 
Comment Letter'').
    \285\ See Invesco Comment Letter.
    \286\ See, e.g., Fidelity Trustees Comment Letter; Fidelity 
Comment Letter.
    \287\ See, e.g., Fin. Svcs. Roundtable Comment Letter.
    \288\ See Dreyfus Comment Letter; SIFMA Comment Letter; Northern 
Trust Comment Letter; BlackRock II Comment Letter; Fidelity Comment 
Letter.

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[[Page 47763]]

    As suggested by commenters, the amendments we are adopting today 
will impose a default liquidity fee of 1%, that may be raised or 
lowered (or not imposed at all) by a fund's board. As discussed below, 
we are persuaded by commenters that 2% may be higher than most 
liquidity costs experienced when selling money market securities in a 
crisis, and may thus result in a penalty for redeeming shareholders 
over and above paying for the costs of their liquidity.\289\ We are 
also persuaded by commenters that fund boards may be reluctant to 
impose a fee that is lower than the default liquidity fee for fear of 
being second-guessed--by the market, the Commission, or otherwise.\290\ 
Accordingly, commenters supporting the 1% default fee have persuaded us 
that 1% is the correct default fee level.
---------------------------------------------------------------------------

    \289\ See, e.g., SIFMA Comment Letter (``Our members' consensus 
is that a redemption fee of 100 basis points will adequately 
compensate a money market fund for the costs of liquidating assets 
to honor redemptions in times of market stress, and avoid imposing a 
punitive charge on shareholders.''); Fidelity Comment Letter (``We 
have examined the liquidation costs for our money market funds that 
sold securities during the period immediately following the 
bankruptcy of Lehman Brothers and determined that the highest 
liquidation cost was less than 50 basis points of face value. 
Recognizing that liquidation costs in a future market stress 
scenario may be greater, we think it is reasonable to set a 
liquidation fee at 100 basis points or one percent.'').
    \290\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    Furthermore, analysis by Commission staff of liquidity costs of 
certain corporate bonds during the financial crisis further confirms 
that a reduced default fee of 1% is appropriate.\291\ DERA staff 
estimated increases in transaction spreads for certain corporate bonds 
that occurred during the financial crisis.\292\ Relative to transaction 
spreads observed during the pre-crisis period from January 2, 2008 to 
September 11, 2008, average transaction spreads increased by 54.1 bps 
for Tier 1 eligible securities and by 104.4 bps for Tier 2 eligible 
securities during the period from September 12, 2008 to October 20, 
2008. These estimates indicate that market stress increases the average 
cost of obtaining liquidity by an amount closer to 1% than 2%.\293\
---------------------------------------------------------------------------

    \291\ See DERA Liquidity Fee Memo, supra note 111.
    \292\ See id.
    \293\ DERA obtained information on trades in Tier 1 and Tier 2 
eligible securities, as defined in rule 2a-7 from TRACE (Trade 
Reporting and Compliance Engine) between January 2, 2008 through 
December 31, 2009, and formed a Tier 1 and a Tier 2 sample. TRACE 
provides transaction records for TRACE eligible securities that have 
a maturity of more than a year at issuance. Money market 
instruments, sovereign debt, and debt securities that have a 
maturity of less than a year at issuance are not reported in TRACE 
and hence DERA's sample differs from what money market funds hold. 
Nevertheless, the samples constructed from TRACE provide estimates 
for costs of liquidity during market stress since the selected 
securities have similar time-to-maturity and credit risk 
characteristics as those permitted under rule 2a-7. DERA included in 
the samples only trades of bonds with fewer than 120 days to 
maturity and with a trade size of at least $100,000. DERA classified 
bonds with credit ratings equal to AAA, AA+, AA, or AA- as Tier 1 
eligible securities. The average days to maturity for Tier 1 
securities in the sample is 67 days, which roughly reflects the 60-
day weighted average maturity limit specified in rule 2a-7. Bonds 
with credit ratings equal to A+, A, or A- represent Tier 2 eligible 
securities. The average days to maturity for Tier 2 securities in 
the sample is 28 days, which is somewhat lower than the 45-day 
weighted average maturity limit required by rule 2a-7.
---------------------------------------------------------------------------

    We received a number of comments on DERA's analysis of liquidity 
costs.\294\ Some commenters agreed that DERA's analysis supports a 
default liquidity fee of 1% and that 1% is the appropriate level for 
the fee.\295\ Other commenters, however, took issue with DERA's 
methodology in examining liquidity costs and, one commenter suggested a 
default fee ``as low as'' 0.50% may be appropriate.\296\
---------------------------------------------------------------------------

    \294\ See, e.g., Comment Letter of SIFMA (Apr. 23, 2014) 
(``SIFMA II Comment Letter''); Comment Letter of Dreyfus Corporation 
(Apr. 23, 2014) (``Dreyfus DERA Comment Letter''); Comment Letter of 
Invesco (Apr. 23, 2014) (``Invesco DERA Comment Letter'').
    \295\ See SIFMA II Comment Letter (``Data in the [DERA] 
Liquidity [Fee Memo] support that a lower default level [from the 
level proposed] will effectively compensate money market funds for 
the cost of liquidity during market turmoil. . . . A 100 basis point 
(1%) default level for the liquidity fee will more closely 
approximate the fund's cost of providing liquidity during a crisis 
period for a portfolio comprised largely of Tier 1 securities.''); 
Dreyfus DERA Comment Letter (``We read [DERA's analysis] and 
interpret the average spread calculations contained [in the DERA 
Liquidity Fee Memo] to support a [default liquidity fee] of 1% and 
not 2%, as proposed.''); Fidelity DERA Comment Letter (supporting a 
1% liquidity fee and suggesting the empirical market data examined 
by DERA in its Liquidity Fee Memo is ``critical in order for the SEC 
to determine the size of a liquidity fee,'' but noting that the 
methodology in DERA's analysis ``overstates the estimates of 
absolute spreads.'')
    \296\ See Invesco DERA Comment Letter (suggesting concerns with 
the data and methodology used in DERA's analysis); BlackRock DERA 
Comment Letter (suggesting the methodology used in DERA's analysis 
was not ``the appropriate methodology to measure the true cost of 
liquidity in MMFs,'' particularly the use of TRACE data); Comment 
Letter of Federated Investors Inc. (Liquidity Fee) (Apr. 23, 2014) 
(``Federated DERA II Comment Letter'') (suggesting it generally 
agrees with DERA's methodology, but believes that a more appropriate 
default liquidity fee may be ``as low as'' 0.50% because ``use of 
[TRACE] bond data as the basis for spread analysis led DERA to find 
significantly larger spreads than it would have found had it based 
its analysis on the short-term instruments in which MMFs actually 
invest''); see also Fidelity DERA Comment Letter (supporting a 1% 
default liquidity fee, but suggesting that the spreads cited in 
DERA's analysis are higher than those it has seen it its experience 
and that its independent analysis reflects average spreads between 
0.12% and 0.57% during the week immediately following the Lehman 
Brothers bankruptcy).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we have attempted to set the 
default liquidity fee high enough to deter shareholder redemptions so 
that funds can recoup costs of providing liquidity to redeeming 
shareholders in a crisis and so that the fund's liquidity is not 
depleted, but low enough to permit investors who wish to redeem despite 
the cost to receive their proceeds without bearing disproportionate 
costs.\297\ Based on the comments we received on the proposal, we 
believe that a default fee of 1% strikes this balance. Although we have 
looked to the DERA study as confirming our decision based on comments 
we received supporting the 1% fee, we recognize commenters' critiques 
of the methodology used in the DERA analysis. We also note, however, 
that DERA acknowledged in its memorandum that its samples were not 
perfectly analogous to money market fund holdings, but that the samples 
nevertheless ``provide estimates for costs of liquidity during market 
stress since the selected securities have similar time-to-maturity and 
credit risk characteristics as those permitted under Rule 2a-7.'' \298\ 
Moreover, at least one commenter who took issue with DERA's samples 
agreed, based on its own independent analysis, that a default liquidity 
fee of 1% is appropriate.\299\ Furthermore, because we recognize that 
establishing any fixed fee level may not precisely address the 
circumstances of a particular fund in a crisis, we are permitting (as 
in the proposal) fund boards to alter the level of the default 
liquidity fee and to tailor it to the specific circumstances of a fund. 
As amended, rule 2a-7 will permit fund boards to increase (up to 2%), 
decrease (to, for example, 0.50% as suggested by a commenter), or not 
impose the default

[[Page 47764]]

1% liquidity fee if it is in the best interests of the fund.
---------------------------------------------------------------------------

    \297\ See, e.g., SIFMA Comment Letter; Fidelity Trustees Comment 
Letter; Fidelity Comment Letter (suggesting a 2% fee would be 
punitive); see also supra note 281.
    \298\ See DERA Liquidity Fee Memo, supra note 111. Some 
commenters suggested we should analyze liquidity spreads in actual 
money market fund portfolios. See Federated DERA II Comment Letter; 
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter. 
However, as one commenter acknowledged, this information is not 
publicly available, and we note that only one commenter on the DERA 
Liquidity Fee Memo provided specific information in this area. See 
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter 
(providing specific information on spreads during the financial 
crisis and stating that a 1% default liquidity fee is appropriate). 
We believe one data point is not adequate for us to draw conclusions 
on liquidity costs in money market funds during the crisis.
    \299\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    As proposed and supported by commenters,\300\ we are limiting the 
maximum liquidity fee that may be imposed by a fund to 2%. As with the 
default fee, we seek to balance the need for liquidity costs to be 
allocated to redemptions with shareholders' need to redeem absent 
disproportionate costs. We also believe setting a limit on the level of 
a liquidity fee provides notice to investors about the extent to which 
a liquidity fee could impact their investment. In addition, as 
recognized by at least one commenter,\301\ the staff has noted in the 
past that fees greater than 2% raise questions regarding whether a 
fund's securities remain ``redeemable.'' \302\ We note that if a fund 
continues to be under stress even with a 2% liquidity fee, the fund 
board may consider imposing a temporary redemption gate under amended 
rule 2a-7 or liquidating the fund pursuant to amended rule 22e-3.
---------------------------------------------------------------------------

    \300\ See, e.g., SIFMA Comment Letter.
    \301\ See NYC Bar Assoc. Comment Letter.
    \302\ Section 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 rule 23c-3(b)(1), which 
permits a maximum 2% repurchase fee for interval funds and rule 22c-
2(a)(1)(i),which similarly permits a maximum 2% redemption fee to 
deter frequent trading in mutual funds.
---------------------------------------------------------------------------

    As recognized in the Proposing Release, there are a number of 
factors a board may want to consider in determining the level of a 
liquidity fee. These may include, but are not limited to: changes in 
spreads for portfolio securities (whether based on actual sales, dealer 
quotes, pricing vendor mark-to-model or matrix pricing, or otherwise); 
the maturity of the fund's portfolio securities; changes in the 
liquidity profile of the fund in response to redemptions and 
expectations regarding that profile in the immediate future; whether 
the fund and its intermediaries are capable of rapidly putting in place 
a fee of a different amount from a previously set liquidity fee or the 
default liquidity fee; if the fund is a floating NAV fund, the extent 
to which liquidity costs are already built into the NAV of the fund; 
and the fund's experience, if any, with the imposition of fees in the 
past. We note that fund boards should not consider our 1% default 
liquidity fee as creating the presumption that a liquidity fee should 
be 1%. If a fund board believes based on market liquidity costs at the 
time or otherwise that a liquidity fee is more appropriately set at a 
lower or higher (up to 2%) level, it should consider doing so. Once a 
liquidity fee has been imposed, the fund's board would likely need to 
monitor the imposition of such fee, including the size of the fee, and 
whether it continues to be in the best interests of the fund.\303\
---------------------------------------------------------------------------

    \303\ A board may change the level of a liquidity fee at any 
time if it determines it is in the best interests of the fund to do 
so. Similarly, once a gate is imposed, the fund's board would likely 
monitor the imposition of the gate and whether it remains in the 
best interests of the fund to continue imposing the gate.
---------------------------------------------------------------------------

    Other commenters argued for even more flexible approaches and/or 
entirely different standards for setting a fee.\304\ For example, a 
commenter argued against having any default fee and instead supported 
allowing the board to tailor the fee to encompass the cost of liquidity 
to the fund.\305\ Different commenters similarly argued that liquidity 
fees should be carefully calibrated in relation to a fund's actual cost 
of liquidity.\306\ A commenter noted this calibration could be achieved 
by, rather than setting a fixed fee in advance, delaying redemptions 
for up to seven days to allow the fund to determine the size of the fee 
based on actual transaction costs incurred on each day's 
redemptions.\307\ Finally, a commenter proposed a flexible redemption 
fee whereby redemptions would occur at basis point NAV (i.e., NAV to 
the fourth decimal place) plus 1%.\308\
---------------------------------------------------------------------------

    \304\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab 
Comment Letter; Santoro Comment Letter; Invesco Comment Letter.
    \305\ See Fin. Svcs. Roundtable Comment Letter.
    \306\ See Invesco Comment Letter; Ropes & Gray Comment Letter.
    \307\ See Ropes & Gray Comment Letter.
    \308\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the amendments we are adopting today 
incorporate substantial flexibility for a fund board to determine when 
and how it imposes liquidity fees. We believe that including in the 
amended rule a 1% default fee that may be modified by the board is the 
best means of directing fund boards to a liquidity fee that may be 
appropriate in stressed market conditions, while at the same time 
providing flexibility to boards to lower or raise the liquidity fee if 
a board determines that a different fee would better and more fairly 
allocate liquidity costs to redeeming shareholders. We would encourage 
a fund board, if practicable given any timing concerns, to consider the 
actual cost of providing liquidity when determining if the default 
liquidity fee is in the fund's best interests. In addition, we note 
that under today's amendments, a fund board also could, as suggested by 
a commenter, determine that the default fee is not in the best 
interests of the fund and instead gate the fund for a period of time, 
possibly later imposing a liquidity fee.
    Furthermore, we have determined not to explicitly tie the default 
liquidity fee to market indicators. As discussed in the Proposing 
Release, we believe there are certain drawbacks to such a ``market-
sized'' liquidity fee.\309\ First, it may be difficult for money market 
funds to rapidly determine precise liquidity costs in times of stress 
when the short-term financing markets may generally be illiquid.\310\ 
Similarly, the additional burdens associated with computing a market-
sized liquidity fee could make it more difficult for funds and their 
boards to act quickly and proactively to stem heavy redemptions. 
Second, a market-sized liquidity fee does not signal in advance the 
size of the liquidity fee shareholders may have to pay if the fund's 
liquidity is significantly stressed.\311\ This lack of transparency may 
hinder shareholders' ability to make well-informed investment decisions 
because investors may invest funds without realizing the extent of the 
costs they could incur on their redemptions.
---------------------------------------------------------------------------

    \309\ See Proposing Release, supra note 25, at 183; see also 
HSBC FSOC Comment Letter (suggesting 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).
    \310\ Our staff gave no-action assurances to money market funds 
relating to valuation during the financial crisis because 
determining pricing in the then-illiquid markets was so difficult. 
See 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.'').
    \311\ A liquidity fee based on market indicators would not 
provide notice to shareholders of the potential level of a liquidity 
fee like our maximum 2% fee and default fee level of 1% provide.
---------------------------------------------------------------------------

    Finally, commenters proposed various potential exemptions from the 
default

[[Page 47765]]

liquidity fee. For example, a commenter suggested an exemption for all 
shareholders to redeem up to $1 million for incidental expenditures 
without a fee.\312\ Other commenters argued that a fee should not be 
imposed on newly purchased shares.\313\ For several independent 
reasons, we do not currently believe that there should be exemptions to 
the default liquidity fee. First, because the circumstances under which 
liquidity becomes expensive historically have been infrequent, we 
believe the imposition of fees and gates will also be infrequent. As 
long as funds' weekly liquid assets are above the regulatory threshold 
(i.e. 30%), fund shareholders should continue to enjoy unfettered 
liquidity for money market fund shares.\314\ The likely limited and 
infrequent use of liquidity fees leads us to believe exemptions are 
generally unnecessary. Second, liquidity fees are meant to impose at 
least some of the cost of liquidity on those investors who are seeking 
liquidity by redeeming their shares. Allowing exemptions to the default 
liquidity fee would run counter to this purpose and permit some 
investors to avoid bearing at least some of their own costs of 
obtaining liquidity and could serve to further harm the liquidity of 
the fund, potentially requiring the imposition of a liquidity fee for 
longer than would otherwise be necessary. Third, as suggested by 
commenters and discussed in section III.C.7.a below, exemptions to the 
default liquidity fee would increase the cost and complexity of the 
amendments for funds and intermediaries because funds would have to 
develop the systems and policies to track, for example, the amount of 
each shareholder's redemption, and could facilitate gaming on the part 
of investors because investors could attempt to fit their redemptions 
within the scope of an exemption.\315\
---------------------------------------------------------------------------

    \312\ See Capital Advisors Comment Letter.
    \313\ See ABA Business Law Section Comment Letter; Wilmington 
Trustees Comment Letter; Federated V Comment Letter.
    \314\ See Proposing Release, supra note 25, at n.342.
    \315\ See, e.g., Federated V Comment Letter (``Any attempt to 
create exceptions, such as allowing redemptions free of any 
liquidity fee up to a set dollar amount or percentage of the 
shareholder's account balance, would add significant operational 
hurdles to the proposed reform. In order to be applied equitably, 
prime [money market funds] would have to take steps to assure that 
intermediaries were implementing the exceptions on a consistent 
basis.''); Fidelity Comment Letter (urging the Commission not to 
adopt partial gates, which like an exception to a liquidity fee, 
would, for example, except a certain amount of redemptions (e.g., up 
to $250,000 per shareholder) from a gate that has been imposed). The 
commenter stated ``that the challenges and costs associated with 
[partial gates] outweigh the benefits. The systems enhancements 
necessary to track holdings for purposes of determining each 
shareholder's redemption limit would be more complicated, 
cumbersome, and costly than the changes required to implement the 
full gate, [and] that this complicated structure lends itself to 
arbitrary or inconsistent application across the industry and 
potential inequitable treatment among shareholders.'' Id.
---------------------------------------------------------------------------

d. Duration of Fees and Gates
    We are adopting, as proposed, a requirement that any fee or gate be 
lifted automatically once the fund's weekly liquid assets have risen to 
or above 30% of the fund's total assets. We are also adopting, with 
certain modifications from the proposal as discussed below, a 
requirement that a money market fund must lift any gate it imposes 
within 10 business days and that a fund cannot impose a gate for more 
than 10 business days in any 90-day period. As proposed, the amendments 
would have allowed funds to impose a gate for up to 30 days in any 90-
day period.
    Several commenters noted positive aspects of the Commission's 
proposed duration for fees and gates.\316\ Some commenters, however, 
suggested that the duration of liquidity fees, like the duration of 
redemption gates, should be limited to a number of days.\317\ We 
continue to believe that the appropriate duration limit on a liquidity 
fee is the point at which a fund's assets rise to or above 30% weekly 
liquid assets. Thirty percent weekly liquid assets is the minimum 
required under rule 2a-7 and thus a fee (or gate) would appear to no 
longer be justified once a fund's level of weekly liquid assets has 
risen to this level. If we were to limit the imposition of liquidity 
fees to a number of days, a fund might have to remove a liquidity fee 
while it is still under stress and thus it would not gain the full 
benefits of imposing the fee.\318\ Additionally, if a fund was required 
to remove the fee while it was still under stress, it may have to re-
impose the fee shortly thereafter, which could cause investor 
confusion.\319\ We note that a fund's board can always determine that 
it is in the best interests of the fund to lift a fee before the fund's 
level of weekly liquid assets is restored to 30% of its total assets.
---------------------------------------------------------------------------

    \316\ See, e.g., HSBC Comment Letter; Dreyfus Comment Letter; 
SIFMA Comment Letter; UBS Comment Letter.
    \317\ See BlackRock II Comment Letter (``We would also recommend 
that a MMF not be open with a liquidity fee for more than 30 
days.''); Federated V Comment Letter (suggesting that liquidity fees 
should be subject to the same duration limits as redemption gates 
and proposing a limit of 10 calendar days); J.P. Morgan Comment 
Letter; see also UBS Comment Letter (noting that ``there should be a 
maximum time period during which the liquidity fee . . . could be 
imposed'').
    \318\ We note that, unlike a redemption gate, a liquidity fee 
does not prohibit a shareholder from accessing its investment; this 
distinction, in our view, justifies imposing a limited duration on 
the imposition of a gate while not doing so for the imposition of 
fees. We also note that, once a fund's weekly liquid assets drop 
below the regulatory minimum (30%), it is limited to purchasing only 
weekly liquid assets, which should increase the fund's liquidity and 
potentially bring it back above the weekly liquid asset threshold. 
See rule 2a-7(d)(4)(iii).
    \319\ As discussed in the Proposing Release, we considered 
whether a fee or gate should be lifted automatically before a fund's 
weekly liquid assets were completely restored to their required 
minimum--for example, after they had risen to 25%. However, we 
believe that such a requirement would be inappropriate for the same 
reasons we are not limiting the length of time the fee is imposed.
---------------------------------------------------------------------------

    We also received a number of comments on the duration of redemption 
gates.\320\ For example, some commenters described the maximum 30-day 
term for gating as reasonable,\321\ including a commenter that noted it 
would not be in favor of a shorter time period.\322\ Another commenter 
stated its support for the Commission's proposed 30-day time limit for 
redemption gates.\323\ In addition, an industry group commented that 
although its members had varying views, some stressed the importance of 
the maximum 30-day period to allow the fund adequate time to replenish 
its liquidity as securities mature.\324\
---------------------------------------------------------------------------

    \320\ See, e.g., UBS Comment Letter (supporting a maximum time 
period that would require a gated fund to reopen or liquidate 
thereafter).
    \321\ See, e.g., Dreyfus Comment Letter; Page Comment Letter.
    \322\ See Dreyfus Comment Letter (noting that shortening the 
maximum gating period might not be enough time for a fund's 
liquidity levels to adequately recover).
    \323\ See HSBC Comment Letter.
    \324\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    On the other hand, in response to our request for comment on the 
appropriate duration of redemption gates, including our request for 
comment on a 10-day maximum gating period, some commenters raised 
concerns with the proposed 30-day maximum gating period.\325\ For 
example, one commenter noted that ``denying investors access to their 
cash for more than a brief period'' would ``create serious hardships.'' 
\326\ This commenter expressed doubt that it would take boards ``much 
more than a week to resolve what course of action would best serve the 
interest of their shareholders'' and suggested an alternate maximum 
gating period of up to 10 calendar days.\327\ A second

[[Page 47766]]

commenter added that the potential total loss of liquidity for up to 30 
days could further exacerbate pre-emptive runs and even be 
destabilizing to the short-term liquidity markets, and suggested an 
alternative maximum gating period of up to 10 calendar days.\328\ 
Additionally, some members of an industry group suggested that gating 
for a shorter period of time would be more consistent with investors' 
liquidity needs and the requirements of the Investment Company 
Act.\329\
---------------------------------------------------------------------------

    \325\ See, e.g., SIFMA Comment Letter; J.P. Morgan Comment 
Letter; Fla. CFO Comment Letter; Federated V Comment Letter.
    \326\ See Federated II Comment Letter; Federated V Comment 
Letter.
    \327\ See Federated II Comment Letter (``Federated had 
previously proposed limiting any suspension of redemptions to five 
or ten business days. Alternative 2, on the other hand, would set 
the limit in terms of calendar days. Federated therefore recommends 
limiting a temporary suspension of redemptions to not more than ten 
calendar days.''); Federated V Comment Letter; Federated X Comment 
Letter; see also Federated Funds Trustees Comment Letter; J.P. 
Morgan Comment Letter (suggesting a 10-day gating period).
    \328\ See J.P. Morgan Comment Letter.
    \329\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    We have carefully considered the comments we received, both on the 
duration of gates and on the possibility of pre-emptive runs as a 
result of potential gates, and have been persuaded that gates should be 
limited to a shorter time period of up to 10 business days.\330\ As 
discussed in the Proposing Release and reiterated by commenters,\331\ 
we recognize the strong preference embodied in the Investment Company 
Act for the redeemability of open-end investment company shares.\332\ 
Additionally, as was echoed by a number of commenters,\333\ we 
understand that investors use money market funds for cash management 
and a lack of access to their investment for a long period of time can 
impose substantial costs and hardships. Indeed, many shareholders in 
the Reserve Primary Fund informed us about these costs and hardships 
during that fund's lengthy liquidation.\334\ As discussed above, it 
remains one of our goals to preserve the benefits of money market funds 
for investors. Accordingly, upon consideration of the comments 
received, we have modified the final rules to limit the redeemability 
of money market fund shares for a shorter period of time.\335\
---------------------------------------------------------------------------

    \330\ In a change from the proposal, the maximum gating period 
in the final amendments uses business days rather than calendar days 
to better reflect typical fund operations and to mitigate potential 
gaming of the application of gates during weekends or periods during 
which a fund might not already typically accept redemption requests. 
If a fund imposes a gate, it is not required to impose the gate for 
10 business days. Rather, a fund can lift a gate before 10 business 
days have passed and we would expect a board would promptly do so if 
it determines that it is in the best interests of the fund. We note 
that a money market fund board would likely meet regularly during 
any period in which a redemption gate is in place. See supra note 
303. Additionally, a fund's board may also consider permanently 
suspending redemptions in preparation for fund liquidation under 
rule 22e-3 if the fund approaches the 10 business day gating limit.
    \331\ See, e.g., SIFMA Comment Letter.
    \332\ See 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); see also 
section 22(e) (limiting delays in payments on redemptions to up to 
seven days).
    \333\ See, e.g., Federated II Comment Letter; Federated V 
Comment Letter; SIFMA Comment Letter.
    \334\ See 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 purchases 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.'').
    \335\ We recognize that rule 22e-3 does not limit gates to a 
short period of time, but under that rule, a gate is permanent and a 
fund must liquidate thereafter. See rule 22e-3.
---------------------------------------------------------------------------

    Some commenters suggested that the longer a potential redemption 
gate may be imposed, the greater the possibility that investors may try 
to pre-emptively redeem from a fund before the gate is in place.\336\ 
We recognize this concern and believe that if gates are limited to 10 
business days, investors may be less inclined to try to redeem before a 
gate is imposed because 10 business days is a relatively short period 
of time and after that time investors will have access to their 
investment.\337\
---------------------------------------------------------------------------

    \336\ See, e.g., J.P. Morgan Comment Letter; Federated XI 
Comment Letter.
    \337\ See, e.g., Federated V Comment Letter (``[A 10-day maximum 
gating period] would also be consistent with the comments of some of 
the investors who indicated to Federated that they probably could 
not go more than two weeks without access to the cash held in their 
[money market fund].'') In addition, we note that 10 business days 
is not significantly longer than funds are statutorily permitted to 
delay payment on redemptions. See section 22(e).
---------------------------------------------------------------------------

    We also believe that by limiting gates to 10 business days, 
investors may be better able to account for the possibility of 
redemption gates when determining their investment allocations and cash 
management policies. For example, an employer may determine that money 
market funds continue to be a viable cash management tool because even 
if a fund imposes a gate, the employer could potentially still meet its 
payroll obligations, depending on its payroll cycle. Similarly, a 
retail investor may determine to invest in a money market fund for cash 
management purposes because a money market fund's potential for yield 
as compared to the interest on a savings or checking account outweighs 
the possibility of a money market fund imposing a gate and delaying 
payment of the investor's bills for up to 10 business days.
    While we believe temporary gates should be limited to a short 
period of time, we also recognize that gates may be the most effective, 
and probably only, way for a fund to stop a run for the duration of the 
gating period. As one commenter stated, ``[s]uspending redemptions 
would allow a [b]oard to deal with large-scale redemptions directly, by 
effectively calling a `time out' until the [b]oard can decide how to 
deal with the circumstances prompting the redemptions.'' \338\ 
Accordingly, we believe gates, even those that are limited to up to 10 
business days, will be a valuable tool for funds to limit heavy 
redemptions in times of stressed liquidity.\339\
---------------------------------------------------------------------------

    \338\ See Federated V Comment Letter.
    \339\ As discussed in supra note 148, as necessary, the 
Commission also has previously granted orders allowing funds to 
suspend redemptions to address exigent circumstances. See, e.g., In 
the Matter of: Centurion Growth Fund, Inc., Investment Company Act 
Release Nos. 20204 (Apr. 7, 1994) (notice) and 20210 (Apr. 11, 1994) 
(order); In the Matter of Suspension of Redemption of Open-End 
Investment Company Shares Because of the Current Weather Emergency, 
Investment Company Act Release No. 10113 (Feb. 7, 1978).
---------------------------------------------------------------------------

    We also recognize, as suggested by some commenters,\340\ that 
temporary gates should provide a period of time for funds to gain 
internal liquidity. In this regard, we note that weekly liquid assets 
generally consist of government securities, cash, and assets that will 
mature in five business days,\341\ and that once a fund has dropped 
below 30% weekly liquid assets (the required regulatory minimum, and 
the threshold for the imposition of gates), the fund can purchase only 
weekly liquid assets.\342\ Accordingly, because the securities a fund 
may purchase once it has imposed a gate will mature, in large part, in 
five business days, we believe a limit of 10 business days for the 
imposition of a gate should provide a fund with an adequate period of 
time in which to generate internal liquidity.\343\
---------------------------------------------------------------------------

    \340\ See, e.g., SIFMA Comment Letter; Dreyfus Comment Letter.
    \341\ See rule 2a-7(a)(34).
    \342\ See rule 2a-7(d)(4)(iii).
    \343\ See J.P. Morgan Comment Letter (``Ten (10) calendar days 
should provide [money market funds] an opportunity to rebuild 
significant amounts of liquidity since the 2010 amendments to Rule 
2a-7 require [money market funds] to invest at least 30% of their 
portfolios in assets that can provide weekly liquidity.'').

---------------------------------------------------------------------------

[[Page 47767]]

    We further recognize that 10 business days is not significantly 
longer than the seven days funds are already permitted to delay payment 
of redemption proceeds under section 22(e) of the Investment Company 
Act. We note, however, that while section 22(e) allows funds to delay 
payment on redemption requests, it does not prevent shareholders from 
redeeming shares. Even if a fund delays payment on redemptions pursuant 
to section 22(e), redemptions can continue to mount at the fund.\344\ 
Unlike payment delays under section 22(e), the temporary gates we are 
adopting today will allow a fund a cooling off period during which 
redemption pressures do not continue to mount while the fund builds 
additional liquidity, and the fund's board can continue to evaluate the 
best path forward. Additionally, temporary gates may also provide a 
cooling off period for shareholders during which they may gather more 
information about a fund, allowing them to make more well-informed 
investment decisions after a gate is lifted.
---------------------------------------------------------------------------

    \344\ For example, if on day one, fifty shareholders place 
redemptions requests with a fund, there is nothing to stop another 
fifty shareholders from placing redemption requests on day two. The 
fund's liquidity may continue to be strained because it is required 
to pay out redemption proceeds to all fifty shareholders from day 
one within seven days (and the next day, to all fifty shareholders 
from day two) and it must do so at day one's NAV (and the next day, 
at day two's NAV).
---------------------------------------------------------------------------

    Finally, one commenter asked the Commission to clarify that the 
time limit for redemption gates may ``occur in multiple separate 
periods within any ninety-day period (as well as consecutively), and if 
so, whether the ninety-day period is a rolling period which is 
recalculated on a daily basis.'' \345\ As indicated in the Proposing 
Release, the intent of the 90-day limit on redemption gates is to 
ensure that funds do not circumvent the time limit on redemption gates 
\346\--for example, by reopening on the 9th business day for one 
business day before re-imposing a gate for potentially another 10 
business day period. Accordingly, when determining whether a fund has 
been gated for more than 10 business days in a 90-day period, the fund 
should account for any multiple separate gating periods and assess 
compliance with the 90-day limit on rolling basis, calculated daily.
---------------------------------------------------------------------------

    \345\ See Comment Letter of Stradley Ronon Stevens & Young, LLP 
(Sept. 17, 2013) (``Stradley Ronon Comment Letter'').
    \346\ See Proposing Release, supra note 25, at 189.
---------------------------------------------------------------------------

3. Exemptions to Permit Fees and Gates
    The Commission is adopting, as proposed, exemptions from various 
provisions of the Investment Company Act to permit a fund to institute 
liquidity fees and redemption gates.\347\ 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 exercising 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 redemption gates notwithstanding these 
restrictions.\348\ As discussed in the Proposing Release and 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.
---------------------------------------------------------------------------

    \347\ See rule 2a-7(c)(2).
    \348\ Section 6(c). To clarify the application of liquidity fees 
and redemption gates to variable contracts, we are also amending 
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act, 
a variable insurance contract issued by a registered separate 
account funding variable insurance contracts or the sponsoring 
insurance company of such separate account may apply a liquidity fee 
or redemption 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 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.''
---------------------------------------------------------------------------

    We do not believe that the temporary gates we are allowing in 
today's amendments will 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.\349\ Rather, under today's amendments, the board of a money 
market fund can impose gates to benefit the fund and its shareholders 
by making the fund better able to protect against redemption activity 
that would harm remaining shareholders, and to allow time for any 
market distress to subside and liquidity to build organically.
---------------------------------------------------------------------------

    \349\ See 2009 Proposing Release, supra note 66, at n.281 and 
accompanying text.
---------------------------------------------------------------------------

    In addition, gates will be limited in that they can be imposed only 
for limited periods of time and only when a fund's weekly liquid assets 
are stressed. 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 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.\350\
---------------------------------------------------------------------------

    \350\ See 2010 Adopting Release, supra note 17, at text 
following n.379.
---------------------------------------------------------------------------

    We are also providing exemptions from rule 22c-1 to permit a money 
market fund to impose liquidity fees because such fees can benefit the 
fund and its shareholders by providing a more systematic and equitable 
allocation of liquidity costs.\351\ In addition, based on the level of 
the liquidity fee imposed, a fee may secondarily benefit a fund by 
helping to repair its market-based NAV.
---------------------------------------------------------------------------

    \351\ See rule 2a-7(c)(2) (providing that, notwithstanding rule 
22c-1, among other provisions, a money market fund may impose a 
liquidity fee under the circumstances specified in the rule).
---------------------------------------------------------------------------

    We are permitting money market funds to impose fees and gates in 
limited situations because they may provide substantial benefits to 
money market funds, the short-term financing markets for issuers, and 
the financial system, as discussed above. However, we are adopting 
limitations on when and for how long money market funds can impose 
these restrictions 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).\352\ We did not 
receive comments suggesting changes to the proposed exemptions and, 
thus, we are adopting them as proposed.\353\
---------------------------------------------------------------------------

    \352\ See rule 2a-7(c)(2)(i) and (ii); cf. 2010 Adopting 
Release, supra note 17, 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.'')
    \353\ But see NYC Bar Committee Comment Letter (discussing 
section 22(e) and the Commission's authority to allow gates under 
that section). As discussed above, we are adopting the proposed 
amendments to rule 22e-3 pursuant to section 6(c).
---------------------------------------------------------------------------

4. Amendments to Rule 22e-3
    Currently, rule 22e-3 allows a money market fund to permanently 
suspend redemptions and liquidate if the fund's board determines that 
the deviation between the fund's amortized cost price per share and its 
market-based NAV per

[[Page 47768]]

share may result in material dilution or unfair results to investors or 
existing shareholders.\354\ Today, we are amending rule 22e-3 to also 
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 10% of its total assets.\355\ As proposed, the 
amendments would have allowed for permanent suspension of redemptions 
and liquidation after a money market fund's level of weekly liquid 
assets fell below 15%.\356\
---------------------------------------------------------------------------

    \354\ See rule 22e-3(a)(1).
    \355\ See id.
    \356\ The proposed weekly liquid asset threshold corresponded 
with the proposed threshold for the imposition of a default fee and/
or redemption gates.
---------------------------------------------------------------------------

    Commenters generally supported our proposed retention of rule 22e-3 
\357\ and did not suggest changes to our proposed amendments. We are 
making a conforming change in the proposed weekly liquid asset 
threshold below which a fund may permanently gate and liquidate, 
however, in order to correspond to other changes in the proposal 
related to weekly liquid asset thresholds for fees and gates. For the 
reasons discussed above, we have determined to raise the initial 
threshold below which a fund board may impose fees and gates, but lower 
the threshold for imposition of a default liquidity fee. Due to the 
absolute and significant nature of a permanent suspension of 
redemptions and liquidation, we believe the lower default fee threshold 
would also be the appropriate threshold for board action under rule 
22e-3.\358\ 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. Therefore, we do not believe that the 30% weekly liquid 
asset threshold for discretionary fees and gates, which is designed to 
provide boards with significant flexibility to restore a fund's 
liquidity in times of stress, would be an appropriate threshold under 
which fund boards could permanently close a fund.
---------------------------------------------------------------------------

    \357\ See, e.g., ICI Comment Letter (supporting the retention of 
rule 22e-3); Stradley Ronon Comment Letter, (discussing rule 22e-3 
and master/feeder funds); Dreyfus Comment Letter; but see Peirce & 
Green Comment Letter (suggesting that the requirement in rule 22e-3 
that ``a fund's board have made an irrevocable decision to liquidate 
the fund . . . unnecessarily dissuades boards from using redemption 
suspensions'').
    \358\ Cf. Proposing Release supra note 25, at 195-196.
---------------------------------------------------------------------------

    Amended rule 22e-3 will allow all money market funds, not just 
those that maintain a stable NAV as currently contemplated by rule 22e-
3, to rely on the rule when the fund's liquidity is significantly 
stressed. A money market fund whose weekly liquid assets have fallen 
below 10% of its total assets (whether that fund has previously imposed 
a fee or gate, or not) may rely on the rule to permanently suspend 
redemptions and liquidate.\359\ Under amended rule 22e-3, stable value 
funds also will continue to be able to suspend redemptions and 
liquidate if the board determines that the deviation between its 
amortized cost price per share and its market-based NAV per share may 
result in material dilution or other unfair results to investors or 
existing shareholders.\360\ Thus, a stable value money market fund that 
suffers a default will still be able to suspend redemptions and 
liquidate before a credit loss leads to redemptions and a fall in its 
weekly liquid assets.
---------------------------------------------------------------------------

    \359\ We note that a money market fund would not have to impose 
a fee or a gate before relying on rule 22e-3. For example, if the 
fund drops below the 10% weekly liquid asset threshold, its board 
may determine that a liquidity fee is not in the best interests of 
the fund and instead decide to suspend redemptions and liquidate.
    \360\ See rule 22e-3(a)(1).
---------------------------------------------------------------------------

5. Operational Considerations Relating to Fees and Gates
a. Operational Costs
    As discussed in the Proposing Release, we recognize that money 
market funds and others in the distribution chain (depending on the 
structure) will incur some operational costs in establishing or 
modifying systems to administer a liquidity fee or temporary gate.\361\ 
These costs may relate to the development of procedures and controls 
for the imposition of liquidity fees or updating systems for 
confirmations and account statements to reflect the deduction of a 
liquidity fee from redemption proceeds.\362\ Additionally, these costs 
may relate to the establishment of new or modified systems or 
procedures that will allow funds to administer temporary gates.\363\ We 
also recognize that money market funds may incur costs in connection 
with board meetings held to determine if fees and/or gates are in the 
best interests of a fund.
---------------------------------------------------------------------------

    \361\ Some commenters also suggested that affected money market 
funds may have to examine whether shareholder approval is required 
to amend organizational documents, investment objectives or 
policies. See, e.g., Ropes & Gray Comment Letter; Fidelity Comment 
Letter.
    \362\ See, e.g., ICI Comment Letter (``[T]he nature of the 
liquidity fee would entail changes to support a separate fee type, 
appropriate tax treatment, and investor reporting, including 
transaction confirmation statements that reference fees charged and 
applicable tax information for customers.'').
    \363\ See ICI Comment Letter (``Temporary gating also would 
require fund transfer agent and intermediary system providers to 
ensure that their systems can suppress redemption activity while 
supporting all other transaction types.'').
---------------------------------------------------------------------------

    In addition, operational costs may be incurred by, or spread among, 
a fund's transfer agents, sub-transfer agents, recordkeepers, 
accountants, portfolio accounting departments, and custodian.\364\ 
Funds also may seek to modify contracts with financial intermediaries 
or seek certifications from intermediaries that they will apply a 
liquidity fee on underlying investors' redemptions. Money market fund 
shareholders also may be required to modify their own systems to 
prepare for possible future liquidity fees, or to manage gates, 
although we expect that only some shareholders will be required to make 
these changes.\365\
---------------------------------------------------------------------------

    \364\ See ICI Comment Letter; see also Comment Letter of State 
Street Corporation (Sept. 17, 2013) (``State Street Comment 
Letter'') (suggesting that transfer agents and intermediaries will 
need to modify their systems to accommodate fees and gates).
    \365\ Many shareholders use common third party-created systems 
and thus would not each need to modify their systems.
---------------------------------------------------------------------------

    A number of commenters suggested that the operational costs and 
burdens of implementing and administrating fees and gates would be 
manageable.\366\ Some commenters noted that liquidity fees and 
redemption gates would be more practicable, and less costly and 
burdensome to implement and maintain than the other proposed reform 
alternative (floating NAV).\367\ Another commenter added that the 
systems modifications for fees and gates, especially absent a 
requirement to net each shareholder's redemptions each day, would be 
``far less costly and onerous'' than the operational challenges posed 
by the floating NAV reform alternative.\368\ One commenter estimated 
that implementing fees and gates would require only ``minimal 
enhancements'' to its core custody/fund accounting systems at ``minimal 
costs.'' \369\ This commenter further noted that most systems 
enhancements would likely be required with respect to the systems of 
transfer agents and

[[Page 47769]]

intermediaries, although their systems would likely already include 
``basic functionality to accommodate liquidity fees and gates.'' \370\ 
Similarly, another commenter noted that the operational issues of fees 
and gates could be solved if the industry and all its stakeholders were 
given sufficient implementation time.\371\ This commenter cited its 
ongoing efforts to implement liquidity fees at its Dublin-domiciled 
money market fund complex as an example that the operational challenges 
and costs would not be prohibitive.\372\
---------------------------------------------------------------------------

    \366\ See, e.g., ICI Comment Letter; HSBC Comment Letter, 
Federated X Comment Letter; Invesco Comment Letter.
    \367\ See, e.g., SunTrust Comment Letter; Federated X Comment 
Letter; Angel Comment Letter. One commenter argued that for 
investors, intermediaries and fund complexes alike, the estimated 
costs of fees and gates ``are dramatically lower'' than under the 
proposed floating NAV alternative. See Federated X Comment Letter.
    \368\ See, e.g., ICI Comment Letter (``System modifications for 
liquidity fees and gates, especially absent the net redemption 
requirement, are far less onerous and costly, however, than the 
extensive programming and other system changes necessary to 
implement a floating NAV as contemplated by the SEC's proposal.'')
    \369\ See State Street Comment Letter.
    \370\ See id.
    \371\ See HSBC Comment Letter. The commenter also noted that a 
variable liquidity fee, if available in a timely manner, should not 
create any operational impediments.
    \372\ See id.
---------------------------------------------------------------------------

    Conversely, a number of commenters expressed concern over the 
operational burdens and related administrative costs with the fees and 
gates requirements.\373\ Some commenters argued that the implementation 
and administration of fees and gates would present significant 
operational challenges, in particular with respect to omnibus accounts, 
sweep accounts, intermediaries and the investors that use them.\374\ 
One commenter argued that, to reduce operational burdens, a liquidity 
fee should be applied to each redemption separately--rather than net 
redemptions--in an affected money market fund.\375\ This commenter also 
expressed concern that intermediaries would not know whether their 
sweeps would be subject to a liquidity fee or temporary gate until 
after the daily investment is made.\376\ For example, the possibility 
of a liquidity fee would require intermediaries to develop trading 
systems to ensure that for each transaction ``the investor has 
sufficient funds to cover the trade itself plus the possibility of a 
liquidity fee.'' \377\ Commenters also suggested that a fee or gate 
could not be uniformly applied within omnibus accounts,\378\ and 
certain commenters expressed concern over transparency with respect to 
fees and gates for shareholders investing through omnibus 
accounts.\379\
---------------------------------------------------------------------------

    \373\ See, e.g., Comment Letter of TIAA-CREF (Sept. 17, 2013) 
(``TIAA-CREF Comment Letter''); J.P. Morgan Comment Letter; Fin. 
Svcs. Roundtable Comment Letter; Goldman Sachs Comment Letter.
    \374\ See, e.g., SunTrust Comment Letter; Comment Letter of 
Coalition of Mutual Fund Investors (Sept. 17, 2013) (``Coal. of 
Mutual Fund Invs. Comment Letter''); Schwab Comment Letter.
    \375\ See ICI Comment Letter (expressing concern that funds, 
record keepers and intermediaries would have to develop complex 
operational systems that could apply a fee with respect to a 
shareholder's net redemptions for a particular day and tracking the 
``shareholder of record'' to whom such a fee would apply).
    \376\ See id.
    \377\ See Fin. Svcs. Roundtable Comment Letter; see also Fin. 
Info. Forum Comment Letter (suggesting liquidity fees could cause 
investors [to] over-trade their account by settling an amount 
greater than their balance due to a liquidity fee not known at the 
time of order entry).
    \378\ See Coal. of Mutual Fund Invs. Comment Letter; SunTrust 
Comment Letter.
    \379\ See Coal. of Mutual Fund Invs. Comment Letter; Goldman 
Sachs Comment Letter.
---------------------------------------------------------------------------

    We understand that the implementation of fees and gates (as with 
any new regulatory requirement) is not without its operational 
challenges; however, we have sought to minimize those challenges in the 
amendments we are adopting today. Based on the comments discussed 
above, we now recognize that a liquidity fee could either be applied to 
each redemption separately or on a net basis. As indicated by the 
relevant commenter, our proposal contemplated net redemptions as an 
investor-friendly manner of applying a liquidity fee.\380\ However, in 
light of the comments, we are persuaded that such an approach may be 
too operationally difficult and costly for funds to apply and, thus, we 
are not requiring funds to apply a liquidity fee on a net basis.\381\
---------------------------------------------------------------------------

    \380\ See Proposing Release, supra note 25, at n.373 (discussing 
the application of a liquidity fee and stating that ``[i]f 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 redemption for the day.''); see also ICI 
Comment Letter (``Currently, systems used to process money market 
fund transactions do not have the ability to assess a fee by netting 
one or more purchases against one or more redemptions. This process 
would be highly complex and require a significant and costly 
redesign of the processing functionality used by funds and 
intermediaries today.'' (footnote omitted)).
    \381\ See ICI Comment Letter (noting that ``[a]bsent further 
definition, it would be challenging for funds (and intermediaries 
assessing the fee) to determine how a shareholder of record 
requirement applies to multiple accounts of a given beneficial 
owner. . . .'').
---------------------------------------------------------------------------

    We also recognize commenters' concerns regarding the application of 
fees and gates in the context of sweep accounts. We note that during 
normal market conditions, fees and gates should not impact sweep 
accounts' (or any other investor's) investment in a money market 
fund.\382\ We also note that, unlike our proposal, the amendments we 
are adopting today will allow fund boards to institute a fee or gate at 
any time during the day.\383\ To the extent a sweep account's daily 
investment is made at the end of the day, we believe this change should 
reduce concerns that the sweep account holder will find out about a 
redemption restriction only after it has made its daily investment and 
may lessen the difficulty and costs related to developing a trading 
system that can ensure an account has sufficient funds to cover the 
trade itself plus the possibility of a liquidity fee.
---------------------------------------------------------------------------

    \382\ As discussed herein, however, we recognize that sweep 
accounts may be unwilling to invest in a money market fund that 
could impose a gate. See supra section III.A.1.c.iv and infra note 
641.
    \383\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    With respect to omnibus accounts, we continue to believe that 
liquidity fees should be handled in a manner similar to redemption 
fees, which currently may be imposed to deter market timing of mutual 
fund shares.\384\ As discussed in the Proposing Release, we understand 
that financial intermediaries themselves generally impose redemption 
fees to record or beneficial owners holding through that 
intermediary.\385\ We recognize commenters' concerns regarding the 
uniform application of liquidity fees through omnibus accounts. We 
believe, however, that the benefits and protections afforded to funds 
and their investors by the fees and gates amendments justify the 
application of these amendments in the context of omnibus accounts. In 
this regard, we note, as we did in the Proposing Release, that funds or 
their transfer agents may contract with intermediaries to have them 
impose liquidity fees. As we also noted in the Proposing Release, we 
understand that some money market fund sponsors may want to review 
their contractual arrangements with their funds' financial 
intermediaries and service providers to determine whether any 
contractual modifications are necessary or advisable to ensure that 
liquidity fees are appropriately applied to beneficial owners of money 
market fund shares. We further 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 
may need to engage in certain communications regarding a liquidity fee.
---------------------------------------------------------------------------

    \384\ See 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.
    \385\ See Proposing Release, supra note 25, at 191.
---------------------------------------------------------------------------

    With respect to those commenters who expressed concern over the 
transparency of fees and gates for omnibus investors, we note that fees 
and gates will be equally transparent for all investors. Investors, 
both those that invest directly and those that invest through omnibus 
accounts, should have access to information about a fund's weekly 
liquid assets, which will be

[[Page 47770]]

posted on the fund's Web site. All money market fund investors also 
should receive copies of a fund's prospectus, which will include 
disclosure on fees and gates.
    We note that some commenters expressed concern about the costs and 
burdens associated with the combination of fees and gates and a 
floating NAV requirement for institutional prime funds.\386\ As we 
stated in the Proposing Release, we do not expect that there will be 
any significant additional costs from combining the two approaches that 
are not otherwise discussed separately with respect to each of the fees 
and gates and floating NAV reforms.\387\ As we discussed in the 
Proposing Release, it is likely that implementing a combined approach 
will 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 will create any new costs as a result of the 
combination itself.\388\ Accordingly, we estimate, as we did in the 
proposal, 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.
---------------------------------------------------------------------------

    \386\ See, e.g., Dreyfus Comment Letter (suggesting the 
combination of both proposed reform options would be ``excessive and 
unduly harmful to the utility of [money market funds] without 
offering any additional benefit''); Northern Trust Comment Letter 
(suggesting the combination of both proposed reform options would 
``be very costly to implement''). For a discussion of the possible 
movement out of money market funds as result of today's reforms, see 
infra section III.K. But see State Street Comment Letter (``State 
Street does not believe there would be any new costs other than 
those listed by the staff from a fund accounting, custody or fund 
administrator point of view by combining the two alternatives.'').
    \387\ See Proposing Release, supra note 25, at 249; see also 
infra section III.B.8 for a discussion of the costs associated with 
the floating NAV requirement.
    \388\ See State Street Comment Letter.
---------------------------------------------------------------------------

b. Cost Estimates
    As we indicated in the Proposing Release, the costs associated with 
the fees and gates amendments will vary depending on how a fee or gate 
is structured, including its triggering event and the level of a fee, 
as well as on the capabilities, functions and sophistication of the 
systems and operations of the funds and others involved in the 
distribution chain, including transfer agents, accountants, custodians 
and intermediaries. These costs relate to the development of procedures 
and controls, systems' modifications, training programs and shareholder 
communications and may vary among funds, shareholders and their service 
providers.
    In the Proposing Release, we estimated a range of hours and costs 
that may be required to perform activities typically involved in making 
systems modifications, such as those described above. We estimated that 
a money market fund (or others in the distribution chain) would incur 
one-time systems modification costs that range from $1,100,000 to 
$2,200,000.\389\ We further estimated that the one-time costs for 
entities to communicate with shareholders about the liquidity fee or 
gate would range from $200,500 to $340,000.\390\ In addition, we 
estimated that the costs for a shareholder mailing would range between 
$1.00 and $3.00 per shareholder.\391\
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    \389\ We estimated 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 
Proposing Release, supra note 25, at n.245 (discussing the bases of 
our estimates of operational and related costs in Proposing 
Release).
    \390\ We estimated 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 Proposing Release, supra note 25, at n.245 
(discussing the bases of our estimates of operational and related 
costs in Proposing Release).
    \391\ Total costs of the mailing for individual funds would vary 
significantly depending on the number of shareholders who receive 
information from the fund by mail (as opposed to electronically).
---------------------------------------------------------------------------

    We also recognized in our proposal that depending on how a 
liquidity fee or gate is structured, mutual fund groups and other 
affected entities already may have systems that can be adapted to 
administer a fee or gate at minimal cost, in which case the costs may 
be less than the range we estimated above. For example, some money 
market funds may be part of mutual fund groups in which one or more 
funds impose deferred sales loads under rule 6c-10 or redemption fees 
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. We estimated that a money market fund 
shareholder whose systems required modifications to account for a 
liquidity fee or gate would incur one-time costs ranging from $220,000 
to $450,000.\392\
---------------------------------------------------------------------------

    \392\ We estimated 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 Proposing Release, supra note 25, at n.245 (discussing the 
bases of our estimates of operational and related costs in Proposing 
Release).
---------------------------------------------------------------------------

    Some of the comments we received regarding the costs of fees and 
gates included alternate estimates of implementation costs.\393\ For 
example, one commenter indicated that its costs for implementing fees 
and gates would likely be in the range of $400,000 to $500,000.\394\ 
This commenter further explained that cost of the fees and gates 
alternative ``reflects the ability of the affected entity to custom-
design its own approach to implementation, as well as the fact that the 
necessary changes would not be for use in day-to-day operations, but 
only for rare occasions.'' \395\
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    \393\ We note that some commenters provided industry-wide 
estimates of approximately $800 million to $1.75 billion for initial 
implementation of fees and gates, and estimates of approximately $80 
to $350 million for annual ongoing costs. See ICI Comment Letter; 
Invesco Comment Letter. As discussed herein, we have analyzed a 
variety of commenter estimates and provided cost estimates on a per-
fund basis (including a fund's distribution chain). We are unable, 
however, to verify the accuracy or make a relevant comparison 
between our per-fund cost estimates and the broad range of costs 
provided by these commenters that apply to all U.S. prime money 
market fund investors and/or the entire industry because we are 
unable to estimate how many intermediaries will be affected by the 
fees and gates amendments.
    \394\ See Federated X Comment Letter.
    \395\ See id. As discussed above, another commenter indicated 
that implementing fees and gates would only require ``minimal 
enhancements'' to its core custody/fund accounting systems at 
``minimal costs,'' and that most transfer agency and intermediary 
systems would likely already include ``basic functionality to 
accommodate liquidity fees and gates.'' See State Street Comment 
Letter. Also as discussed above, an additional commenter noted that, 
with respect to its Dublin-domiciled money market fund complex that 
is currently implementing the ability to impose liquidity fees, the 
implementation process has created costs but that these costs have 
not been prohibitive. See HSBC Comment Letter.
---------------------------------------------------------------------------

    A number of other commenters, however, expressed concern that the 
fees and gates amendments would impose significant costs and burdens, 
higher than those estimated in the Proposing Release.\396\ For example, 
one commenter estimated that it would cost it a total of approximately 
$11 million in largely one-time costs, reflecting costs of $9 million 
to implement fees and gates as well as $2 million for the related 
modifications in disclosure.\397\ Another commenter indicated that the 
implementation costs of fees and gates would be an estimated 
$1,697,000.\398\ Similarly, an industry group conducting a survey of 
its members found that the

[[Page 47771]]

implementation costs relating to liquidity fees would likely be $2 
million or more, according to 36% of survey respondents.\399\ The group 
also noted that initial costs would be particularly significant for 
distributors and intermediaries, with 60% of respondents estimating 
initial costs at $2 million or more.\400\ In addition, the survey found 
initial costs associated with gates to range from $1 million to $10 
million.\401\
---------------------------------------------------------------------------

    \396\ See, e.g., IDC Comment Letter; Comment Letter of Dechert 
LLP (Sept. 17, 2013) (``Dechert Comment Letter''); SPARK Comment 
Letter.
    \397\ See Fidelity Comment Letter.
    \398\ See Comment Letter of Financial Information Forum (Sept. 
17, 2013) (``Fin. Info. Forum Comment Letter'') (``Based on the 
available information, one back office processing service provider 
estimates the implementation cost of . . . Alternative 2 at 
$1,697,000.'')
    \399\ SIFMA Comment Letter. The survey also included the 
following results for implementation costs: 24% in the $2 million to 
$5 million range, 8% in the $5 million to $10 million range, and 4% 
in the $10 million to $15 million range.
    \400\ Id. The commenter's survey indicated that 40% of asset 
managers would incur $2 to $5 million in initial costs.
    \401\ Id. The survey indicated costs of $1 million to $2 million 
according to 17% of respondents, $2 million to $5 million according 
to another 17% of respondents, and $5 million to $10 million 
according to 8% of respondents.
---------------------------------------------------------------------------

    Based on the information provided by commenters, as well as the 
operational changes in the final rule, we are increasing our estimates 
for implementation costs for fees and gates. Three of the four 
commenters who provided estimates suggested that the implementation 
costs would be around $2,000,000 or more.\402\ In addition, we estimate 
that a fund's ability to impose a fee or gate intra-day (as opposed to 
the end of the day, as contemplated by the proposal) may result in 
increased operational costs related to the implementation of fees and 
gates. Accordingly, we have increased our original estimate of 
$1,100,000 to $2,200,000 \403\ for one-time systems modification costs 
to a higher estimate of $1,750,000 to $3,000,000.\404\ We continue to 
estimate that the one-time costs for entities to communicate with 
shareholders (including systems costs related to communications) about 
fees and gates would range from $200,500 to $340,000. In addition, we 
are increasing the estimated cost for a shareholder mailing from 
between $1.00 and $3.00 per shareholder to between $2.00 and $3.00 per 
shareholder, recognizing that it is unlikely such a mailing would cost 
$1.00. We continue to estimate one-time costs of $220,000 to $450,000 
for a money market fund shareholder whose systems (including related 
procedures and controls) required modifications to account for a 
liquidity fee or redemption gate.
---------------------------------------------------------------------------

    \402\ See supra notes 394-401 and accompanying text.
    \403\ We note that, in the Proposing Release, our estimate was 
based on a money market fund that determined it would only impose a 
flat liquidity fee of a fixed percentage known in advance and have 
the ability to impose a gate. This estimate was based on our 
proposal, which included less flexibility than today's amendments. 
Accordingly, our revised estimates account for a money market fund 
that has the ability to vary the level of a fee at imposition or 
thereafter, or impose a gate.
    \404\ As with our estimate in the Proposing Release, these 
amounts reflect the costs of one-time systems modifications for a 
money market fund and/or others in its distribution chain.
---------------------------------------------------------------------------

    We recognized in our proposal that adding new capabilities or 
capacity to a system will entail ongoing annual maintenance costs and 
understand these costs generally are estimated as a percentage of 
initial costs of building or expanding a system. We also recognized 
that ongoing costs related to fees and gates may include training 
costs. In the proposal, we estimated that the costs to maintain and 
modify the systems required to administer a fee or gate (to accommodate 
future programming changes), to provide ongoing training, and to 
administer the fee or gate on an ongoing basis would range from 5% to 
15% of the one-time costs. We understand that funds may impose varying 
liquidity fees and that the cost of varying liquidity fees could exceed 
this range, but because such costs depend on to what extent the fees 
might vary, we do not have the information necessary to provide a 
reasonable estimate of how much more (if any) varying fees might cost 
to implement.
    One commenter indicated a lower estimate of approximately $164,000 
for annual ongoing costs.\405\ Another commenter, an industry group 
that surveyed its members, indicated that ongoing annual costs of 
implementing a liquidity fee are likely to range from 10% to 20% of 
initial costs.\406\ The same commenter indicated that ongoing annual 
costs related to redemption gates were estimated as 10% to 20% of 
initial cost by 33% of survey respondents.\407\ Based on these 
estimates, which are largely similar to our estimates of 5-15% in the 
Proposing Release, we continue to believe our estimates in the 
Proposing Release are appropriate.
---------------------------------------------------------------------------

    \405\ See Federated X Comment Letter.
    \406\ See SIFMA Comment Letter. The survey indicated 10% to 15% 
of initial costs for 17% of respondents, 15% to 20% of initial costs 
for 12% of respondents, and 20+% of initial costs for 8% of 
respondents. With respect to distributor/intermediary respondents, 
the commenter indicated that ongoing annual costs for a liquidity 
fee are estimated as 10% to 20% of initial costs by 29% of 
distributor/intermediary respondents (evenly split between those who 
estimate 10% to 15% of initial cost and those who estimate 15% to 
20%). For asset managers, the commenter indicated that ongoing 
annual costs for a liquidity fee are estimated to be 10% to 15% of 
initial costs by 20% of respondents, 15% to 20% of initial costs by 
10% of respondents and 20+% of initial costs by 20% of respondents.
    \407\ See SIFMA Comment Letter. The commenter note that the 33% 
of survey respondents were evenly split between those who estimated 
10% to 15% of initial cost and those who estimated 15% to 20% of 
initial cost.
---------------------------------------------------------------------------

    We also recognize that funds may incur costs in connection with 
board meetings held to determine if fees and/or gates are in the best 
interests of the fund. In the Proposing Release, we estimated an 
average annual time cost of approximately $9,895 per fund in connection 
with each such board meeting.\408\ We did not receive comments on this 
estimate. As discussed in section IV.A.3 herein, we are revising our 
estimate from $9,895 per fund to $10,700 as result of updated industry 
data.\409\
---------------------------------------------------------------------------

    \408\ See Proposing Release, supra note 25, at 549.
    \409\ See infra section IV.A.3 (discussing the PRA estimates for 
board determinations under the fees and gates amendments and noting 
that certain estimates have increased from those in the proposal as 
a result of the increased number of funds that may cross the higher 
weekly liquid assets threshold of 30% (as compared to 15%) for the 
imposition of fees and gates).
---------------------------------------------------------------------------

    Although we have 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.
6. Tax Implications of Liquidity Fees
    As discussed in the Proposing Release, we understand that liquidity 
fees may have certain tax implications for money market funds and their 
shareholders.\410\ We understand that for federal income tax purposes, 
shareholders of mutual funds that impose a redemption fee pursuant to 
rule 22c-2 under the Investment Company Act 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).\411\

[[Page 47772]]

Consistent with this characterization, funds generally treat the 
redemption fee as having no associated tax effect for the fund.\412\ We 
understand that a liquidity fee will be treated for federal income tax 
purposes consistently with the way that funds and shareholders treat 
redemption fees under rule 22c-2.
---------------------------------------------------------------------------

    \410\ As discussed above, the liquidity fee we are adopting 
today is analogous to a redemption fee under rule 22c-2, which 
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.
    \411\ Cf. 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.
    \412\ See ICI Comment Letter (``Pursuant to section 311(a)(2) of 
the Internal Revenue Code, corporations (including investment 
companies) do not recognize gain or loss upon a redemption of their 
shares.'').
---------------------------------------------------------------------------

    If, as described above, a liquidity fee has no direct federal 
income tax consequences for the money market fund, that tax treatment 
will allow the fund to use 100% of the fee to help repair a market-
based NAV per share that was below $1.00. If redemptions involving 
liquidity fees cause a stable value 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 on the upside (i.e., by rounding up to $1.01 in 
pricing its shares).\413\ 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.
---------------------------------------------------------------------------

    \413\ See rule 2a-7(g)(2).
---------------------------------------------------------------------------

    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). Thus, in the event of any return of 
capital distributions, as we noted in the Proposing Release, there is a 
possibility that the fund, other intermediaries, and the shareholders 
might become subject to tax-reporting or tax-payment obligations that 
do not affect stable value money market funds currently operating under 
rule 2a-7.\414\
---------------------------------------------------------------------------

    \414\ See Proposing Release, supra note 25, at 207. Funds that 
strive to maintain a stable NAV per share currently are not subject 
to these transaction reporting requirements. We have been informed 
that, today, the Department of the Treasury and the IRS are 
proposing new regulations to exempt all money market funds from 
transaction reporting obligations. As we describe below, funds and 
brokers may rely on this exemption immediately. We note that at 
least one commenter indicated that funds and intermediaries may want 
to provide certain tax information to their investors even if it is 
not required. See ICI Comment Letter.
---------------------------------------------------------------------------

    Commenters were concerned with this possibility--that investors may 
have to recognize capital gains or reduced losses if a fund makes a 
distribution to shareholders in order to avoid ``breaking the buck'' on 
the upside as a result of excessive fees.\415\ Commenters noted that 
such distributions and the resulting capital gains or losses upon 
disposition of investors' shares would require funds and intermediaries 
to start tracking investors' basis in shares of a fund.\416\ In order 
to avoid such basis tracking, commenters suggested that the Treasury 
Department and the Internal Revenue Service (``IRS'') issue guidance 
stating that when a money market fund is required to make a payment of 
excess fees in order to avoid breaking the buck, the fund should be 
deemed to have sufficient earnings and profits to treat the 
distribution as a taxable dividend.\417\
---------------------------------------------------------------------------

    \415\ See, e.g., Fidelity Comment Letter; BlackRock II Comment 
Letter; Wells Fargo Comment Letter.
    \416\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
BlackRock II Comment Letter; SIFMA Comment Letter; but see, e.g., 
State Street [Appendix 4] (suggesting that a liquidity fee causing 
the shadow price to exceed $1.0049 would not result in special 
distribution to shareholders but most likely be recorded as income 
to the fund and paid out to shareholders as an ordinary income 
distribution).
    \417\ See, e.g., BlackRock II Comment Letter; ICI Comment 
Letter; Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Although these events are hypothetically possible, the scenario 
that would lead to a payment of excess fees to fund shareholders 
without sufficient earnings and profits is subject to many 
contingencies that make it unlikely to occur. First, as we discussed 
above, under normal market conditions, we believe funds will rarely 
impose liquidity fees. Second, we believe it is highly unlikely that 
shareholders would redeem with such speed and in such volume that the 
redemptions would create a danger of breaking the buck on the upside 
before a fund could remove a fee. Third, the distributions to avoid 
breaking the buck might not exceed the fund's earnings and profits. For 
this purpose, we understand that the fund's earnings and profits take 
into account the fund's income through the end of the taxable year. 
Thus, unless the additional distribution occurs very close to the end 
of the taxable year, some of the money market fund's subsequent income 
during the year will operate to qualify these distributions as 
dividends.\418\
---------------------------------------------------------------------------

    \418\ A portion of this subsequent income may also have to be 
distributed to avoid breaking the buck on the upside. However, if 
the fund attracts new shareholders, we understand that some of the 
subsequent income can be retained, with its associated earnings and 
profits qualifying the earlier distributions as dividends.
---------------------------------------------------------------------------

    Finally, as discussed in the Proposing Release, 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. However, we have been informed that the Treasury 
Department and the IRS today will propose new regulations exempting all 
money market funds from certain transaction reporting 
requirements.\419\ This exemption is to be formally applicable for 
calendar years beginning on or after the date of publication in the 
Federal Register of a Treasury Decision adopting those proposed 
regulations as final regulations. The Treasury Department and the IRS 
have informed us, however, that the text of the proposed regulations 
will state that persons subject to transaction reporting may rely on 
the proposed exemption for all calendar years prior to the final 
regulations' formal date of applicability. Therefore, the Treasury 
Department and IRS relief described above is available immediately.
---------------------------------------------------------------------------

    \419\ See infra section III.B.6.a.
---------------------------------------------------------------------------

    Thus, even in the unlikely event that some shareholders' bases in 
their shares change due to non-dividend distributions, neither fund 
groups nor their intermediaries will need to track the tax bases of 
money market fund shares. On the other hand, if there are any non-
dividend distributions by money market funds, the affected shareholders 
will need to report in their annual tax filings any resulting gains 
\420\ or reduced losses upon the sale of affected money market fund 
shares. We are unable to quantify with any specificity 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

[[Page 47773]]

subject to liquidity fees would cause the funds to make returns of 
capital distributions to the remaining shareholders (although, as noted 
above, we believe such returns of capital distributions are unlikely). 
Commenters did not provide any such estimates.
---------------------------------------------------------------------------

    \420\ Redemptions subject to a liquidity fee would almost always 
result in losses, but gains are possible in the unlikely event that 
a shareholder received a return of capital distribution with respect 
to some shares. Because a later redemption of the shares by the 
shareholder would be for $1.00 each, there would be small gains with 
respect to those redemptions. If the money market fund making such a 
non-dividend distribution is a floating NAV money market fund and if 
a shareholder uses the simplified aggregate method discussed below 
in section III.B.6.a, then the shareholder would be able to report 
the gain or loss without having to track the basis of individual 
shares.
---------------------------------------------------------------------------

7. Accounting Implications
    A number of commenters questioned whether an investment in a money 
market fund subject to a possible fee or gate, or in a money market 
fund that in fact imposes a fee or gate, would continue to qualify as a 
``cash equivalent'' for purposes of U.S. Generally Accepted Accounting 
Principles (``U.S. GAAP'').\421\ 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.\422\ To remove any uncertainty, 
several commenters requested that the Commission, the Financial 
Accounting Standards Board (``FASB'') and/or Government Accounting 
Standards Board (``GASB'') issue guidance to clarify whether 
investments in money market funds will continue to qualify as cash 
equivalents under U.S. GAAP.\423\ Various commenters on our proposal, 
including the American Institute of Certified Public Accountants 
(``AICPA'') and each of the ``Big Four'' accounting firms, stated that 
a money market fund's ability to impose fees and gates should not 
preclude an investment in the fund from being classified as a ``cash 
equivalent'' under U.S. GAAP.\424\
---------------------------------------------------------------------------

    \421\ See, e.g., Invesco Comment Letter; BlackRock II Comment 
Letter; Wells Fargo Comment Letter; see also Proposing Release, 
supra note 25, at 246 (stated that ``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.''); ICI Comment Letter (suggesting that any such Commission 
guidance should also ``discuss whether a money market fund that 
imposes a liquidity fee and/or gate would continue to be considered 
a cash equivalent investment and whether the amount of the fee or 
the length of the gate would affect the analysis.'')
    \422\ In addition, some corporate investors may perceive cash 
and cash equivalents on a company's balance sheet as a measure of 
financial strength.
    \423\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Fin. Svcs. Roundtable Comment Letter; see also Proposing Release, 
supra note 25, at 246 (suggesting that funds with the ability to 
impose fees and gates should still be considered cash equivalents). 
As discussed in section III.C.4 herein, we do not have authority 
over the actions that GASB may or may not take with respect to 
LGIPs.
    \424\ See Comment Letter of American Institute of Certified 
Public Accountants, Financial Reporting Executive Committee (Sept. 
16, 2013) (``AICPA Comment Letter); Comment Letter of Ernst & Young 
LLP (Sept. 12, 2013) (``Ernst & Young Comment Letter''); Comment 
Letter of Deloitte & Touche LLP (Sept. 17, 2013) (``Deloitte Comment 
Letter''); Comment Letter of KPMG LLP (Sept. 17, 2013) (``KPMG 
Comment Letter''); Comment Letter of PricewaterhouseCoopers LLP 
(Sept. 16, 2013) (``PWC Comment Letter'').
---------------------------------------------------------------------------

    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.'' \425\ U.S. GAAP includes an investment in a money market fund 
as an example of a cash equivalent.\426\ The Commission's position 
continues to be that, under normal circumstances, an investment in a 
money market fund that has the ability to impose a fee or gate under 
rule 2a-7(c)(2) qualifies as a ``cash equivalent'' for purposes of U.S. 
GAAP.\427\ However, as is currently the case, events may occur that 
give rise to credit and liquidity issues for money market funds. If 
such events occur, including the imposition of a fee or gate by a money 
market fund under rule 2a-7(c)(2), shareholders would need to reassess 
if their investments in that money market fund continue to meet the 
definition of a cash equivalent. A more formal pronouncement (as 
requested by some commenters) to confirm this position is not required 
because the federal securities laws provide the Commission with plenary 
authority to set accounting standards, and we are doing so here.\428\
---------------------------------------------------------------------------

    \425\ See FASB Accounting Standards Codification (``FASB ASC'') 
paragraph 305-10-20.
    \426\ Id.
    \427\ We are also amending the Codification of Financial 
Reporting Policies to reflect our interpretation under U.S. GAAP, as 
discussed below. See infra section VI.
    \428\ The federal securities laws provide the Commission with 
authority to set accounting and reporting standards for public 
companies and other entities that file financial statements with the 
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15 
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 30(e), section 
31, and section 38(a) of the Investment Company Act.
---------------------------------------------------------------------------

    If events occur that cause shareholders to determine that their 
money market fund 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.\429\ For example, during the financial crisis, 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.
---------------------------------------------------------------------------

    \429\ See FASB ASC paragraph 320-10-25-1. This accounting 
treatment would not apply to entities to which the guidance in FASB 
ASC Topic 320 does not apply. See FASB ASC paragraph 320-10-15-3.
---------------------------------------------------------------------------

B. Floating Net Asset Value

1. Introduction
    As discussed earlier in this Release, absent an exemption 
specifically provided by the Commission from various provisions of the 
Investment Company Act, all registered mutual funds must price and 
transact in their shares at the current NAV, calculated by valuing 
portfolio instruments at market value, in the case of securities for 
which market quotations are readily available, or, at fair value, as 
determined in good faith by the fund's board of directors, in the case 
of other securities and assets (i.e., use a floating NAV).\430\ Under 
rule 2a-7, the Commission has exempted money market funds from this 
floating NAV requirement, allowing them to price and transact at a 
stable NAV per share (using the amortized cost and penny rounding 
methods), provided that they follow certain risk-limiting 
conditions.\431\ In doing so, the Commission was statutorily required 
to find that such an exemption was 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.\432\ Accordingly, when providing this exemption in 1983, the 
Commission considered the benefits of a stable value product as a cash 
management vehicle for investors, but also imposed a number of 
conditions designed to minimize the risk inherent in a stable value 
fund that some shareholders may redeem and receive more than their 
shares are actually worth, thus diluting the holdings of remaining 
shareholders.\433\ At the time, the Commission was persuaded that 
deviations in value that could cause material dilution to investors 
generally would not occur, given the risk-limiting

[[Page 47774]]

conditions of the rule.\434\ Experience, however, has shown that 
deviations in value do occur, and at times, can be significant.
---------------------------------------------------------------------------

    \430\ See supra section I.
    \431\ Id.
    \432\ Section 6(c) of the Investment Company Act provides the 
Commission with broad authority to exempt persons, securities or 
transactions from any provision of the Investment Company Act, or 
the regulations thereunder, if and to the extent that such exemption 
is 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. See Commission Policy and 
Guidelines for Filing of Applications for Exemption, SEC Release No. 
IC-14492 (Apr. 30, 1985).
    \433\ See Proposing Release, supra note 25, at n.9. The 
Commission was similarly concerned with the risk that redeeming 
shareholders may receive less than their shares were worth and that 
purchasing shareholders may pay too little for their shares, 
diluting remaining shareholders.
    \434\ Id.
---------------------------------------------------------------------------

    As discussed above, money market funds' sponsors on a number of 
occasions have voluntarily chosen to provide financial support for 
their money market funds for various reasons, including to keep a fund 
from re-pricing below its stable value, suggesting that material 
deviations in the value in money market funds have not been a rare 
occurrence.\435\ This historical experience, combined with the events 
of the financial crisis, has caused us to reconsider the exemption from 
the statutory floating NAV requirement for money market funds in light 
of our responsibilities under the Act in providing this exemption. In 
doing so, we again took into account the benefits of money market funds 
as a stable value cash management product for investors, but also 
considered all of the historical and empirical information discussed in 
section I above, the Investment Company Act's general obligation for 
funds to price and transact in their shares at the current NAV, and 
developments since 1983.
---------------------------------------------------------------------------

    \435\ See supra section II.B.4
---------------------------------------------------------------------------

    We considered the many reasons shareholders may engage in heavy 
redemptions from money market funds--potentially resulting in the 
dilution of share value that the Investment Company Act's provisions 
are designed to avoid--and have tailored today's final rules 
accordingly. In particular, while many investors may redeem because of 
concerns about liquidity, quality, or lack of transparency--and our 
fees and gates, disclosure, and reporting reforms are primarily 
intended to address those incentives--an incremental incentive to 
redeem is created by money market funds' current valuation and pricing 
methods. As discussed below, this incremental incentive to redeem 
exacerbates shareholder dilution in a stable NAV product because non-
redeeming shareholders are forced to absorb losses equal to the 
difference between the market-based value of the fund's shares and the 
price at which redeeming shareholders transact. For the reasons 
discussed below, we believe that this incentive exists largely in prime 
money market funds because these funds exhibit higher credit risk that 
make declines in value more likely (compared to government money market 
funds).\436\ We further believe history shows that, to date, 
institutional investors have been significantly more likely than retail 
investors to act on this incentive.\437\ Thus, given the tradeoffs 
involved in requiring that any money market fund transact at a floating 
NAV, we are limiting this reform (and thus the repeal of the special 
exemptive relief allowing these funds to price other than as required 
under the Investment Company Act) to institutional prime funds.
---------------------------------------------------------------------------

    \436\ See infra section III.C.1; see also, e.g., Fidelity 
Comment Letter; ICI Comment Letter; Comm. Cap. Mkt. Reg. Comment 
Letter.
    \437\ See infra section III.C.2 and DERA Study, supra note 24; 
see also, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable Comment 
Letter; Vanguard Comment Letter.
---------------------------------------------------------------------------

    As discussed previously, the first investors to redeem from a 
stable value money market fund that is experiencing a decline in its 
NAV benefit from a ``first mover advantage'' as a result of rule 2a-7's 
current valuation and pricing methods, which allows them to receive the 
full stable value of their shares even if the fund's portfolio value is 
less.\438\ One possible reason that institutional prime funds may be 
more susceptible to rapid heavy redemptions than retail funds is that 
their investors are often more sophisticated, have more significant 
money at stake, and may have a lower risk tolerance due to legal or 
other restrictions on their investment practices.\439\ Institutional 
investors may also have more resources to carefully monitor their 
investments in money market funds. Accordingly, when they become aware 
of potential problems with a fund, institutional investors may quickly 
redeem their shares among other reasons, to benefit from the first 
mover advantage.\440\ When many investors try to redeem quickly, 
whether to benefit from the first mover advantage or otherwise, money 
market funds may experience significant stress. As discussed above, 
even a few high-dollar redemptions by institutional investors (because 
of their greater capital at stake) may have a significant adverse 
effect on a fund as compared with retail investors whose investments 
are typically smaller and would therefore require a greater number of 
redemptions to have a similar effect.\441\ This can lead to the very 
dilution of fund shares that we were concerned about when we first 
provided the exemptions in rule 2a-7 permitting funds to use different 
valuation and pricing methods than other mutual funds to facilitate 
maintaining a stable value.\442\
---------------------------------------------------------------------------

    \438\ See supra section II.B.3. This first mover advantage does 
not have the same degree of value in other mutual funds that do not 
have a stable value because investors receive the market value of 
their shares when redeeming from a floating NAV fund.
    \439\ See, e.g., Systemic Risk Council Comment Letter.
    \440\ Id.; see, e.g. TIAA-CREF Comment Letter; Systemic Risk 
Council Comment Letter.
    \441\ See supra text following note 66.
    \442\ See infra section III.B.3.b; see, e.g., Schwab Comment 
Letter.
---------------------------------------------------------------------------

    As discussed in the previous section, our fee and gate reform is 
designed to address some of the risks associated with money market 
funds that we have identified in this Release, but does not address 
them all. In particular, fees and gates are intended to enhance money 
market funds' ability to manage and mitigate potential contagion from 
high levels of redemptions and make redeeming investors pay their share 
of the costs of the liquidity that they receive. But those reforms do 
not address the incremental incentive to redeem from a fund with a 
shadow price below $1.00 that is at risk of breaking the buck. As a 
result of their sophistication, risk tolerance, and large investments, 
institutional investors are more likely to redeem at least in part due 
to this first mover advantage.\443\
---------------------------------------------------------------------------

    \443\ See, e.g. Comment Letter of United Services Automobile 
Association (Feb. 15, 2013) (available in File No. FSOC-2012 0003) 
(``USAA FSOC Comment Letter''); see, e.g., Systemic Risk Council 
Comment Letter; but see, e.g., HSBC Comment Letter (arguing that 
first mover advantage that results from the valuation and pricing 
methods in rule 2a-7 is overstated in light of the real world issues 
with information and time to act, and that other motivations are the 
primary driver of redemptions); Dreyfus Comment Letter.
---------------------------------------------------------------------------

    This has led to us re-evaluate our decision to provide an exemption 
allowing amortized cost valuation and penny rounding pricing for money 
market funds with these specific kinds of investors.\444\ As discussed 
above, this exemption was originally premised on our expectation that 
funds that followed the requirements of rule 2a-7 would be unlikely to 
experience material deviations from their stable value. With respect to 
prime funds in particular, this expectation has proven inaccurate with 
enough regularity to cause concern, especially given the potentially 
serious consequences to investors and the markets that can and has 
resulted at times. Accordingly, for the reasons discussed above and in 
other sections of this Release,\445\ we no longer believe that 
exempting institutional prime

[[Page 47775]]

money market funds under section 6(c) of the Act is appropriate--i.e., 
we find that such an exemption is no longer 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.\446\ As discussed in detail in the sections that follow, we are 
now rescinding the exemption that allows institutional prime funds to 
maintain a stable NAV and are requiring them to price and transact in 
their shares at market-based value, like all other mutual funds.\447\
---------------------------------------------------------------------------

    \444\ A number of commenters agreed with our proposed approach 
of only targeting the funds most susceptible to runs (institutional 
prime) with the floating NAV requirement. See, e.g., Fin. Svcs. 
Roundtable Comment Letter (``. . . a floating NAV confined to 
institutional prime funds represents a reasonable targeting of 
reform efforts at the segment of the market that has shown the most 
proclivity to runs.''); Vanguard Comment Letter.
    \445\ See supra section II; infra sections III.B.3.a and 
III.B.3.b.
    \446\ See supra note 432.
    \447\ See, e.g., Systemic Risk Council Comment Letter (``A 
floating NAV (for all funds) is the same simple regulatory framework 
that applies to all other mutual funds . . .'').
---------------------------------------------------------------------------

    This reform is intended to work in concert with the liquidity fees 
and gates reforms discussed above (as well as other reforms discussed 
in section III.K.3). The floating NAV requirement, applicable only to 
institutional prime funds, balances concerns about the risks of heavy 
redemptions from these funds in times of stress and the resulting 
negative impacts on short-term funding markets and potential dilution 
of investor shares, with the desire to preserve, as much as possible, 
the benefits of money market funds for investors.\448\ Consistent with 
a core objective of the Investment Company Act, the floating NAV reform 
may also lessen the risk of unfairness and potential wealth transfers 
between holding and redeeming shareholders by mutualizing any potential 
losses among all investors, including redeeming shareholders. We do not 
intend, and the floating NAV reform does not seek, to deter redemptions 
that constitute rational risk management by shareholders or that 
reflect a general incentive to avoid loss.\449\ Instead, as discussed 
below, the requirement is designed to achieve two independent 
objectives: (1) To reduce the first mover advantage inherent in a 
stable NAV fund due to rule 2a-7's current valuation and pricing 
methods by dis-incentivizing redemption activity that can result from 
investors attempting to exploit the possibility of redeeming shares at 
the stable share price even if the portfolio has suffered a loss; and 
(2) to reduce the chance of unfair investor dilution, which would be 
inconsistent with a core principle of the Investment Company Act. An 
additional motivation for this reform is that the floating NAV may make 
it more transparent to certain of the impacted investors that they, not 
the fund sponsors or the federal government, bear the risk of loss. 
Many commenters suggested that, among the reform alternatives proposed, 
the floating NAV reform is the most meaningful.\450\
---------------------------------------------------------------------------

    \448\ See infra section III.B.3 (discussing the benefits of a 
floating NAV requirement).
    \449\ A number of commenters agreed with this goal. See, e.g., 
Schwab Comment Letter; Systemic Risk Council Comment Letter.
    \450\ See, e.g., Boston Federal Reserve Comment Letter; Systemic 
Risk Council Comment Letter; Thrivent Comment Letter.
---------------------------------------------------------------------------

2. Summary of the Floating NAV Reform
    The liquidity fees and gates amendments apply to all money market 
funds (with the exception of government money market funds). Today we 
are also adopting a targeted reform designed to address the specific 
risks associated with institutional prime money market funds.\451\ We 
are doing so by amending rule 2a-7 to rescind certain exemptions that 
have permitted these funds to maintain a stable price by use of 
amortized cost valuation and/or penny-rounding pricing--as a result, 
institutional prime money market funds will transact at a floating 
NAV.\452\
---------------------------------------------------------------------------

    \451\ The floating NAV reform will not apply to government and 
retail money market funds. See rule 2a-7(a)(16) (defining 
``government money market fund''); rule 2a-7(a)(25) (defining 
``retail money market fund''). Government and retail money market 
funds are discussed infra in sections III.C.1 and III.C.2.
    \452\ Rule 2a-7(c)(1) (Share price calculation). As discussed 
below, an institutional prime money market fund may continue to call 
itself a ``money market fund'' provided that it follows the other 
conditions in rule 2a-7. But it may not use the amortized cost and 
penny rounding methods to maintain a stable NAV. See rule 2a-7(b); 
infra note 629 and accompanying text (discussing rule 35d-1, the 
``names rule'').
---------------------------------------------------------------------------

    Under our reform, institutional prime money market funds will value 
their portfolio securities using market-based factors and will sell and 
redeem shares based on a floating NAV.\453\ Under the final rules, and 
as we proposed, institutional prime funds will round prices and 
transact in fund shares to four decimal places in the case of a fund 
with a $1.00 target share price (i.e., $1.0000) or an equivalent or 
more precise level of accuracy for money market funds with a different 
share price (e.g., a money market fund with a $10 target share price 
could price its shares at $10.000). Institutional prime money market 
funds will still be subject to the risk-limiting conditions of rule 2a-
7.\454\ Accordingly, they will continue to be limited to investing in 
short-term, high-quality, dollar-denominated instruments, but will not 
be able to use the amortized cost or penny rounding methods to maintain 
a stable value. Finally, funds subject to the floating NAV reform will 
be subject to the other reforms discussed in this Release.
---------------------------------------------------------------------------

    \453\ See rule 2a-7(c)(1). We discuss floating NAV money market 
fund share pricing in section III.B.4. A money market fund that 
currently chooses to use amortized cost valuation typically also 
uses a penny-rounding convention to price fund shares. See 1983 
Adopting Release, supra note 3. Although not generally used, a money 
market fund may also currently choose to maintain a stable NAV 
solely by using penny-rounding pricing. As discussed below, these 
money market funds would be able to use amortized cost valuation 
only to the same 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. See ASR 219, supra note 5; we discuss the use of 
amortized cost below. See infra section III.B.5.
    \454\ See rule 2a-7(d) (risk-limiting conditions).
---------------------------------------------------------------------------

    As discussed in section III.B.9 below, institutional prime money 
market funds will have two years to comply with the floating NAV 
reform. Although some commenters, including some sponsors of money 
market funds, expressed general support for the floating NAV reform as 
it was proposed,\455\ the majority of commenters generally opposed 
requiring institutional prime money market funds to implement a 
floating NAV.\456\ Below, we address the principal considerations and 
requirements of the floating NAV reform, discuss comments received, and 
how if applicable, the amendments have been revised to address 
commenter concerns.
---------------------------------------------------------------------------

    \455\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment 
Letter; T. Rowe Price Comment Letter; Vanguard Comment Letter; 
Comment Letter of CFA Institute (Sept. 19, 2013) (``CFA Institute 
Comment Letter'').
    \456\ See, e.g., Federated II Comment Letter; Comment Letter of 
Arnold & Porter LLP on behalf of Federated Investors (Floating NAV) 
(Sept. 13, 2013) (``Federated IV Comment Letter''); Federated X 
Comment Letter; J.P. Morgan Comment Letter; Comment Letter of U.S. 
Chamber of Commerce, Center for Capital Markets Competitiveness 
(Aug. 1, 2013) (``Chamber I Comment Letter''); Chamber II Comment 
Letter.
---------------------------------------------------------------------------

3. Certain Considerations Relating to the Floating NAV Reform
a. A Reduction in the Incentive To Redeem Shares
    When a money market fund's shadow price is less than the fund's 
$1.00 share price, shareholders have an economic incentive to redeem 
shares ahead of other investors. In the Proposing Release, we noted 
that the size of institutional investors' holdings and their resources 
for monitoring funds provide the motivation and means to act on this 
incentive, and observed that institutional investors redeemed shares at 
a much higher rate than retail investors from prime money market funds 
in both September 2008 and June 2011.\457\ We also noted, as some 
market

[[Page 47776]]

observers had suggested, that the valuation and pricing techniques 
currently permitted by rule 2a-7 may underlie this incentive to redeem 
ahead of other shareholders and to obtain $1.00 per share when 
investors become aware (or expect) that the actual value of the fund's 
shares is below (or will fall below) $1.00.\458\ As discussed below, to 
address this incentive, the floating NAV reform mandates that 
institutional prime funds transact at share prices that reflect current 
market-based factors (not amortized cost or penny rounding, as 
currently permitted) and therefore remove investors' incentives to 
redeem early to take advantage of transacting at a stable value.
---------------------------------------------------------------------------

    \457\ But see supra note 68.
    \458\ See Proposing Release, supra note 25, at n.139.
---------------------------------------------------------------------------

    Some commenters agreed that a floating NAV mitigates the first 
mover incentive to redeem ahead of other shareholders that results from 
current rule 2a-7's valuation and pricing methods.\459\ Two commenters 
also noted that requiring institutional prime funds to adopt a floating 
NAV would force investors who cannot tolerate any share price movement 
into other products that better match their risk tolerances.\460\ 
According to these commenters, investors who remain in floating NAV 
funds may have a greater tolerance for loss and may be less likely to 
redeem quickly in times of market stress.\461\
---------------------------------------------------------------------------

    \459\ See, e.g., Thrivent Comment Letter; TIAA-CREF Comment 
Letter; Fin. Svcs. Roundtable Comment Letter; SIFMA Comment Letter; 
Systemic Risk Council Comment Letter.
    \460\ See Thrivent Comment Letter; Vanguard Comment Letter; see 
infra section III.B.3.c.
    \461\ See Vanguard Comment Letter.
---------------------------------------------------------------------------

    Several commenters generally objected to our reasoning that our 
floating NAV reform (by addressing the economic incentive inherent in 
rule 2a-7) would reduce the incentive for shareholders to redeem ahead 
of other investors in times of market stress, observing that a floating 
NAV may not eliminate investors' incentive to redeem to the extent that 
it results from the desire to move to investments of higher quality or 
greater liquidity.\462\ Both the DERA Study and Proposing Release 
discussed this concern.\463\ As the DERA Study noted, the incentive for 
investors to redeem ahead of other investors may be heightened by 
liquidity concerns--when cash levels are insufficient to meet 
redemption requests, funds may be forced to sell portfolio securities 
into illiquid secondary markets at discounted or even fire-sale 
prices.\464\ The floating NAV reform may not fully address the 
incentive to redeem because market-based pricing may 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.\465\
---------------------------------------------------------------------------

    \462\ See, e.g., Dreyfus Comment Letter; Federated IV Comment 
Letter; Chamber II Comment Letter; Comment Letter of The Squam Lake 
Group (Sept. 17, 2013) (``Squam Lake Comment Letter''); Ropes & Gray 
Comment Letter.
    \463\ See Proposing Release, supra note 25, at section 
III.A.1.c.
    \464\ See DERA Study, supra note 24, at 4 (noting that most 
money market fund portfolio securities are held to maturity, and 
secondary markets in these securities are not deeply liquid).
    \465\ Id.
---------------------------------------------------------------------------

    We acknowledge that a floating NAV does not eliminate the incentive 
to redeem in pursuit of higher quality or greater liquidity--indeed, we 
intend to address the risks associated with these incentives primarily 
through our fees and gates reform. However, we continue to believe that 
a floating NAV should mitigate the incentive to redeem due to the 
mismatch between the stable NAV price and the actual value of fund 
shares because shareholders will receive a market value for their 
shares rather than a fixed price when they redeem. Importantly, the 
complementary liquidity fees and gates aspect of our money market 
reforms would also apply to institutional prime funds that are subject 
to a floating NAV. As discussed previously, while not intended to stem 
investors' desire to move to more liquid or higher quality investments, 
liquidity fees are specifically designed to ensure that redeeming 
investors pay the costs of the liquidity they receive, and redemption 
gates are designed as a tool to allow funds to manage heavy redemptions 
in times of stress and thus reduce the chance of harm to the fund and 
investors. In this way, we believe that the totality of our money 
market fund reforms addresses comprehensively many features of money 
market funds, including the characteristics of their investor base that 
can make them susceptible to heavy redemptions, and gives fund boards 
new tools for addressing a loss of liquidity that may develop in 
funds.\466\
---------------------------------------------------------------------------

    \466\ Some commenters agreed that a floating NAV alone is not 
enough to address these incentives. See, e.g., Americans for Fin. 
Reform Comment Letter (``[w]hile the floating NAV has clear benefits 
in making clear that investor assets are at risk of loss, we are 
concerned that a floating NAV alone will not create a sufficient 
disincentive for investors to engage in `runs' on MMFs.'').
---------------------------------------------------------------------------

    One commenter submitted a white paper concluding that (i) liquidity 
fees and gates, if implemented effectively, could stop and prevent 
runs; and (ii) although a variable NAV would not stop a run, it could 
mitigate the first mover advantage associated with the motivation to 
run that results from small shadow price departures from $1.00.\467\ 
The authors of the paper concluded further that the ability of a 
variable NAV to mitigate this first mover advantage is overstated when 
viewed in light of the real-world costs of moving between investments 
that investors will face and, in a significant stress event, such 
effect is a minor determinant of behavior.\468\ We acknowledge this 
view and agree, as discussed above, that a floating NAV cannot stop 
redemptions when (as assumed in the paper) investors are redeeming in a 
flight to quality due to a continuing deterioration of the credit risk 
in a fund's portfolio. However, the floating NAV reform reduces the 
benefit from redeeming ahead of others to at most one half of a 
hundredth of a cent per share \469\--100 times less than it is 
currently--which investors would weigh against the cost of switching to 
an alternative investment.\470\ As we discuss above, the floating NAV 
reform is designed to supplement the fees and gates reform only for 
those funds that are more vulnerable to credit events (compared to 
government funds) and that have an investor base more likely to engage 
in heavy redemptions (compared to retail investors) because of, among 
other reasons, the first mover advantage created by the funds' current 
valuation and pricing practices. Specifically, compared to the current 
stable NAV environment, a variable NAV will significantly limit the 
value of the first mover advantage. Although this first mover advantage 
may not be the main driver of investor decisions to redeem, it 
strengthens the incentive to redeem for those investors with the most 
at stake from a decline in a fund's value, which increases the chance 
of unfair investor dilution in contravention of a core principle of the 
Investment Company Act. We continue to believe that a floating NAV 
will, for institutional prime funds, reduce the impact of the first 
mover advantage associated with money market funds' current valuation 
and pricing practices and thus is consistent with our

[[Page 47777]]

obligation to seek to prevent investor dilution of fund shares (as 
discussed in more detail in the section below).
---------------------------------------------------------------------------

    \467\ See Treasury Strategies III Comment Letter (submitting a 
white paper: Carfang, et al., Proposed Money Market Mutual Fund 
Regulations: A Game Theory Assessment (using ``game theory'' 
analysis to evaluate whether a variable NAV and/or a constant NAV, 
with or without the ability to impose a liquidity fee or gate, can 
prevent or stop a run on money market fund assets).
    \468\ Id.
    \469\ For example, the floating NAV at 4 decimals will adjust 
from $1.0000 to $0.9999 as soon as the value reaches $0.99995. 
Hence, the most an investor can benefit from redeeming ahead of 
others and switching to an alternative investment is $1.0000-
$0.99995 = $0.00005.
    \470\ We discuss the costs associated with institutional 
investors transferring between investment alternatives in section 
III.K.3.
---------------------------------------------------------------------------

    A few commenters also suggested that shareholders in a floating NAV 
fund would have the same incentive to redeem if a floating NAV fund 
deviates far enough from the typical historical range for market-based 
pricing, particularly if they believe the fund may continue to drop in 
value.\471\ We note, however, that the floating NAV reform, one part of 
our broader reforms to money market funds, is designed to address a 
particular structural incentive that exists as a result of existing 
valuation and pricing methodologies under rule 2a-7. As we stated in 
our proposal and in this Release, the floating NAV reform is not 
intended to deter redemptions that constitute rational risk management 
by shareholders or that reflect a general incentive to avoid loss.
---------------------------------------------------------------------------

    \471\ See, e.g., Federated IV Comment Letter (arguing that, 
unlike a stable NAV fund, shareholders may have a greater incentive 
to redeem from a declining floating NAV fund because shareholders 
would ``realize'' the small declines in value); Chamber II Comment 
Letter.
---------------------------------------------------------------------------

    Several commenters argued that shareholders may choose not to 
redeem from a stable NAV money market fund during times of stress to 
avoid contributing to the likelihood that their fund breaks the 
buck.\472\ Although this may be the case for some shareholders, as 
shown during the financial crisis, other shareholders do redeem from 
stable value money market funds, regardless of the impact on the 
fund.\473\ It is the actions of those shareholders that have led to our 
re-evaluation of the appropriateness of exempting all money market 
funds from the valuation and pricing provisions that apply to all other 
mutual funds.
---------------------------------------------------------------------------

    \472\ See, e.g., Wells Fargo Comment Letter; Ropes & Gray 
Comment Letter; ICI Comment Letter.
    \473\ See supra section II.
---------------------------------------------------------------------------

    One commenter also argued that rule 2a-7 already places a number of 
detailed remedial obligations on the board of a money market fund, in 
the event a credit event occurs, that are designed to prevent any first 
mover advantage related to money market funds' current valuation and 
pricing methods.\474\ This commenter discussed, for example, the 
existing requirement that fund boards periodically calculate the fund's 
shadow price and take action in the event it deviates from the market-
based NAV per share by more than 50 basis points. We note, however, 
that the floating NAV reform is designed to proactively address a 
structural feature of money market funds that may incentivize heavy 
redemptions in times of market stress (and the resulting shareholder 
inequities) before a significant credit event occurs or the fund re-
prices its shares using market-based values (i.e., breaks the buck). 
Under current rule 2a-7, there remains a first mover advantage until 
the fund breaks the buck and re-prices its shares using market-based 
valuations. One commenter also noted that any reduction in the 
incentive to redeem early from the fund's stable pricing would be 
marginal and contingent upon the type of stress experienced.\475\ We 
note that the floating NAV reform is targeted towards the funds that 
have been most susceptible to heavy redemptions in the past. We believe 
that the risks associated with these funds have shown that the first 
mover advantage that results from current rule 2a-7's valuation and 
pricing methods needs to be addressed. This is particularly true in 
light of the Investment Company Act mandate to ensure that investors 
are treated fairly and the impact that the first mover advantage has on 
investor dilution.
---------------------------------------------------------------------------

    \474\ See Federated IV Comment Letter.
    \475\ See ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    Finally, a number of commenters suggested that the evidence of 
heavy redemptions in European floating NAV money market funds and U.S. 
ultra-short bond funds during 2008, taken together, may be the best 
means available to predict whether a floating NAV will reduce 
shareholder incentives to redeem shares in times of stress.\476\ These 
commenters suggest, therefore, that a floating NAV alone likely would 
not stop investors from redeeming shares.\477\ We recognize that many 
European floating NAV money market funds and U.S. ultra short bond 
funds experienced heavy redemptions during the financial crisis.\478\ 
We note that, as discussed above, the floating NAV reform is not 
intended to wholly prevent heightened redemptions or deter redemptions 
that constitute rational risk management by shareholders or that 
reflect a general incentive to avoid loss. Instead, our floating NAV 
reform is intended to address the incremental incentive to redeem 
created by money market funds' current valuation and pricing methods 
(and not incentives to redeem that relate to flights to quality and 
liquidity) and that exacerbates shareholder dilution.
---------------------------------------------------------------------------

    \476\ See, e.g., Federated IV Comment Letter; HSBC Comment 
Letter.
    \477\ See supra note 475 and accompanying text.
    \478\ As we discussed in the Proposing Release, we understand 
that many European floating NAV money market funds are priced and 
managed differently than floating NAV funds (as we proposed, and as 
adopted today). We also noted that Europe 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. Finally, we noted in the Proposing Release that empirical 
analysis yields different opinions on whether floating NAV funds, as 
compared with stable NAV funds, are less susceptible to run-like 
behavior. See Proposing Release, supra note 25, at section 
III.A.1.d. Accordingly, we note that the fact that some ultra-short 
bond funds and European floating NAV funds experienced heavy 
redemptions during the financial crisis does not necessarily suggest 
that investors in floating NAV money market funds (as adopted today) 
also would redeem heavily in a financial crisis.
---------------------------------------------------------------------------

b. Risks of Investor Dilution
    As discussed earlier, one of the Commission's most significant 
concerns when originally providing the exemption permitting the use of 
amortized cost valuation and penny rounding pricing for money market 
funds was to minimize the risks of investor dilution.\479\ A primary 
principle underlying the Investment Company Act is that sales and 
redemptions of redeemable securities should be effected at prices that 
are fair and do not result in dilution of shareholder interests or 
other harm to shareholders.\480\ Absent an exemption, a mutual fund 
must sell and redeem its redeemable securities only at a price based on 
its current net asset value, which equals the value of the fund's total 
assets minus the amount of the fund's total liabilities.\481\ A mutual 
fund generally must value its assets at their market value, in the case 
of securities for which market quotations are readily available, or at 
fair value, as determined in good faith by the fund's board of

[[Page 47778]]

directors, in the case of other securities and assets.\482\
---------------------------------------------------------------------------

    \479\ See Proposing Release, supra note 25.
    \480\ See Investment Trusts and Investment Companies: Hearings 
on S. 3580 before a Subcommittee of the Senate Committee on Banking 
and Currency, 76th Cong., 3d Sess. 136-38 (1940) (hearings that 
preceded the enactment of the Company Act). In addition, all funds 
must accurately calculate their net asset values to ensure the 
accuracy of their payment of asset-based fees, such as investment 
advisory fees, as well as the accuracy of their reported 
performance. Statement Regarding ``Restricted Securities,'' 
Investment Company Act Release No. 5847 (Oct. 21, 1969).
    \481\ Rule 22c-1. When calculating its net asset value for 
purposes of rule 22c-1: (i) An open-end fund adds up the current 
values of all of its assets (using their market values or fair 
values, as appropriate), which reflect any unrealized gains; and 
(ii) subtracts all of its liabilities, which include any federal 
income tax liability on any unrealized gains. If the open-end fund 
understates a liability, among other consequences, the price at 
which the fund's redeemable securities are redeemed will be higher, 
so that redeeming shareholders will receive too much for their 
shares while the net asset value of shares held by the remaining 
shareholders may be reduced correspondingly when the full amount of 
the liability must be paid.
    \482\ Rule 2a-4; see also section 2(a)(41) defining the term 
``value.''
---------------------------------------------------------------------------

    A fund that prices and transacts in fund shares valued at amortized 
cost value and rounded to the nearest penny poses a risk of dilution of 
investor shares because investors may redeem for the stable value of 
their shares even where the underlying market value of the fund's 
portfolio may be less. If such a redemption occurs, the value of the 
remaining shareholders' shares can be diluted, as remaining 
shareholders effectively end up paying redeeming shareholders the 
difference between the stable value and the underlying market value of 
the fund's assets.\483\ This result is illustrated in the example 
provided in the Proposing Release, where we discussed how redeeming 
shareholders can concentrate losses in a money market fund.\484\
---------------------------------------------------------------------------

    \483\ See TIAA-CREF Comment Letter (``Allowing investors to 
transact at daily using amortized pricing in times of stress could 
lead to dilution of the remaining investors' shares as the first 
redeemers in a run on a money market fund would get a higher 
valuation for their shares based on amortized cost than would 
subsequent redeemers.'').
    \484\ See Proposing Release, supra note 25, at section II.B.1.
---------------------------------------------------------------------------

    This risk of dilution is magnified by the ``cliff effect'' that can 
occur if a stable value fund is required to re-price its shares. If, 
due to heavy redemptions, losses embedded in a fund's portfolio cause 
it to re-price its shares from its stable value, remaining money market 
fund investors will receive at most 99 cents for every share remaining, 
while redeeming investors received the full $1.00, even if the market 
value of the fund's portfolio had not changed. In a mutual fund that 
transacts using a floating NAV, this cliff effect is minimized because 
(assuming pricing to four decimal places) the ``cliff'' is a 1/100th 
the size compared to when a money market fund is priced using penny 
rounding. In other words, in a floating NAV fund the risk of investor 
dilution is far less, in part, because the cliff occurs earlier and is 
significantly smaller (at $0.9999 cents, or one hundred times sooner 
and smaller than a stable value fund that drops from $1.00 to 99 
cents). Thus, the ``cliff effect'' is significantly mitigated in a 
floating NAV fund that prices and rounds share prices to four decimal 
places.
    As we discuss in more detail below, applying a floating NAV only to 
institutional investors investing in prime funds and allowing retail 
investors to continue to invest in a stable value product recognizes 
the historical differences between these types of investors, and 
cordons off some of the risks, reducing the chance that heavy 
redemptions by institutions will result in disruption or material 
dilution of retail investors' shares.\485\ We also recognize that 
institutional investors are not always similarly situated, with some 
institutions having more or less investment at risk, resources to 
monitor their investments, tolerance for losses, or proclivity to 
redeem, which makes certain institutional investors less likely to be 
among the first movers.\486\ A floating NAV should also help reduce the 
risks of material dilution to this subset of institutional investors, 
as it will reduce the first mover advantage associated with current 
rule 2a-7's valuation and pricing methods, which can prompt heavy 
redemptions and can have the effect of diluting the shares of slower-
to-redeem institutional investors.\487\
---------------------------------------------------------------------------

    \485\ See infra section III.C.2; see also Schwab Comment Letter 
(agreeing that segregating institutional investors from retail 
investors would ``reduce the chance that retail investors, who tend 
to be slower to react to market events, will absorb a 
disproportionate share of the losses if a fund breaks the buck.'').
    \486\ See, e.g., ABA Business Law Comment Letter (``It is more 
likely, however, that larger institutions have greater analytical 
resources than other institutional investors, such as small pension 
plans and companies.'').
    \487\ Several commenters supported our belief that a floating 
NAV treats shareholders more equitably than under current rule 2a-7. 
See, e.g., Deutsche Comment Letter; TIAA-CREF Comment Letter; 
Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

    A floating NAV might also prompt investors who are the least 
tolerant of losses, and thus the most likely to redeem early to avoid a 
decline in a fund's NAV per share, to shift into other investment 
products, such as government money market funds or other stable value 
products that may more appropriately match their risk profile. Such a 
shift would further reduce the risks of dilution for the remaining 
investors, mitigating the chances that rapid heavy redemptions will 
result in negative outcomes for these funds and their investors.
    We recognize that our liquidity fees and gates reforms also address 
the risks of dilution to some extent. However, fees and gates may not 
address the incentives that cause rapid heavy redemptions to occur in 
certain money market funds in the first place (although they should 
help manage the results). They also are not primarily designed to 
address the risks associated with deviations in a fund's NAV caused by 
portfolio losses or other credit events; rather, they are designed to 
ensure that investors pay the costs of their liquidity and allow funds 
time to manage heavy redemptions. A floating NAV requires redeeming 
investors to receive only their fair share of the fund when there are 
embedded losses in the portfolio (avoiding dilution of remaining 
shareholders), even in cases where the fund has sufficient liquidity 
such that fees or gates would not be permitted. We believe that the 
risks associated with institutional prime money market funds--including 
the incentives associated with the first mover advantage that results 
from current rule 2a-7's valuation and pricing methods, and associated 
heavy redemptions that can worsen a decline in a fund's stable NAV--are 
significant enough that they need to be addressed through the targeted 
reform of a floating NAV.
c. Enhanced Allocation of Principal Volatility Risk
    Today, the risks associated with the principal volatility of a 
money market fund's portfolio securities can be obscured by the pricing 
and valuation methods that allow these funds to maintain a stable NAV. 
In non-money market funds, investors may look to historical principal 
volatility as an indicator of fund risk because changes in the 
principal may be the dominant source of the total return.\488\ 
Historical principal volatility in money market funds may not have been 
as fully appreciated by investors, because they do not experience any 
principal volatility unless the fund breaks the buck (even if such 
volatility has in fact occurred).\489\
---------------------------------------------------------------------------

    \488\ Mutual funds earn money through dividend payments, capital 
gains distributions (increases in the price of the fund's portfolio 
securities), and increased NAV. See SEC Office of Investor Education 
and Advocacy, Mutual Funds, A Guide for Investors (Aug. 2007), 
available at http://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Money market fund investors may be more likely to focus 
on the other components of total return in a fund, such as interest 
or dividends.
    \489\ Such principal volatility may be even less apparent if the 
fund's sponsor provides support for the fund. See supra section 
II.B.4.
---------------------------------------------------------------------------

    Some commenters suggested, and we agree, that transacting at prices 
based on current market values means that institutional investors who 
invest in floating NAV funds will be more aware of, and willing to 
tolerate, occasional fluctuations in fund share prices (largely 
resulting from volatility in principal that had been previously 
obscured).\490\ This may result in more efficient allocation of risk 
through a ``sorting effect'' whereby institutional investors in prime 
funds either remain in a floating NAV money market fund and accept the 
risks of regular principal

[[Page 47779]]

volatility \491\ or move their assets into alternative investment 
products better suited to their actual risk tolerance.\492\ 
Accordingly, the shareholders who remain in institutional prime money 
market funds must be prepared to experience gains and losses in 
principal on a regular basis, which may result in those remaining 
investors being less likely to redeem at the first sign that a money 
market fund may experience such principal volatility.
---------------------------------------------------------------------------

    \490\ See, e.g. Vanguard Comment Letter.
    \491\ We acknowledge, however, that although we expect money 
market fund shares priced to four decimal places likely will 
fluctuate on a somewhat regular basis, they are not likely to 
fluctuate daily primarily due to the high quality and short duration 
of the fund's underlying portfolio securities. A few commenters 
argued that a floating NAV will not necessarily inform investors 
because NAVs may not fluctuate much. See, e.g., Federated IV Comment 
Letter; HSBC Comment Letter; ICI Comment Letter. Our staff 
estimates, based on a historical analysis of money market fund 
shadow prices, that money market funds would have floated just over 
50% of the time if priced to four decimal places. See infra note 502 
and accompanying text.
    \492\ See, e.g. Vanguard Comment Letter (``The reason the 
floating NAV would mitigate the risk of disruptive shareholder 
redemptions in institutional prime MMFs is that the process of 
moving from a stable NAV to a floating NAV will force the 
shareholders of those funds, which tend to be concentrated with 
professional investors who cannot withstand any share price 
movement, into different investment vehicles. The shareholders who 
remain will have a greater tolerance for loss, making them less 
likely to flee at the first sign of stress.'').
---------------------------------------------------------------------------

    Some commenters recognized that making principal gains and losses 
more apparent to investors could recalibrate investors' perceptions of 
the risks inherent in money market funds.\493\ A number of commenters 
argued, however, that institutional investors who invest in money 
market funds that will be subject to a floating NAV are well aware of 
the risks of money market funds and that money market fund shares may 
fluctuate in value.\494\ But contrary to institutional investors' 
purported existing knowledge of those risks, when the reality of 
potential principal losses became more apparent during the financial 
crisis, many of them redeemed heavily from money market funds.\495\ Our 
floating NAV reform, by requiring that investors experience any gains 
or losses in principal when they transact in money market fund shares, 
will more fully reveal the risk from changes in the fund's principal 
value to shareholders.
---------------------------------------------------------------------------

    \493\ See, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable 
Comment Letter; Boston Federal Reserve Comment Letter.
    \494\ See, e.g., Federated IV Comment Letter (citing to comments 
submitted on the FSOC Proposed Recommendations); Hanson et al. 
Comment Letter. Commenters also noted that investors already 
understand that money market funds can ``break the buck.'' See, 
e.g., Comment Letter of OFI Global Asset Management, Inc. (Sept. 17, 
2013) (``Oppenheimer Comment Letter''); Dreyfus Comment Letter; UBS 
Comment Letter; Wells Fargo Comment Letter; Comment Letter of Key 
Bank, NA (Sept. 16, 2013) (``Key Bank Comment Letter'').
    \495\ Some commenters agreed with this view. See, e.g., American 
Bankers Ass'n Comment Letter; Angel Comment Letter.
---------------------------------------------------------------------------

    Finally, some commenters also suggested that enhanced disclosure 
(including daily Web site reporting of shadow NAVs), rather than a 
floating NAV, would be a more efficient and less costly way to achieve 
the same goal.\496\ We agree that daily disclosure of funds' shadow 
NAVs does improve visibility of risk to some degree, by making the 
information about NAV fluctuations available to investors should they 
choose to seek it out. But the mere availability of this information 
cannot provide the same effect that is provided by institutions 
experiencing actual fluctuations in the value of their investments (or 
acknowledging, through their investment in a fully disclosed floating 
NAV investment product, their willingness to accept daily fluctuations 
in share price value), which will be provided by a floating NAV.
---------------------------------------------------------------------------

    \496\ See, e.g., Federated IV Comment Letter; ICI Comment 
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter. A few commenters suggested that money market funds 
be required to transact in fund shares to the same level of 
precision as disclosed on fund Web sites, which is the approach that 
we are adopting today. See, e.g., Fidelity Comment Letter (stating 
that money market funds should disclose (on fund Web sites) the NAV 
to the same precision as it prices its shares for transactions in 
order to avoid arbitrage opportunities based on asymmetry of 
information).
---------------------------------------------------------------------------

4. Money Market Fund Pricing
    Having determined to adopt the floating NAV reform for 
institutional prime funds, there is a separate (albeit related) issue 
of how to price the shares for transactions. Today, for the reasons 
discussed previously in this section, we are amending rule 2a-7 to 
eliminate the exemption that currently permits institutional prime 
funds to maintain a stable NAV through amortized cost valuation and/or 
penny rounding pricing.\497\ We are also adopting, as proposed, an 
additional requirement that these money market funds value their 
portfolio assets and price fund shares by rounding the fund's current 
NAV to four decimal places in the case of a fund with a $1.0000 share 
price or an equivalent or more precise level of accuracy for money 
market funds with a different share price (e.g., a money market fund 
with a $10 target share price could price its shares at $10.000).\498\ 
Accordingly, the final amendments change the rounding convention for 
money market funds that are required to adopt a floating NAV--from 
penny rounding (i.e., to the nearest one percent) to ``basis point'' 
rounding (i.e., to the nearest 1/100th of one percent), which is a more 
precise standard than other mutual funds use today.
---------------------------------------------------------------------------

    \497\ As discussed further below, under our final rule 
amendments, government and retail money market funds will be 
permitted to use the amortized cost method and/or penny-rounding 
method to maintain a stable price per share as they do today.
    \498\ See rule 2a-7(c)(1)(ii). Mutual funds that are not relying 
on the exemptions provided by rule 2a-7 today are required to price 
and transact in fund shares rounded to a minimum of 1/10th of 1 
percent, or three decimal places. See ASR 219, supra note 5.
---------------------------------------------------------------------------

    We proposed to require that institutional prime funds use basis 
point rounding and we noted that basis point rounding appeared to be 
the level of sensitivity that would be required if gains and losses 
were to be regularly reflected in the share price of money market funds 
in all market environments, including relatively stable market 
conditions. We also noted that this level of precision may help more 
effectively inform investor expectations regarding the floating nature 
of their shares.\499\ In money market funds today, there is no 
principal volatility unless the fund breaks the buck, and thus this 
indicator of risk may not have always been readily apparent.\500\
---------------------------------------------------------------------------

    \499\ See Proposing Release, supra note 25, at section III.A.2.
    \500\ Some commenters recognized that making gains and losses 
more apparent to investors could help recalibrate investors' 
perceptions of the risks inherent in money market funds. See, e.g., 
Schwab Comment Letter; Fin Svcs. Roundtable Comment Letter; Boston 
Federal Reserve Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we considered, as an 
alternative to the basis point rounding requirement that we are 
adopting today (which is a condition for relying on rule 2a-7 for 
institutional prime money market funds), requiring institutional prime 
funds to price and transact in fund shares at a precision of 1/10th of 
one percent (which is typically the equivalent of three decimal places 
at $10.00 share price) (``10 basis point rounding''), like other mutual 
funds. But in the Proposing Release, we noted our concern that 10 basis 
point rounding may not be sufficient to ensure that investors can 
regularly observe the investment risks that are present in money market 
funds, particularly if funds manage themselves in such a way that their 
NAVs remain constant or nearly constant.\501\
---------------------------------------------------------------------------

    \501\ See supra note 491.
---------------------------------------------------------------------------

    In considering whether to require basis point rounding or, instead, 
to allow 10 basis point rounding, we have looked to the potential for 
price

[[Page 47780]]

fluctuations under the two approaches. Based on our staff analysis of 
Form N-MFP data between November 2010 and November 2013, 53% of money 
market funds have fluctuated in price over a twelve-month period with a 
NAV priced using basis point rounding, compared with less than 5% of 
money market funds that would have fluctuated in price using 10 basis 
point rounding.\502\ We recognize that, either way, this limited 
fluctuation in prices is the result of the nature of money market fund 
portfolios, whose short duration and/or high quality generally results 
in fluctuations in value primarily when there is a credit deterioration 
or other significant market event.\503\ Because of the nature of money 
market fund portfolios, pricing with the accuracy of basis point 
rounding should better reflect the nature of money market funds as an 
investment product by regularly showing market gains and losses in an 
institutional prime money market fund's portfolio.\504\
---------------------------------------------------------------------------

    \502\ Our staff has updated its analysis from the discussion in 
the Proposing Release. See Proposing Release, supra note 25, at 
section III.A.2 and n.164.
    \503\ See, e.g., Comment Letter of Arnold & Porter LLP on behalf 
of Federated Investors (Elimination of the Use of Amortized Cost 
Method of Valuation by Stable Value Money Market Funds) (Sept. 16, 
2013) (``Federated VI Comment Letter'').
    \504\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    After considering the results of the staff's analysis, we are 
persuaded to require basis point rounding. We believe that some of the 
institutional investors in these funds may not appreciate the risk 
associated with money market funds.\505\ As for this subset of 
institutional investors, we believe that the basis point rounding 
requirement may accentuate the visibility of the risks in money market 
funds by causing these shareholders to experience gains and losses when 
the funds' value fluctuates by 1 basis point or more.\506\ We further 
believe this may, in turn, have two potential effects that are 
consistent with our overall goal of addressing features in money market 
funds that can make them susceptible to heavy redemption. First, to the 
extent that some of these investors become more aware of the risks, 
they may develop an increased risk tolerance that could help make them 
less prone to run.\507\ Second, by helping make the risk more apparent 
through periodic price fluctuations, basis point rounding may help 
signal to those investors who cannot tolerate the risk associated with 
the fluctuating NAV that they should migrate to other investment 
options, such as government funds.\508\ Because basis point rounding 
is, as the staff's study demonstrated, more likely to produce price 
fluctuations than 10 basis point rounding, we believe it is more likely 
to have these desired effects.\509\
---------------------------------------------------------------------------

    \505\ To be sure, this may not generally include the more 
sophisticated institutional investors who have professional 
financial experts advising them and carefully monitoring their 
investments. See, e.g., Federated IV Comment Letter (citing to 
comments submitted on the FSOC Proposed Recommendations; Hanson et 
al. Comment Letters). But within the class of institutional 
investors, we understand that there are many less sophisticated 
investors--e.g., smaller, closely held corporations--who rely on 
money market funds to manage their cash flow but who are not fully 
aware of the risks and the potential for loss.
    \506\ See, e.g., Report 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, 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) (``Federated May 
2011 Comment Letter'') (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''). As discussed above, we 
believe that our floating NAV reform improves the allocation of risk 
and should result in better-informed investors that, by choosing to 
invest in a floating NAV, appreciate and are willing to tolerate the 
risks of principal volatility, even if those fluctuations do not 
occur on a daily basis. See supra section III.B.3.c.
    \507\ Several commenters agreed with this position. See, e.g., 
Comment Letter of Eric S. Rosengren, President, Federal Reserve Bank 
of Boston, et al. (Sept. 12, 2013) (``Fed Bank President Comment 
Letter'') (``We agree with the SEC's position that a floating NAV 
requirement, if properly implemented, could recalibrate investors' 
perception of the risks inherent in a fund by `making gains and 
losses a more regularly observable occurrence'.''); HSBC Comment 
Letter.
    \508\ See, e.g., Fed Bank President Comment Letter (``Because a 
constant NAV MMMF generally draws risk-averse investors, it is 
likely that given an appropriate transition period, the investor 
base would either change or become more tolerant of NAV 
fluctuations, lowering the chance of destabilizing runs.'').
    \509\ We are concerned that, were we to adopt 10 basis point 
rounding, institutional prime money market funds would not regularly 
float during normal market times, in which case certain 
institutional investors may not fully appreciate that the investment 
has risks and they might thus invest in the product despite their 
lower risk tolerance. See, e.g., PWG Report, supra note 506, 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.'').
---------------------------------------------------------------------------

a. Other Considerations
    We recognize that 10 basis point rounding would provide certain 
benefits. For example, it could provide consistency in pricing among 
all floating NAV mutual funds and this could reduce investors' 
incentives to reallocate assets into other potentially riskier floating 
NAV mutual funds (e.g., ultra-short bond funds) that some commenters 
suggested may appear to present less volatility. A number of commenters 
argued for this alternative, suggesting that money market funds should 
not be required to use a more precise rounding convention than what is 
required of other mutual funds.\510\
---------------------------------------------------------------------------

    \510\ See, e.g., BlackRock II Comment Letter; Legg Mason & 
Western Asset Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Notwithstanding these potential benefits, as discussed above we 
believe there are sufficient countervailing considerations that make it 
appropriate to require basis point rounding for institutional prime 
money market funds. Further, we are requiring this additional level of 
precision because institutional prime money market funds are distinct 
from other mutual funds in their regulatory structure, purpose, and 
investor risk tolerance, as well as the risks they pose of investor 
dilution and to well-functioning markets. Accordingly, we believe on 
balance that it is appropriate to require these money market funds to 
use a more precise pricing and rounding convention than used by other 
mutual funds.
    Some commenters also argued that enhanced disclosure (including 
daily Web site reporting of shadow NAVs), would be a more efficient and 
less costly way to achieve the same goal.\511\ We agree that daily 
disclosure of funds' shadow NAVs does improve visibility of risk to 
some degree, by making the information about NAV fluctuations available 
to investors should they choose to seek it out. But we are skeptical 
that, as to the subset of institutional investors who are less aware of 
the risks, the mere availability of this information can provide the 
same level of impact than is provided by actually experiencing 
fluctuations in the investment value (or acknowledging, through these 
investors' investment in a fully disclosed floating NAV investment 
product, their willingness to accept daily fluctuations in share price 
value), which will be provided by a floating NAV priced using basis 
rounding. In a similar vein, one commenter suggested that, as an 
alternative to a floating NAV, we consider a modified penny-rounding 
pricing method whereby a money market fund would be permitted to 
calculate an unrounded NAV once each

[[Page 47781]]

day and therefore, absent a significant market event, use the previous 
day's portfolio valuation for any intraday NAV calculations.\512\ Under 
this approach, money market funds would disclose their basis-point 
rounded price, but only transact at the penny-rounded price.\513\ 
Although we recognize that such an approach would likely retain the 
efficiencies associated with amortized cost valuation, this alternative 
is not without other risks, including the use of potentially stale 
valuation data. More significantly, unlike our floating NAV reform, 
this alternative does not address the first-mover advantage or risks of 
investor dilution discussed above.\514\
---------------------------------------------------------------------------

    \511\ See, e.g., Federated IV Comment Letter; ICI Comment 
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter.
    \512\ See Comment Letter of Federated Investors, Inc. (Nov. 6, 
2013); see also Comment Letter of Arnold & Porter LLP on behalf of 
Federated Investors (July 16, 2014). We note that this alternative, 
if combined with fees and gates, is very similar to the fees and 
gates alternative we proposed (which included a requirement for 
penny-rounded pricing). We discuss why we have chosen not to adopt 
that alternative in section III.L.1.
    \513\ Id.
    \514\ See supra section III.B.3.
---------------------------------------------------------------------------

    Several commenters argued that basis point rounding is an 
artificial means to increase the volatility of floating NAV funds and 
would mislead investors by exaggerating the risks of investing in money 
market funds compared to ultra-short bond funds, and suggested that 
instead we should adopt 10 basis point rounding.\515\ For example, one 
commenter noted that basis point rounding is so sensitive that it might 
produce price distinctions among funds that result merely from the 
valuation model used by a pricing service, rather than from a 
difference in the intrinsic value of the securities (``model 
noise'').\516\ We do not believe that basis point rounding will mislead 
investors, nor do we believe that price changes at the fourth decimal 
place will generally be a result of ``model noise'' rather than 
reflecting changes in the market value of the fund's portfolio.\517\ We 
note that today many money market funds are voluntarily disclosing 
their shadow price with basis point rounding, and they are prohibited 
from doing so if the shadow price was misleading to investors. Funds 
have also been required to report their shadow NAVs to us on Form N-MFP 
priced to the fourth decimal place since the inception of the form, and 
we have found the shadow NAVs priced at this level useful and relevant 
in our risk monitoring efforts. For example, reporting of shadow prices 
to four decimal places provides a level of precision (as compared with 
three decimal place rounding) needed for our staff to fully evaluate 
and monitor the impact of credit events on money market fund share 
prices.\518\
---------------------------------------------------------------------------

    \515\ See, e.g., Schwab Comment Letter; Stradley Ronon Comment 
Letter; SIFMA Comment Letter; Legg Mason & Western Asset Comment 
Letter; Fidelity Comment Letter.
    \516\ See Goldman Sachs Comment Letter.
    \517\ See, e.g., HSBC Comment Letter (noting that basis point 
rounding would ``better reflect gains and losses'' than 3 decimal 
place rounding).
    \518\ Basis point precision will also enable our staff to 
monitor the effect of shifts in interest rates on money market fund 
share prices (particularly in more regular market conditions).
---------------------------------------------------------------------------

    Some commenters also stated that ultra-short bond funds priced 
using 10 basis point rounding might appear less volatile than money 
market funds priced using basis point rounding.\519\ As a result, these 
commenters noted what they viewed as the undesirable effect that 
investors might be incentivized to move their assets into ultra-short 
bond funds that have similar investment parameters to money market 
funds but are not required to adhere to the risk-limiting conditions of 
rule 2a-7.\520\ Based on our staff analysis of Morningstar data between 
November 2010 and November 2013, 100% of ultra-short bond funds have 
fluctuated in price over a twelve-month period with a NAV priced using 
10 basis point rounding, compared with 53% of money market funds that 
would have fluctuated in price using basis point rounding.\521\ 
Accordingly, we do not believe that it is likely investors will view 
ultra-short bond funds as less volatile than money market funds priced 
using basis point rounding. We also note, however, that because 
floating NAV money market funds and ultra-short bond funds invest in 
different securities and are subject to different regulatory 
requirements (including risk-limiting conditions), investors may 
consider these factors when evaluating the risk profile of these 
different investment products.\522\ Existing disclosure requirements, 
along with the amendments to money market fund disclosure requirements 
we are adopting today, are designed to help investors understand these 
differences and the associated risks.
---------------------------------------------------------------------------

    \519\ See, e.g., BlackRock II Comment Letter; Stradley Ronon 
Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter.
    \520\ We note that other features of ultra-short bond funds may 
counter this incentive, including that they are generally not a cash 
equivalent for accounting purposes and their less favorable tax 
treatment than what the Treasury Department and IRS have proposed 
and issued today. See infra section III.B.6.
    \521\ Using Morningstar data, our staff analyzed the monthly NAV 
fluctuations of 54 active ultra-short bond fund share classes during 
November 2010 and November 2013. The money market fund data was 
obtained using Form N-MFP data. See supra note 502 and accompanying 
text.
    \522\ As discussed in infra section III.B.6, the Treasury 
Department and the IRS will issue today a revenue procedure that 
exempts from the wash sale rule dispositions of shares in any 
floating NAV money market fund. This exemption does not apply to 
ultra-short bond funds.
---------------------------------------------------------------------------

b. Implementation of Basis Point Rounding
    One commenter noted that basis point rounding ``should be 
relatively straightforward for the industry to accommodate.'' \523\ A 
number of commenters, however, objected to our proposed amendment to 
require that floating NAV money market funds price and transact their 
shares at the fourth decimal place. Commenters stated that pricing and 
transacting at four decimal places (as opposed to reporting only their 
shadow price at four decimal places) would be operationally expensive 
and overly burdensome because money market fund systems are typically 
designed for processing all mutual funds,\524\ which generally process 
and record transactions rounded to the nearest penny (which is 
typically the equivalent of three decimal places at a $10.00 share 
price).\525\ We acknowledge that money market funds, intermediaries, 
and shareholders will likely incur significant costs in order to modify 
their systems to accommodate pricing and transacting in fund shares 
rounded to four decimals. We discuss these costs in section III.B.8.a 
below. We understand, however, that because virtually all mutual funds 
(including money market funds), regardless of price, round their NAV to 
the nearest penny, these system change costs will be incurred if we 
require money market funds to float their NAV, regardless of whether we 
require the use of basis point rounding (unless funds were to re-price 
to $10.00 per share).\526\
---------------------------------------------------------------------------

    \523\ Comment Letter of Interactive Data Corporation (Sept. 17, 
2013) (``Interactive Data Comment Letter'').
    \524\ See supra note 500.
    \525\ See, e.g., BlackRock II Comment Letter; Invesco Comment 
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment 
Letter; ICI Comment Letter.
    \526\ We understand that virtually all systems round to the 
nearest penny when processing fund share transactions. See ICI 
Comment Letter. Accordingly, if a money market fund continued to be 
priced at a dollar, even if rounded to the third decimal place, we 
understand that similar significant systems changes would be 
necessary to transact and report in fund shares priced at $1.000. We 
note that money market funds would be able to avoid these costs and 
move floating NAV money market funds to existing mutual fund systems 
by re-pricing fund shares to $100.00 per share, under a basis point 
rounding requirement. See id. We recognize that such a transition 
might create other costs, such as proxy solicitation if the fund's 
charter prohibits such a re-pricing and potential investor 
resistance to using a cash management product that prices based on a 
$100.00 initial share price. See id. (noting that basis point 
rounding would be workable (without significant costs) if money 
market funds moved to a $100.00 price per share, but suggesting that 
investors would be unlikely to use a cash management product priced 
at this level). We agree with this commenter that it is unlikely 
that investors would invest in a money market fund that implements 
an initial $100.00 share price in a floating NAV money market fund. 
If a money market fund chose to do so, we estimate that each fund 
would incur one-time proxy solicitation costs of $100,000. See infra 
note 735 and accompanying text.

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[[Page 47782]]

    A few commenters also noted that although basis point rounding may 
convey the risk of a floating NAV to investors more clearly by 
reflecting very small fluctuations in value, it does so at a 
significant cost--increasing the tax and accounting burdens associated 
with the realized gains and losses that would result from more frequent 
changes in a money market fund's NAV per share.\527\ As discussed in 
section III.B.6.a below, however, the Treasury Department and IRS are 
today proposing a new regulation that would permit investors to elect 
to use a ``simplified aggregate mark-to-market method'' to determine 
annual realized gains or losses and therefore eliminate the need to 
track purchase and sale transactions. Therefore, it is unlikely that 
there will be increased operational burdens that result from tax or 
accounting costs associated with more frequent realized gains or 
losses.\528\
---------------------------------------------------------------------------

    \527\ See, e.g., BlackRock II Comment Letter; UBS Comment 
Letter.
    \528\ As discussed in section III.B.6.a.i, however, investors 
are likely to incur additional, although small, realized gains and/
or losses as a result of more frequent fluctuations in the share 
price under a floating NAV priced to four decimal places.
---------------------------------------------------------------------------

c. Economic Analysis
    Under our final amendments, and as we proposed, institutional prime 
funds will round prices and transact in fund shares to four decimal 
places in the case of a fund with a $1.00 target share price (i.e., 
$1.0000) or an equivalent or more precise level of accuracy for money 
market funds with a different share price. During normal market 
conditions, rounding prices and transacting in fund shares at four 
decimal places will provide investors an opportunity to better 
understand the risks of institutional prime funds as an investment 
option and will provide investors with improved transparency in 
pricing. This should positively affect competition. During times of 
stress, it will reduce much of the economic incentive for shareholders 
to redeem shares ahead of other investors at a stable net asset value 
when the market value of portfolio holdings fall and will reduce 
shareholder dilution. As such, the risk of heavy share redemptions 
should decrease, and shareholders will be treated more equitably as 
they absorb their proportionate share of gains, losses, and costs. In 
addition, rounding prices and transacting in fund shares at four 
decimal places may help to further reduce the incentive for 
shareholders to redeem shares ahead of other investors by helping less 
informed investors better understand the inherent risks in money market 
funds. As such, the risk of heavy share redemptions may decrease as 
investors experience greater information efficiency and allocative 
efficiency by better understanding the risks more closely and directing 
their investments accordingly. Reducing the risk of heavy share 
redemptions by removing the first-mover advantage should promote 
capital formation by making money market funds a more stable source of 
financing for issuers of short-term credit instruments. We recognize, 
however, that as discussed below in section II.K, to the extent that 
money flows out of institutional prime floating NAV funds and into 
alternative investment vehicles, capital formation may be adversely 
affected.
5. Amortized Cost and Penny Rounding for Stable NAV Funds
    As discussed above, all money market funds that are not subject to 
our targeted floating NAV reform may continue to price fund shares as 
they do today and use the amortized cost method to value portfolio 
securities.\529\ This approach differs from our 2013 proposal, in which 
we proposed to eliminate the use of the amortized cost method of 
valuation for all money market funds. At that time, we stated that 
amortized cost valuation or penny rounding pricing 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, and in light of the fact that, under our proposal, all 
money market funds (including stable NAV funds) would be required to 
disclose on a daily basis their fund share prices with their portfolios 
valued using market-based factors (rather than amortized cost), we 
proposed to eliminate the use of amortized cost for stable NAV funds 
(but to continue to permit penny rounding pricing).\530\
---------------------------------------------------------------------------

    \529\ Stable NAV money market funds may also choose to use the 
penny rounding method of pricing fund shares. Under our amendments, 
government and retail money market funds will be permitted to 
maintain a stable NAV. See infra sections III.C.1 and III.C.2.
    \530\ See Proposing Release, supra note 25, at section III.A.3.
---------------------------------------------------------------------------

    A number of commenters objected to eliminating amortized cost 
valuation for stable NAV funds.\531\ Most significantly, commenters 
argued that prohibiting the use of amortized cost valuation would 
hinder money market funds' ability to provide for intraday purchases 
and redemptions and same-day settlement because of the increased time 
required to strike a market-based price.\532\ One commenter noted, for 
example, that if a money market fund prices at the close of the New 
York Stock Exchange, the fund may not be able to complete the penny 
rounding process, wire redemption proceeds, and settle fund trades 
before the close of the Fedwire.\533\ Commenters also argued that 
substituting penny rounding pricing for amortized cost valuation would 
increase costs and operational complexity without providing 
corresponding benefits.\534\ A few commenters also suggested that, in 
assessing whether to eliminate amortized cost valuation for securities 
that mature in more than 60 days, we should consider the broader 
systemic implications of a potential shift in money market fund 
portfolio holdings towards securities that mature within 60

[[Page 47783]]

days (in order to avoid the need to use market-based values).\535\
---------------------------------------------------------------------------

    \531\ See generally BlackRock II Comment Letter; Dreyfus Comment 
Letter; Federated VI Comment Letter; Wells Fargo Comment Letter; 
SIFMA Comment Letter. A number of commenters suggested that 
amortized cost is an appropriate valuation method for money market 
funds because the characteristics of typical portfolio holdings 
(i.e., high quality, short duration, and typically held-to-maturity) 
result in minimal differences between a money market fund's NAV 
calculated using amortized cost and a fund's market-based NAV. See, 
e.g., Legg Mason & Western Asset Comment Letter; UBS Comment Letter; 
Chamber II Comment Letter. Commenters also suggested that amortized 
cost valuation may increase objectivity and consistency across the 
fund industry because money market instruments do not often trade in 
the secondary markets and therefore the market-based prices may be 
less reliable. See, e.g., Federated VI Comment Letter; Goldman Sachs 
Comment Letter; Legg Mason & Western Asset Comment Letter.
    \532\ See, e.g., Federated VI Comment Letter (suggesting that it 
would take a minimum of three to four hours to strike a market-based 
NAV (assuming there are no technology problems), compared with as 
little as one hour for a fund using penny-rounded pricing and 
amortized cost valuation). See also, e.g., Legg Mason & Western 
Asset Comment Letter; SunGard Comment Letter; UBS Comment Letter; 
ICI Comment Letter; BlackRock II Comment Letter.
    \533\ See Federated VI Comment Letter.
    \534\ See, e.g., Federated VI Comment Letter (noting that June 
2012 survey data from Form N-MFP filings shows that approximately 
72% of prime money market fund assets had maturities of less than 60 
days). As a result, this commenter suggests that substituting penny 
rounding for amortized cost imposes disproportionately high costs 
without incremental benefits because a large portion of fund 
portfolios will continue to use amortized cost under current 
Commission guidance. See also, e.g., Legg Mason & Western Asset 
Comment Letter; SunGard Comment Letter; UBS Comment Letter; ICI 
Comment Letter.
    \535\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment 
Letter. As discussed in this section, we are not eliminating, as 
proposed, the use of amortized cost valuation for stable NAV money 
market funds under our final amendments.
---------------------------------------------------------------------------

    We no longer believe that, as we stated in the Proposing Release, 
there would be little additional cost to funds if we eliminated 
amortized cost valuation (and permitted only penny rounding) for all 
money market funds (including stable NAV money market funds). Our 
belief was, in part, based on the fact that, as proposed (and as we are 
adopting today), all money market funds would be required to post on 
their Web sites daily shadow prices (determined using market-based 
values) rounded to four decimal places. Because, under our proposal 
money market funds would be required to obtain daily market-based 
valuations in order to post daily shadow prices to fund Web sites, we 
believed that funds would have this information readily available (and 
therefore not require the use of amortized cost). Notwithstanding this, 
commenters noted, however, the ability to use amortized cost valuation 
provides a significant benefit to money market funds when compared to 
penny rounding pricing--the ability to provide intraday liquidity to 
shareholders in a cost-effective and efficient manner. We agree with 
commenters that eliminating amortized cost valuation would likely 
hinder the ability of funds to provide frequent intraday liquidity to 
shareholders and may impose unnecessary costs and operational burdens 
on stable NAV money market funds. This is particularly true in light of 
the fact that under existing regulatory restrictions and guidance, a 
material intraday fluctuation would still have to be recognized in fair 
valuing the security. We therefore believe that eliminating amortized 
cost valuation in the context of stable NAV funds would be contrary to 
a primary goal of our rulemaking--to preserve to the extent feasible, 
while protecting investors and the markets, the benefits of money 
market funds for investors and the short-term funding markets by 
retaining a stable NAV alternative.
    Accordingly, we are not adopting the proposed amendments that would 
prohibit stable NAV money market funds from using amortized cost to 
value portfolio securities. Rather, under the final amendments, stable 
NAV funds may continue to price fund shares as they do today, using the 
amortized cost method to value portfolio securities and/or the penny 
rounding method of pricing. Given the continued importance of amortized 
cost valuation under our final rules, we are providing expanded 
valuation guidance related to the use of amortized cost and other 
related valuation matters in section III.D.
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
    In the Proposing Release, we discussed two principal tax 
consequences of requiring certain money market funds to implement a 
floating NAV, potentially causing shareholders to experience taxable 
gains or losses. First, under tax rules applicable at the time of the 
Proposing Release, floating NAV money market funds (or their 
shareholders) would be required to track the timing and price of 
purchase and sale transactions in order to determine and report capital 
gains or losses. Second, floating NAV funds would be subject to the 
``wash sale'' rule, which postpones the tax benefit of losses when 
shareholders sell securities at a loss and, within 30 days before or 
after the sale, buy substantially identical securities. These tax 
consequences generally do not exist today, because purchases and sales 
of money market fund shares at a stable $1.00 share price do not 
generate gains or losses. Because we are today adopting the floating 
NAV requirement for certain money market funds as part of our reforms, 
we have continued to analyze the related tax effects. As discussed 
below, the Treasury Department and IRS will address these tax concerns 
to remove almost all tax-related burdens associated with our floating 
NAV requirement.
i. Accounting for Net Gains and Losses
    As we discussed in the Proposing Release, we expected taxable 
investors in floating NAV money market funds, like taxable investors in 
other types of mutual funds, to experience gains and losses. 
Accordingly, we expected shareholders in floating NAV money market 
funds to owe tax on any realized gains, to receive tax benefits from 
any realized losses, and to be required to determine those amounts. 
However, because it is not possible to predict the timing of 
shareholders' future transactions and the amount of NAV fluctuations, 
we were not able to estimate with any specificity the amount of any 
increase or decrease in shareholders' tax burdens. Because we expect 
that investors in floating NAV money market funds will experience 
relatively small fluctuations in value, and because many money market 
funds may qualify as retail and government money market funds, any 
changes in tax burdens likely would be minimal.
    In the Proposing Release, we also noted that tax rules generally 
require mutual funds or intermediaries to report to the IRS and 
shareholders certain information about sales of shares, including sale 
dates and gross proceeds. If the shares sold were acquired after 
January 1, 2012, the fund or intermediary would also have to report 
basis and whether any gain or loss is long or short term.\536\ At the 
time of the Proposing Release, Treasury regulations excluded sales of 
stable value money market funds from this transaction reporting 
obligation.\537\ We noted that mutual funds and intermediaries (and, we 
anticipated, floating NAV money market funds) are not required to make 
reports to certain shareholders, including most institutional 
investors. The regulations call these shareholders ``exempt 
recipients.'' \538\
---------------------------------------------------------------------------

    \536\ The 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) (26 U.S.C. 6045(g), 6045A, and 6045B); see also 26 CFR 1.6045-
1; Internal Revenue Service Form 1099-B. These new basis reporting 
requirements and the pre-2012 reporting requirements are 
collectively referred to as ``transaction reporting.''
    \537\ See 26 CFR 1.6045-1(c)(3)(vi).
    \538\ See 26 CFR 1.6045-1(c)(3)(i).
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS 
today will propose new regulations to make all money market funds 
exempt from this transaction reporting requirement, and the exemption 
is to be formally applicable for calendar years beginning on or after 
the date of publication in the Federal Register of a Treasury Decision 
adopting those proposed regulations as final regulations. Importantly, 
the Treasury Department and the IRS have informed us that the text of 
the proposed regulations will state that persons subject to transaction 
reporting may rely on the proposed exemption for all calendar years 
prior to the final regulations' formal date of applicability. 
Therefore, the Treasury and IRS relief described above is available 
immediately.
    We noted in the Proposing Release our understanding that the 
Treasury Department and the IRS were considering alternatives for 
modifying forms and guidance: (1) To include net transaction 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. 
Many commenters argued that this potential relief does not go far 
enough and noted that, because institutions are exempt recipients, 
these

[[Page 47784]]

investors would still incur costs to build systems to track and report 
their own basis information and calculate gains and losses.\539\ We 
recognized in the Proposing Release the limitations of this potential 
tax relief.
---------------------------------------------------------------------------

    \539\ See, e.g., BlackRock II Comment Letter; Schwab Comment 
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS 
today will propose new regulations that will provide more comprehensive 
and effective relief than the approaches described in the Proposing 
Release. These regulations will, as suggested by one commenter,\540\ 
make a simplified aggregate method of accounting available to investors 
in floating NAV money market funds and are proposed to be formally 
applicable for taxable years ending after the publication in the 
Federal Register of a Treasury Decision adopting the proposed 
regulations as final regulations. Importantly, the Treasury Department 
and the IRS have informed us that the text of the proposed regulations 
will state that taxpayers may rely on the proposed rules for taxable 
years ending on or after the date that the proposed regulations are 
published in the Federal Register. That is, because investors may use 
this method of accounting before final regulations are published, the 
Treasury Department and IRS relief is available as needed before then.
---------------------------------------------------------------------------

    \540\ See Comment Letter of George C. Howell, III, Hunton & 
Williams LLP, on behalf of Federated Investors (Tax Compliance 
Issues Created by Floating NAV) (May 1, 2014) (``Federated XII 
Comment Letter'') (suggesting that a ``mark to market'' tax 
accounting method would meaningfully resolve the more significant 
tax issue (as compared with ``wash sale'' provisions) resulting from 
the floating NAV reform).
---------------------------------------------------------------------------

    The simplified aggregate method will allow money market fund 
investors to compute net capital gain or loss for a year by netting 
their annual redemptions and purchases with their annual starting and 
ending balances. Importantly, for shares in floating NAV money market 
funds, the simplified aggregate method will enable investors to 
determine their annual net taxable gains or losses using information 
that is currently provided on shareholder account statements and--most 
important--will eliminate any requirement to track individually each 
share purchase, each redemption, and the basis of each share redeemed. 
We expect that the simplified aggregate method will significantly 
reduce the burdens associated with tax consequences of the floating NAV 
requirement because funds will not have to build new tracking and 
reporting systems and shareholders will be able to calculate their tax 
liability using their existing shareholder account statements, rather 
than tracking the basis for each share. We have also considered the 
effect of this relief on the tax-related burdens associated with 
accounting for net gains and losses in our discussion of operational 
implications below.\541\
---------------------------------------------------------------------------

    \541\ See infra section III.B.8.
---------------------------------------------------------------------------

    The Treasury Department and IRS have informed us of their intention 
to proceed as expeditiously as possible with the process of considering 
comments and issuing final regulations regarding the simplified 
aggregate method of accounting for floating NAV money market funds. We 
note that money market funds and their shareholders may begin using the 
simplified method of accounting as needed before the regulations are 
finalized. Were the Treasury Department and IRS to withdraw or 
materially limit the relief in the proposed regulations, the Commission 
would expect to consider whether any modifications to the reforms we 
are adopting today may be appropriate.
ii. Wash Sales
    As discussed in the Proposing Release, the ``wash sale'' rule 
applies when shareholders sell securities at a loss and, within 30 days 
before or after the sale, buy substantially identical securities.\542\ 
Generally, if a shareholder incurs a loss from a wash sale, the loss 
cannot be recognized currently and instead must be added to the basis 
of the new, substantially identical securities, which postpones the 
loss recognition until the shareholder recognizes gain or loss on the 
new securities.\543\ 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) and subject to the wash sale 
rule.
---------------------------------------------------------------------------

    \542\ See 26 U.S.C. 1091.
    \543\ Id.
---------------------------------------------------------------------------

    Subsequent to our proposal, the Treasury Department issued for 
comment a proposed revenue procedure under which redemptions of 
floating NAV money market fund shares that generate losses below 0.5% 
of the taxpayer's basis in those shares would not be subject to the 
wash sale rule (de minimis exception).\544\ Many commenters noted, 
however, that the de minimis exception to the wash sale rule does not 
mitigate the tax compliance burdens and operational costs that would be 
required to establish systems capable of identifying wash sale 
transactions, determining if they meet the de minimis criterion, and 
adjusting shareholder basis when they do not.\545\
---------------------------------------------------------------------------

    \544\ See IRS Notice 2013-48, Application of Wash Sale Rules to 
Money Market Fund Shares (proposed July 3, 2013), available at 
http://www.irs.gov/pub/irs-drop/n-13-48.pdf.
    \545\ See, e.g., ICI Comment Letter; BlackRock II Comment 
Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    We understand that these concerns will not be applicable to 
floating NAV money market funds. First, under the simplified aggregate 
method of accounting described above, taxpayers will compute aggregate 
gain or loss for a period, and gain or loss will not be associated with 
any particular disposition of shares. Thus, the wash sale rule will not 
affect any shareholder that chooses to use the simplified aggregate 
method. Second, for any shareholder that does not use the simplified 
aggregate method, the Treasury Department and the IRS today will 
release a revenue procedure that exempts from the wash sale rule 
dispositions of shares in any floating NAV money market fund. This 
wash-sale tax relief will be available beginning on the effective date 
of our floating NAV reforms (60 days after publication in the Federal 
Register). We have also considered the effect of this relief from the 
tax-related burdens associated with the wash sale rule in our 
discussion of operational implications below.\546\
---------------------------------------------------------------------------

    \546\ See infra section III.B.8.
---------------------------------------------------------------------------

b. Accounting Implications
    In the Proposing Release, we noted that some money market fund 
shareholders may question whether they can treat investments in 
floating NAV money market funds as ``cash equivalents'' on their 
balance sheets. As we stated in the Proposing Release, and as we 
discuss below, it is the Commission's position that, under normal 
circumstances, an investment in a money market fund with a floating NAV 
under our final rules meets the definition of a ``cash equivalent.'' 
\547\
---------------------------------------------------------------------------

    \547\ See supra section III.A.7 for a discussion of accounting 
implications related to the liquidity fees and gates aspect of our 
final rules.
---------------------------------------------------------------------------

    Many commenters agreed with our position regarding the treatment of 
investments in floating NAV money market funds as cash 
equivalents.\548\ Most of these commenters, however, suggested that the 
Commission issue a more formal pronouncement and/or requested that FASB 
and GASB codify our position.\549\ A few commenters

[[Page 47785]]

suggested that our floating NAV requirement raises uncertainty about 
whether floating NAV money market fund shares could continue to be 
classified as cash equivalents,\550\ and one commenter disagreed and 
suggested that it is likely that under present accounting standards 
investors would have to classify investments in shares of floating NAV 
money market funds as trading securities or available-for-sale 
securities (rather than as a cash equivalent).\551\ We have carefully 
considered commenters' views and, for the reasons discussed below, our 
position continues to be that an investment in a floating NAV money 
market fund under our final rules, under normal circumstances, meets 
the definition of a ``cash equivalent.'' A more formal pronouncement 
(as requested by some commenters) is not required because the federal 
securities laws provide the Commission with plenary authority to set 
accounting standards, and we are doing so here.\552\ We reiterate our 
position below.\553\
---------------------------------------------------------------------------

    \548\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; Deloitte Comment Letter; Ernst & Young Comment Letter.
    \549\ See, e.g., ICI Comment Letter; BlackRock II Comment 
Letter; Fidelity Comment Letter. We do not have authority over the 
actions that GASB may or may not take with respect to local 
government investment pools (``LGIPs''). See infra section III.C.4.
    \550\ See, e.g., J.P. Morgan Comment Letter; Northern Trust 
Comment Letter; Boeing Comment Letter.
    \551\ See, Federated X Comment Letter (citing to Statement on 
Financial Accounting Standards No. 115); see also infra note 429 and 
accompanying text.
    \552\ The federal securities laws provide the Commission with 
authority to set accounting and reporting standards for public 
companies and other entities that file financial statements with the 
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15 
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 29(e), section 
30, and section 37(a) of the Investment Company Act.
    \553\ We are also amending the Codification of Financial 
Reporting Policies to reflect our interpretation under U.S. GAAP, as 
discussed below. See infra section VI.
---------------------------------------------------------------------------

    The adoption of a floating NAV alone for certain rule 2a-7 funds 
will not preclude shareholders from classifying their investments in 
money market funds as cash equivalents, under normal circumstances, 
because fluctuations in the amount of cash received upon redemption 
would likely be small and would be consistent with the concept of a 
`known' amount of cash. As already exists today with stable share price 
money market funds, events may occur that give rise to credit and 
liquidity issues for money market funds so that shareholders would need 
to reassess if their investments continue to meet the definition of a 
cash equivalent.
7. Rule 10b-10 Confirmations
    Rule 10b-10 under the Securities Exchange Act of 1934 (``Exchange 
Act'') addresses broker-dealers' obligations to confirm their 
customers' securities transactions.\554\ Under Rule 10b-10(a), a 
broker-dealer generally must provide customers with information 
relating to their investment decisions at or before the completion of a 
securities transaction.\555\ Rule 10b-10(b), however, provides an 
exception for certain transactions in money market funds that attempt 
to maintain a stable NAV and where no sales load or redemption fee is 
charged. The exception permits broker-dealers to provide transaction 
information to money market fund shareholders on a monthly basis 
(subject to certain conditions) in lieu of immediate confirmations for 
all purchases and redemptions of shares of such funds.\556\
---------------------------------------------------------------------------

    \554\ 17 CFR 240.10b-10.
    \555\ 17 CFR 240.10b-10(a).
    \556\ 17 CFR 240.10b-10(b).
---------------------------------------------------------------------------

    Because share prices of institutional prime money market funds 
likely will fluctuate, absent exemptive relief, broker-dealers will not 
be able to continue to rely on the current exception under Rule 10b-
10(b) for transactions in floating NAV money market funds.\557\ 
Instead, broker-dealers will be required to provide immediate 
confirmations for all such transactions. We note, however, that 
contemporaneous with this Release, the Commission is providing notice 
and requesting comment on a proposed order that, subject to certain 
conditions, would grant exemptive relief from the immediate 
confirmation delivery requirements of Rule 10b-10 for transactions 
effected in shares of any open-end management investment company 
registered under the Investment Company Act that holds itself out as a 
money market fund operating in accordance with rule 2a-
7(c)(1)(ii).\558\
---------------------------------------------------------------------------

    \557\ See generally Money Market Fund Reform; Amendments to Form 
PF, Securities Act Release No. 9408, Investment Advisers Act Release 
No. 3616, Investment Company Act Release No. 30551 (June 5, 2013), 
78 FR 36834, 36934 (June 19, 2013); see also Exchange Act rule 10b-
10(b)(1), (limiting alternative monthly reporting to money market 
funds that attempt[] to maintain a stable net asset value) (emphasis 
added).
    \558\ See Notice of Proposed Exemptive Order Granting Permanent 
Exemptions Under the Securities Exchange Act of 1934 from the 
Confirmation Requirements of Exchange Act Rule 10b-10 for Certain 
Money Market Funds, Exchange Act Release No. 34-72658 (July 23, 
2014) (``Notice of Proposed Exemptive Order'').
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether, if the 
Commission adopted the floating NAV requirement, broker-dealers should 
be required to provide immediate confirmations to all institutional 
prime money market fund investors. Commenters generally urged the 
Commission not to impose such a requirement, arguing that there would 
be significant costs associated with broker-dealers providing immediate 
confirmations.\559\ Commenters noted that there would be costs of 
implementing new systems to generate confirmations and ongoing costs 
related to creating and sending trade-by-trade confirmations.\560\ We 
estimate below the costs to broker-dealers associated with providing 
securities transaction confirmations for floating NAV money market 
funds.\561\
---------------------------------------------------------------------------

    \559\ See ICI Comment Letter; SIFMA Comment Letter at Appendices 
1 and 2; Dreyfus Comment Letter; Federated X Comment Letter.
    \560\ See, e.g., Federated X Comment Letter.
    \561\ Broker-dealers may not incur all of these costs if the 
exemptive relief we propose today is adopted.
---------------------------------------------------------------------------

    We believe that the initial one-time cost to implement, modify, or 
reprogram existing systems to generate immediate confirmations (rather 
than monthly statements) will be approximately $96,650 on average per 
affected broker-dealer, based on the costs that the Commission has 
estimated in a similar context of developing internal order and trade 
management systems so that a registered security-based swap entity 
could electronically process transactions and send trade 
acknowledgments.\562\ In addition, we estimate that 320 broker-dealers 
that are clearing customer transactions or carrying customer funds and 
securities would be affected by this requirement because they would 
likely be the broker-dealers responsible for providing trade 
confirmations.\563\ As a result, the

[[Page 47786]]

Commission estimates initial costs of $30,928,000 for providing 
immediate confirmations for shareholders in institutional prime money 
market funds.\564\
---------------------------------------------------------------------------

    \562\ This estimate is based on the following: [(Sr. Programmer 
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at 
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) + 
(Director of Compliance (5 hours) at $426 per hour) + (Compliance 
Attorney (20 hours) at $291 per hour)] = $96,650 per broker-dealer. 
See Trade Acknowledgement and Verification of Security-Based Swap 
Transactions, Exchange Act Release No. 63727, 76 FR 3859, 3871 n.81 
(Jan. 21, 2011). (We note that the original estimate in the Trade 
Acknowledgment release contained a technical error in the 
calculation stating a cost of $66,650 instead of $96,650 for a 
security-based swap entity.) A SIFMA survey also indicates that the 
costs are likely to be below $500,000 per firm. See SIFMA Comment 
Letter, at Appendices 1 and 2. According to this commenter, after 
surveying its members, it found that the vast majority of 
respondents estimated that initial costs associated with providing 
confirmation statements would fall below $500,000. However, based on 
the data provided, it was unclear at what level below $500,000 its 
members considered to be the actual cost and whether the firms were 
a representative sample (e.g., in terms of size and sophistication) 
of the type of firms that would be affected.
    \563\ Based on FOCUS Report data as of December 31, 2013, the 
Commission estimates that there are approximately 320 broker-dealers 
that are clearing or carrying broker-dealers that do not claim 
exemptions pursuant to paragraph (k) of Exchange Act rule 15c3-3. 
Because not all of these clearing or carrying broker-dealers would 
necessarily provide rule 10b-10 confirmations to customers of 
institutional prime money market funds, the Commission anticipates 
that this is a conservative estimate of the number of clearing or 
carrying broker-dealers that would provide trade confirmations to 
customers in money market funds subject to the floating NAV 
requirement.
    \564\ This estimate is based on the following: $96,650 x 320 
firms = $30,928,000.
---------------------------------------------------------------------------

    To estimate ongoing costs of providing immediate confirmations, one 
commenter stated that, based on the data it had gathered, the median 
estimated ongoing annual cost associated with confirmation statements 
would constitute between 10% and 15% of the initial costs.\565\ To be 
conservative, we have estimated that the ongoing annual costs would 
constitute 15% of the initial costs. Applying that figure to the 
initial costs, the Commission estimates ongoing annual costs of 
$4,639,200 for providing immediate confirmations for shareholders in 
institutional prime money market funds.\566\
---------------------------------------------------------------------------

    \565\ See SIFMA Comment Letter, at Appendices 1 and 2.
    \566\ This estimate is based on the following: $30,928,000 x 15% 
= $4,639,200.
---------------------------------------------------------------------------

    The Commission notes that benefits related to the immediate trade 
confirmation requirements under Rule 10b-10 with respect to 
institutional prime money market funds are difficult to quantify as 
they relate to the additional value to investors provided by having 
more timely confirmations with respect to funds that we expect will 
experience relatively small fluctuations in value. While the Commission 
did not receive any comments regarding these potential benefits, given 
that institutional prime money market funds likely will fluctuate in 
price, some investors may find value in receiving information relating 
to their investment decisions at or before the completion of a 
securities transaction.\567\
---------------------------------------------------------------------------

    \567\ The Commission acknowledges that shareholders that invest 
in institutional prime money market funds will continue to have 
extensive investor protections separate and apart from the 
protections provided under rule 10b-10, including that (1) funds 
subject to the floating NAV requirement will continue to be subject 
to the ``risk-limiting'' conditions of rule 2a-7, and (2) 
information on prices will be available through other means (for 
example, under the new fund disclosure requirements of Investment 
Company Act Rule 2a-7(h)(10), investors will be able to access a 
fund's daily market-based NAV per share on a money market fund's Web 
site). See Notice of Proposed Exemptive Order, at 6-7.
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8. Operational Implications of Floating NAV Money Market Funds
a. Operational Implications to Money Market Funds and Others in the 
Distribution Chain
    In the Proposing Release, we stated that we expect that money 
market funds and transfer agents already have laid the foundation 
required to use floating NAVs because they are required under rule 2a-7 
to have the capacity to redeem and sell fund shares at prices based on 
the funds' current NAV pursuant to rule 22c-1 rather than $1.00, i.e., 
to transact at the fund's floating NAV.\568\ 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.\569\ We also noted that before the Commission adopted the 
2010 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.\570\
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    \568\ See current rule 2a-7(c)(13). See also 2010 Adopting 
Release, supra note 17, at nn.362-363.
    \569\ See, e.g., 2010 Adopting Release, supra note 17, 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'').
    \570\ See, 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).
---------------------------------------------------------------------------

    Commenters noted, as we recognized in the Proposing Release, 
however, that some funds, transfer agents, intermediaries, and others 
in the distribution chain may not currently have the capacity to 
process constantly transactions at floating NAVs, as would be required 
under our proposal.\571\ Accordingly, consistent with our views 
reflected in the Proposing Release and as discussed below, we continue 
to 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.\572\ In each case, the procedures and controls that support the 
accounting systems at these entities would have to be modified to 
permit those systems to calculate a money market fund's floating NAV 
periodically each business day and to communicate that value to others 
in the distribution chain on a permanent basis.
---------------------------------------------------------------------------

    \571\ See, e.g., ICI Comment Letter; Comment Letter of Chapin 
Davis, Inc. (Aug. 28, 2013) (``Chapin Davis Comment Letter''); 
Federated IV Comment Letter.
    \572\ Even 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, supra note 569, at 20. The systems of 
sub-transfer agents and other parties may also require modifications 
related to the floating NAV requirement. We have included these 
anticipated modifications in our cost estimates below.
---------------------------------------------------------------------------

    Some commenters noted that our floating NAV requirement would 
adversely affect cash sweep programs, in which customer cash balances 
are automatically ``swept'' into investments in shares of money market 
funds (usually through a broker-dealer or other intermediary). For 
example, one commenter suggested that sweep programs cannot accommodate 
a floating NAV because such programs are predicated on the return of 
principal.\573\ Another commenter suggested that the substantial cost 
and complexity associated with intraday pricing makes it likely that 
many intermediaries will discontinue offering floating NAV 
institutional prime money market funds as sweep options, and instead 
turn to alternative investment products, including stable NAV 
government funds.\574\ Although we do not know to

[[Page 47787]]

what extent, if at all, intermediaries will continue to offer sweep 
accounts for floating NAV money market funds, we acknowledge that there 
are significant operational costs involved in order to modify sweep 
platforms to accommodate a floating NAV product. Accordingly, we 
anticipate that sweep account assets currently invested in 
institutional prime money market funds will likely shift into 
government funds that will maintain a stable NAV under our final rules. 
We discuss in the Macroeconomic Effects section below potential costs 
related to a migration of assets away from floating NAV funds into 
alternative investments, including stable NAV money market funds such 
as government funds. Because the amount of sweep account assets 
currently invested in institutional prime money market funds is not 
reported to us, nor are we aware of such information in the public 
domain, we are not able to provide a reasonable estimate of the amount 
of sweep account assets that may shift into alternative investment 
products.
---------------------------------------------------------------------------

    \573\ See, e.g., ICI Comment Letter. Another commenter noted 
that the sweep investment product is only feasible in the current 
stable-NAV environment because the client knows at the time of 
submitting the purchase order how many shares it has purchased, and 
how many shares it will receive the next day upon redemption, absent 
a break-the-buck event. See State Street Comment Letter.
    \574\ See, e.g., Wells Fargo Comment Letter (acknowledging that, 
as we stated in the Proposing Release, sweep products may continue 
to be viable for floating NAV money market funds because fund 
sponsors and other intermediaries will make modifications to price 
fund shares periodically during the day, but suggesting that the 
costs for broker-dealers to reprogram their systems would be 
significant and the operational complexity could be made worse to 
the extent that fund sponsors do not standardize the times of day at 
which they price shares).
---------------------------------------------------------------------------

    In the Proposing Release, we also estimated additional costs under 
our floating NAV reform that would be imposed on money market funds and 
other recordkeepers to track portfolio security gains and losses, 
provide ``basis reporting,'' and monitor for potential wash-sale 
transactions. As discussed above, we have been informed that, today, 
the Treasury Department and the IRS will propose new regulations that 
will eliminate the need for money market funds and others to track 
portfolio gains and losses and basis information, as well as issue 
today a revenue procedure that exempts money market funds from the 
wash-sale rules. Accordingly, our cost estimates for the floating NAV 
reform have been revised from our proposal to reflect this fact.\575\
---------------------------------------------------------------------------

    \575\ See supra section III.B.8.a.
---------------------------------------------------------------------------

    We understand that the costs to modify a particular entity's 
existing controls and procedures will 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.\576\ Procedures and controls that support 
systems that operate in highly automated operating environments will 
likely be less costly to modify while those that support complex 
operations with multiple fund types or limited automation or both will 
likely be more costly to change. Because each system's capabilities and 
functions are different, an entity will likely have to perform an in-
depth analysis of the new 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 \577\ of the potential costs of 
modifying procedures and controls, we expect that each entity will bear 
one-time costs to modify existing procedures and controls in the 
functional areas that are likely to be impacted by the floating NAV 
reform.
---------------------------------------------------------------------------

    \576\ See, e.g., Chamber I Comment Letter.
    \577\ We are using the term ``point estimate'' to indicate a 
specific single estimate as opposed to a range of estimates.
---------------------------------------------------------------------------

    In the Proposing Release, we 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) and 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.\578\ In addition, we noted that we expect money market funds 
(and their intermediaries) would incur additional costs associated with 
programs and systems modifications necessary to provide shareholders 
with access to information about the floating NAV per share online, 
through automated phone systems, and on shareholder statements and to 
explain to shareholders that the value of their money market funds 
shares will fluctuate.\579\ We 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 and that the 
ongoing costs to maintain automated phone systems and systems for 
processing shareholder statements would range from 5% to 15% of the 
one-time costs.\580\ In sum, we estimated that the total range of one-
time implementation costs to money market funds and others in the 
distribution chain would be approximately $1,430,000 to $2,790,000 per 
entity, with ongoing costs that range between 5% to 15% of these one-
time costs.\581\
---------------------------------------------------------------------------

    \578\ See Proposing Release, supra note 25, nn.285-86 and 
accompanying text. We estimated 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. As 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.
    \579\ See id. at n.287 and accompanying text. We expect 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.
    \580\ See id. at n.288 and accompanying text. We estimate 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 578.
    \581\ This estimate is calculated as follows: less extensive 
modifications ($1,200,000 + $230,000 = $1,430,000); more extensive 
modifications ($2,300,000 + $490,000 = $2,790,000).
---------------------------------------------------------------------------

    Commenters did not generally disagree with the type and nature of 
costs that we estimated will be imposed by our floating NAV reform. One 
commenter noted that the costs required to make the necessary systems 
changes would not be prohibitive and could be completed within two to 
three years.\582\ A number of commenters, however, provided a wide 
range of estimated operational costs to money market funds, 
intermediaries, and others in the distribution chain. These commenters 
suggested that estimated one-time implementation costs would be between 
$350,000 to $3,000,000, depending on the affected entity.\583\ One 
commenter estimated that it could cost up to $2,300,000 per fund, 
transfer agent, or intermediary, to modify systems procedures and 
controls to implement a floating NAV.\584\ Another commenter estimated 
that it would cost each back office processing service provider 
$1,725,000 in one-time costs to implement a floating NAV.\585\ We also 
received from commenters some cost estimates provided on a fund complex 
level. Two fund complexes estimated their total one-time costs to 
implement a floating NAV to be between $10,000,000 to $11,000,000, and 
one of the largest money market fund sponsors approximated its one-time 
costs to be $28,000,000. Averaged across the number of money market 
funds offered, these one-time implementation costs

[[Page 47788]]

range from $306,000 to $718,000.\586\ Another commenter provided survey 
data stating that 40% of respondents (asset managers and 
intermediaries) estimated that it would cost $2,000,000 to $5,000,000 
in one-time costs to implement a floating NAV.\587\ Finally, a few 
commenters estimated the one-time costs to the entire fund industry 
related to implementing our floating NAV reform.\588\
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    \582\ See HSBC Comment Letter.
    \583\ See Chamber II Comment Letter (citing Treasury Strategies, 
Operational Implications of a Floating NAV across Money Market Fund 
Industry Key Stakeholders (Summer 2013) (``TSI Report'')). This 
commenter estimated costs for various intermediaries in order to 
implement a floating NAV: Corporate treasury management system 
vendors ($350,000-$400,000); fund accounting service providers 
($400,000-$425,000); broker-dealers and portals ($500,000-$600,000); 
transfer agent systems ($2,000,000-$2,500,000); and sweep account 
software providers ($2,000,000-$3,000,000). Another commenter 
estimated that it would cost approximately $2,000,000 in one-time 
costs for a large trust group to implement a floating NAV. See 
Treasury Strategies Comment Letter.
    \584\ See Federated II Comment Letter.
    \585\ See Fin. Info. Forum Comment Letter.
    \586\ See Federated X Comment Letter (estimating its one-time 
costs to implement a floating NAV to be $11,200,000); Schwab Comment 
Letter (estimating its one-time costs to implement a floating NAV to 
be $10,000,000); Fidelity Comment Letter (estimating its one-time 
costs of implement a floating NAV to be $28,000,000). Based on Form 
N-MFP data as of February 28, 2014, the per fund costs are: 
Federated $311,000 ($11,200,000 / 36 money market funds); Schwab 
$588,000 ($10,000,000 / 17 money market funds); and Fidelity 
$718,000 ($28,000,000 / 39 money market funds).
    \587\ See SIFMA Comment Letter (stating that another 20% of 
survey respondents estimated that one-time implementation costs for 
a floating NAV would be between $5,000,000 to $15,000,000). Because 
we do not have access to the names of the survey respondents or 
their specific cost estimates, we are unable to approximate these 
costs on a per fund basis.
    \588\ See, e.g., TSI Report (estimating $1.8 to $2.0 billion in 
total upfront costs for U.S. institutional money market fund 
investors to modify operations in order to comply with a floating 
NAV requirement); Angel Comment Letter (estimating $13.7 to $91.5 
billion in initial upfront costs related to implementing a floating 
NAV reform). As discussed above, we have analyzed a variety of 
commenter estimates and provided cost estimates on a per-fund basis. 
We are unable, however, to verify the accuracy or make a relevant 
comparison between our per-fund cost estimates and the broad range 
of costs provided by these commenters that apply to all U.S. 
institutional money market fund investors and/or the entire fund 
industry.
---------------------------------------------------------------------------

    We estimated in the Proposing Release that it would cost each money 
market fund, intermediary, and other participant in the distribution 
chain approximately $1,430,000 (for less extensive modifications) to 
$2,790,000 (for more extensive modifications) in one-time costs to 
implement a floating NAV.\589\ Based on staff analysis and experience, 
we are revising the estimated operational costs for our floating NAV 
reform downward by 15% to reflect the tax relief discussed above.\590\ 
In addition, as discussed above (and, in a change from our proposal), 
our final rules will permit retail and government money market funds to 
continue to maintain a stable NAV as they do today and to use amortized 
cost valuation and/or penny-rounding pricing. A number of commenters 
noted that eliminating the ability of stable NAV funds to use amortized 
cost valuation, as we proposed, would impose significant operational 
costs on these funds.\591\ Accordingly, based on staff analysis and 
experience, we are also revising the estimated operational costs 
downward by 5% to reflect the ability of stable NAV funds to continue 
to use amortized cost valuation as they do today. We therefore estimate 
that it will cost each money market fund, intermediary, and other 
participant in the distribution chain approximately $1,144,000 (for 
less extensive modifications) to $2,232,000 (for more extensive 
modifications) in one-time costs to implement the floating NAV 
reform.\592\
---------------------------------------------------------------------------

    \589\ See supra note 581.
    \590\ See supra section III.B.6.a. We note that many commenters 
suggested that a primary drawback (and cost) of our floating NAV 
reform is the substantial operational costs associated with 
complying with tax tracking requirements in a floating NAV fund. 
See, e.g., Fin. Svcs. Roundtable Comment Letter; Federated IV 
Comment Letter; Fidelity Comment Letter. Although we attribute a 15% 
reduction in estimated operational costs to tax-related costs, the 
cost savings could be higher or lower than our estimate.
    \591\ See supra note 534.
    \592\ This estimate is calculated as follows: $1,430,000 x 80% = 
$1,144,000 (less extensive modifications); $2,790,000 x 80% = 
$2,232,000 (more extensive modifications). A few commenters also 
noted that our floating NAV requirement would also result in 
significant lost management fees. See, e.g., Federated X Comment 
Letter (suggesting that a shift of one-third of assets away from 
institutional prime funds would result in annual lost management 
fees of approximately $578 million for money market fund advisers 
nationwide). We acknowledge that, to the extent there is a 
significant outflow of assets from the institutional prime funds 
into non-money market funds as a result of the floating NAV 
requirement, money market fund managers may experience declines in 
management fee income. We discuss the possibility of such shifts in 
money market fund assets in our discussion of macroeconomic effects 
below.
---------------------------------------------------------------------------

    We believe that this range of estimated costs generally fits within 
the range of costs suggested by commenters as described above (after 
accounting for estimated costs savings related to tax relief and the 
increased availability of amortized cost valuation, not contemplated by 
commenters in their estimates). We note, 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 will likely experience economies of scale. 
Accordingly, we expect that the cost for many individual entities that 
would have to process transactions at a floating NAV will likely be 
less than these estimated costs.\593\
---------------------------------------------------------------------------

    \593\ For example, the costs will 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.
---------------------------------------------------------------------------

    In addition to the estimated one-time implementation costs, we 
estimate that funds, intermediaries, and others in the distribution 
chain will incur annual operating costs of approximately 5% to 15% of 
initial costs. Accordingly, we estimate that funds and other 
intermediaries will incur annual operating costs as a result of the 
floating NAV reform that range from $57,200 to $334,800.\594\ Most 
commenters that addressed this issue directly did not disagree with our 
estimate of ongoing costs, although we note that a few commenters 
estimated the new annual operating costs to the entire fund industry 
related to implementing our floating NAV reform.\595\ One commenter 
provided survey data showing that 66% of respondents (asset managers 
and intermediaries) estimated that annual costs would approximate 10% 
to 15% of initial costs.\596\ Another commenter, however, disagreed 
with our estimate of annual operating costs of approximately 5% to 15% 
of initial costs and suggested that the annual costs to fund sponsors 
will actually be close to the costs of initial implementation. We 
disagree. This commenter noted that most of the ongoing cost would 
result from the elimination of amortized cost accounting (generally) 
and more frequent price calculations using market-based factors.\597\ 
Because stable NAV money market funds may continue to use amortized 
cost valuation under our final rules (unlike our proposal), we believe 
this commenter has overstated the ongoing costs under our final 
rules.\598\ Therefore, we believe consistent with the comments 
received, that it is more appropriate to continue to estimate the 
ongoing operational

[[Page 47789]]

costs as approximately 5% to 15% of the initial implementation costs 
and are not revising the ongoing cost estimates from our proposal.
---------------------------------------------------------------------------

    \594\ This estimate is calculated as follows: less extensive 
modifications = $57,200 ($1,144,000 x 5%); more extensive 
modifications = $334,800 ($2,232,000 x 15%).
    \595\ See, e.g., Chamber II Comment Letter (estimating $2.0 to 
$2.5 billion in new annual operating costs relating to the FNAV 
reform). As discussed above, most commenters did not specifically 
object to our estimated range of ongoing costs on a per-fund basis. 
We do not, however, have information available to us to evaluate the 
accuracy of cost estimates to the entire fund industry or make a 
meaningful comparison of such estimates with our per-fund cost 
ongoing cost estimates.
    \596\ See SIFMA Comment Letter.
    \597\ See Federated X Comment Letter (noting, however, that it 
estimates annual operating costs of approximately $231,000 per fund 
($5.7 million for pricing services + $1.5 million for transfer agent 
services + $2.5 million for technology, training, and other 
monitoring costs = $9.7 million / 42 money market funds managed by 
Federated = approximately $231,000 per fund). This estimate is 
consistent with our estimated range of ongoing costs. See supra note 
594.
    \598\ We recognize, however, that under our final rules, 
floating NAV money market funds will incur increased costs as a 
result of the elimination of amortized cost valuation. These costs, 
discussed above, are significantly lower than those that funds would 
incur under our proposal (that would have eliminated amortized cost 
valuation for all money market funds, including those funds not 
subject to our floating NAV reform).
---------------------------------------------------------------------------

b. Operational Implications to Money Market Fund Shareholders
    In addition to money market funds and other entities in the 
distribution chain, each money market fund shareholder will also likely 
be required to analyze 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. We 
describe below the types of activities typically involved in making 
systems modifications and estimate a range of hours and costs that we 
anticipate will be required to perform these activities. We sought 
comment in the Proposing Release regarding the potential costs of 
system modifications for money market fund shareholders, and the 
comments we received, along with the differences between our proposal 
and the final rules, have informed our estimates.
    In the Proposing Release, we 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. In deriving our 
estimates, we considered the need to modify systems and related 
procedures and controls related to recordkeeping, accounting, trading, 
and cash management, and to provide training concerning these 
modifications. We estimated that a shareholder whose systems (including 
related procedures and controls) would require less extensive 
modifications would incur one-time costs ranging from $123,000 to 
$253,000, while a shareholder whose systems (including related 
procedures and controls) would require more extensive modifications 
would incur one-time costs ranging from $1.4 million to $2.9 
million.\599\
---------------------------------------------------------------------------

    \599\ We estimate 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.
---------------------------------------------------------------------------

    Most commenters did not disagree with our cost estimates. One 
commenter stated that it expects at least 50% of institutional 
investors in money market funds will require some systems development 
to be able to invest in a floating NAV money market fund. This 
commenter also noted that having sufficient time to implement the 
changes is a more important factor than cost in determining the extent 
to which corporate treasurers, for example, would use a floating NAV 
fund product.\600\ Another commenter acknowledged our range of 
estimated costs and suggested that while these estimates may not appear 
substantial at first glance, when viewed in the context of current 
money market fund returns, such costs represent a significant 
disincentive to continued investment in institutional prime funds.\601\ 
Although we acknowledge that the costs to money market fund 
shareholders may make investing in floating NAV money market funds 
uneconomical given the current rates of return, we note that we are 
adopting a two-year compliance period that may, to the extent that 
interest rates return to more typical levels, counter any disincentive 
that may exist currently.\602\
---------------------------------------------------------------------------

    \600\ See HSBC Comment Letter.
    \601\ See Wells Fargo Comment Letter.
    \602\ See infra section III.N.2. for a discussion of the 
floating NAV compliance date.
---------------------------------------------------------------------------

    The TSI Report \603\ provided ranges of costs that it expects would 
be imposed on floating NAV money market fund shareholders. These costs 
ranged from $250,000 for a U.S. business that invests in floating NAV 
money market funds and makes the fewest changes possible, to $550,000 
for a government-sponsored entity money market fund shareholder.\604\ 
We have carefully considered this range of costs to shareholders 
provided by the commenter and the changes from the proposal to the rule 
that we are adopting today, and we now believe that it is appropriate 
to decrease our cost estimates from the proposal. Accordingly, we 
estimate that a shareholder whose systems (including related procedures 
and controls) would require less extensive modifications would incur 
one-time costs ranging from $212,500 to $340,000, while a shareholder 
whose systems (including related procedures and controls) would require 
more extensive modifications would incur one-time costs ranging from 
$467,500 to $850,000. We believe that these estimates better reflect 
the changes in our final rules from those that we proposed.\605\ We 
also recognize that these estimates are more consistent with the range 
of cost estimates provided by this commenter. We estimate that the 
annual maintenance costs to these systems and procedures and controls, 
and the costs to provide continuing training, will range from 5% to 15% 
of the one-time implementation costs.\606\
---------------------------------------------------------------------------

    \603\ See supra note 583.
    \604\ See id., TSI Report (estimating that the one-time 
implementation costs would range from $350,000 to $370,000 for a 
corporate investor; $275,000 to $300,000 for a public university 
investor; $325,000 to $350,000 for a municipality investor; and 
$400,000 to $425,000 for a fiduciary investor).
    \605\ Consistent with our cost estimates discussed above for 
funds, intermediaries, and others in the distribution chain, we have 
considered in these estimates cost savings related to the tax relief 
discussed above. See supra section III.B.8.a.
    \606\ See supra note 578. Commenters did not address 
specifically our estimate of ongoing costs to money market fund 
shareholders in floating NAV funds. Accordingly, we are not amending 
our estimate from the proposal.
---------------------------------------------------------------------------

c. Intraday Liquidity and Same-Day Settlement
    As discussed below, we believe that floating NAV money market funds 
should be able to continue to provide shareholders with intraday 
liquidity and same-day settlement by pricing fund shares periodically 
during the day (e.g., at 11 a.m. and 4 p.m.). In the Proposing Release, 
we noted that 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. 
Shareholders generally are able to transact in fund shares at a stable 
value known in advance, which permits money market fund transactions to 
settle on the same day that an investor places a purchase or sell order 
and determine the exact value of his or her money market fund shares 
(absent a liquidation event) at any time. These features have made 
money market funds an important component of systems for processing and 
settling various types of transactions.
    Some commenters have expressed concern that intraday liquidity and/
or same-day settlement would not be available to investors in floating 
NAV money market funds. These commenters point to, for example, 
operational challenges such as striking the NAV multiple times during 
the day while needing to value each portfolio security using market-
based values.\607\ A few commenters also noted that pricing services 
may not be able to provide periodic pricing throughout the day.\608\ 
Some commenters also raised concerns about the additional costs 
involved with striking the NAV multiple times per

[[Page 47790]]

day, including, for example, costs for pricing services to provide 
multiple quotes per day and for accounting agents to calculate multiple 
NAVs.\609\ On the other hand, one commenter who provides pricing 
services noted that, while providing intraday liquidity and same-day 
settlement for floating NAV funds would require some investment, they 
believe that calculating NAVs multiple times per day is feasible within 
our proposed two-year compliance period.\610\ A few commenters further 
noted that transfer agents will need to enhance their systems to 
account for floating NAV money market funds and condense their 
reconciliation and audit processes (which may, for example, increase 
the risk of errors).\611\
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    \607\ See, e.g., BlackRock II Comment Letter; ICI Comment 
Letter; Chamber II Comment Letter.
    \608\ See, e.g., Federated IV Comment Letter; Interactive Data 
Comment Letter; Chamber II Comment Letter.
    \609\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter; State Street Comment Letter.
    \610\ See Interactive Data Comment Letter. Another commenter 
noted that money market funds would still be able to provide same-
day settlement in floating NAV funds. See State Street Comment 
Letter.
    \611\ See J.P. Morgan Comment Letter; Dreyfus Comment Letter; 
Comment Letter of DST Systems, Inc. (Sept. 18, 2013) (``DST Systems 
Comment Letter'').
---------------------------------------------------------------------------

    A few commenters also asserted that if floating NAV funds are 
unable to provide same-day settlement, this could affect features that 
are particularly appealing to retail investors, such as ATM access, 
check writing, and electronic check payment processing services and 
products.\612\ First, as discussed below, we believe that many floating 
NAV money market funds will continue to be able to provide same-day 
settlement. Second, we note that under the revised retail money market 
fund definition adopted today, retail investors should have ample 
opportunity to invest in a fund that qualifies as a retail money market 
fund and thus is able to maintain a stable NAV. As a result, this 
should significantly alleviate concerns about the costs of altering 
these features and permit a number of funds to continue to provide 
these features as they do today. Nonetheless, we recognize that not all 
funds with these features may choose to qualify as retail money market 
funds, 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.
---------------------------------------------------------------------------

    \612\ See, e.g., Fidelity 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.'').
---------------------------------------------------------------------------

    We understand that many money market funds currently permit same-
day trading up until 5 p.m. Eastern Time. These funds do so because 
amortized cost valuation allows funds to calculate their NAVs before 
they receive market-based prices (typically provided at the end of the 
day after the close of the Federal Reserve Cash Wire). We recognize 
that, under the floating NAV reform, closing times for same-day 
settlement will likely need to be moved earlier in the day to allow 
sufficient time to calculate the NAV prior to the close of the Federal 
Reserve Cash Wire. One commenter suggested that it will take a minimum 
of three to four hours to strike a market-based NAV price.\613\ As a 
result, investors in floating NAV money market funds may not have the 
ability to redeem shares late in the day, as they can today. We also 
recognize that floating NAV money market funds may price only once a 
day, at least until such time as pricing vendors are able to provide 
continuous pricing throughout the day.\614\ We considered these 
potential costs as well as the benefits of our floating NAV reform and 
believe that, as discussed above, it is appropriate to address, through 
the floating NAV reform, the incremental incentive that exists for 
shareholders to redeem in times of stress from institutional prime 
money market funds. We note, however, that because stable NAV money 
market funds may continue to use amortized cost as they do today (as 
revised from our proposal), these same-day settlement concerns raised 
by commenters here would be limited to institutional prime funds--the 
only money market funds subject to the floating NAV reform.\615\
---------------------------------------------------------------------------

    \613\ See Federated II Comment Letter.
    \614\ See SIFMA Comment Letter (noting that in its survey of 
members, 60% of asset managers expect to price their floating NAV 
money market funds only once per day, which is less frequent than 
currently offered by most money market funds). See also 
Institutional Cash Distributors, ICD Commentary: Operational and 
Accounting Issues with the Floating NAV and the Impact on Money 
Market Funds (July 2013), available at http://www.sec.gov/comments/
;s7-03-13/s70313-40.pdf. One commenter noted that they are already 
investing in new technology that includes real-time debt security 
evaluations. See Comment Letter of Interactive Data.
    \615\ See SIFMA Comment Letter (noting that, under our proposal, 
the impediment to same-day settlement exists for stable NAV money 
market funds as well as floating NAV money market funds because both 
types of funds would be prohibited from using amortized cost for 
securities with remaining maturities over 60 days). As noted above, 
we are no longer prohibiting stable NAV funds from using amortized 
cost.
---------------------------------------------------------------------------

    We sought comment in the Proposing Release on the costs associated 
with providing same-day settlement and for pricing services to provide 
prices multiple times each day. One commenter provided survey data that 
estimated the range of costs for floating NAV funds to offer same-day 
settlement. Seventy-five percent of respondents estimated the one-time 
costs to be approximately $500,000 to $1 million, and 25% of 
respondents estimated the one times costs to be approximately $1 
million to $2 million.\616\ Sixty-six percent of respondents 
approximated ongoing costs that would range between 10-15% of initial 
costs.\617\ We did not receive other quantitative estimates 
specifically on the costs associated with modifying systems to allow 
for same-day settlement by floating NAV funds.\618\ We have carefully 
considered this survey data with respect to same-day settlement issues 
in arriving at our aggregate operational cost estimates discussed above 
in section III.B.8.a.\619\
---------------------------------------------------------------------------

    \616\ As discussed supra in note 587, we do not have access to 
the names of the survey respondents or their specific cost estimates 
and are therefore unable to approximate these costs on a per fund 
basis. Accordingly, the costs on a per fund basis will likely be 
significantly lower than the figures provided here.
    \617\ See SIFMA Comment Letter.
    \618\ We note that some commenters may have included costs 
associated with enabling floating NAV funds to provide same-day 
settlement in their cost estimates of operational implications 
generally. These costs are discussed above.
    \619\ We have based our cost estimates for same-day settlement 
principally on staff experience and expertise. In assessing the 
reasonableness of our estimates, we considered as an outer bound the 
survey data provided by SIFMA (although as noted above, the survey 
respondents likely represent fund complexes and thus we are not able 
to determine these costs on a per fund basis). We estimate that 
money market funds will likely establish twice per day pricing as 
the appropriate balance between current money market fund practice 
to provide multiple settlements per business day and the additional 
costs and complexities involved in pricing money market fund shares 
using market-based values.
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9. Transition
    We are providing a two-year compliance date (as proposed) for money 
market funds to implement the floating NAV reform. A long compliance 
period will give more time for funds to implement any needed changes to 
their investment policies and train staff, and also will provide more 
time for investors to analyze their cash management strategies. This 
compliance period will also give time for retail money market funds to 
reorganize their operations and establish new funds. Importantly, this 
compliance period will allow additional time for the Treasury 
Department and IRS to consider finalizing rules addressing certain tax 
issues relating to a floating NAV described above and for the

[[Page 47791]]

Commission to consider final rules removing NRSRO ratings from rule 2a-
7,\620\ so that funds could make several compliance-related changes at 
one time.
---------------------------------------------------------------------------

    \620\ See Removal of Certain References to Credit Ratings and 
Amendment to the Issuer Diversification Requirement in the Money 
Market Fund Rule, Investment Company Act Release No. IC-31184 (July 
23, 2014).
---------------------------------------------------------------------------

    We acknowledge, as discussed in the Proposing Release and as noted 
by some commenters, that a transition to a new regulatory regime could 
itself cause the type of heavy redemptions that the amendments, 
including the floating NAV reform, are designed to prevent.\621\ In the 
proposal, we noted that our proposed two-year compliance period would 
benefit money market funds and their shareholders by allowing money 
market funds to make the transition to a floating NAV at the optimal 
time and potentially not at the same time as all other money market 
funds. In addition, we stated our belief that money market fund 
sponsors would use the relatively long compliance period to select an 
appropriate conversion date that would minimize the risk that 
shareholders may pre-emptively redeem shares at or near the time of 
conversion if they believe that the market value of their shares will 
be less than $1.00. Several commenters reiterated this concern, with 
one commenter noting that shareholders in floating NAV money market 
funds may be incentivized to redeem in order to avoid losses or realize 
gains, depending on the expected NAV at the time of conversion.\622\ A 
few commenters suggested that money market funds will likely be 
unwilling or unable to stagger their transitions over our proposed two-
year transition period, but did not provide any survey data or other 
support for their beliefs.\623\
---------------------------------------------------------------------------

    \621\ See, e.g., Dreyfus Comment Letter; Goldman Sachs Comment 
Letter. The PWG Report suggests that a transition to a floating NAV 
could itself result in significant redemptions. See PWG Report, 
supra note 506, at 22.
    \622\ See Stradley Ronon Comment Letter.
    \623\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment 
Letter.
---------------------------------------------------------------------------

    We continue to believe that an extended compliance period (as 
adopted, two years) should help mitigate potential pre-emptive 
redemptions by providing money market fund shareholders with sufficient 
time to consider the reforms and decide, if they determine that a 
floating NAV investment product is not appropriate or desirable, to 
invest a stable NAV retail or government money market fund or an 
alternative investment product. We recognize that, although money 
market funds may comply with the rule amendments at any time between 
the effective date and the compliance date, in practice, money market 
funds may implement amendments relating to floating NAV near the end of 
the transition period, which may further cause the potential for 
widespread redemptions prior to the transition. Although a few 
commenters suggested as much,\624\ we did not receive any survey data 
and we are not able to reasonably estimate the extent to which money 
market funds may or may not stagger their transition to a floating NAV.
---------------------------------------------------------------------------

    \624\ Id.
---------------------------------------------------------------------------

    We note, however, that in order to mitigate this risk, money market 
fund managers could take steps to ensure that the fund's market-based 
NAV is $1.00 or higher at the time of conversion and communicate to 
shareholders the steps that the fund plans to take ahead of time in 
order to mitigate the risk of heavy pre-emptive redemptions, though 
funds would be under no obligation to do so. Even if funds took such 
steps, investors may pre-emptively withdraw their assets from money 
market funds that will transact at a floating NAV to avoid this risk. 
We note, however, that while a two-year compliance period does not 
eliminate such concerns, we expect, as discussed above, that providing 
a two-year compliance period will allow money market funds time to 
prepare and address investor concerns relating to the transition to a 
floating NAV, and therefore possibly mitigate the risk that the 
transition to a floating NAV, itself, could prompt significant 
redemptions. In addition, the liquidity fees and gates reforms will be 
effective and therefore available to fund boards as a tool to address 
any heightened redemptions that may result from the transition to a 
floating NAV.\625\
---------------------------------------------------------------------------

    \625\ We will monitor fund redemption activity during the 
transition period and consider appropriate action if it appears 
necessary. For example, such action could include SEC Staff 
contacting fund groups to determine the nature of any stress from 
redemption activity and the potential need for any exemptive or 
other relief.
---------------------------------------------------------------------------

C. Effect on Certain Types of Money Market Funds and Other Entities

1. Government Money Market Funds
    The fees and gates and floating NAV reforms included in today's 
Release will not apply to government money market funds, which are 
defined as a money market fund that invests at least 99.5% of its total 
assets in cash, government securities,\626\ and/or repurchase 
agreements that are ``collateralized fully'' (i.e., collateralized by 
cash or government securities).\627\ In addition, under today's 
amendments, government money market funds may invest a de minimis 
amount (up to 0.5%) in non-government assets,\628\ unlike our proposal 
and under current rule 2a-7, which permits government money market 
funds to invest up to 20% of total assets in non-government 
assets.\629\
---------------------------------------------------------------------------

    \626\ A ``government security'' is backed by the full faith and 
credit of the U.S. government. See rule 2a-7(a)(17); section 
2(a)(16).
    \627\ See rule 2a-7(a)(5) (defining ``collateralized fully'' by 
reference to rule 5b-3(c)(1), which requires that collateral be 
comprised of cash or government securities).
    \628\ Non-government assets would include all ``eligible 
securities'' permitted under rule 2a-7 other than cash, government 
securities (as defined in section 2(a)(16), or repurchase agreements 
that are ``collateralized fully'' (as defined in rule 5b-3).
    \629\ Under current rule 2a-7 (and as proposed), a government 
money market fund is defined based on the portfolio holdings test 
used today for determining the accuracy of a fund's name (``names 
rule''). See Proposing Release, supra note 25, n.169 and 
accompanying text (rule 35d-1 states that 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). While in the 
Proposing Release we discussed the definition of government money 
market fund in the context of the proposed floating NAV reform, this 
definition also was applicable to the proposed fees and gates 
reform. We understand that government money market funds today 
invest in other government money market funds (``fund of funds'') 
and look through those funds to the underlying securities when 
determining compliance with rule 35d-1, or the ``names rule.'' 
Accordingly, we expect that money market funds will continue to 
evaluate compliance with what investments qualify under our 
definition of government money market fund in the same way, and 
therefore categorize, as appropriate, investments in other 
government money market funds as within the 99.5% government-asset 
basket.
---------------------------------------------------------------------------

    Additionally, as proposed, a government money market fund will not 
be required to, but may, impose a fee or gate if the ability to do so 
is disclosed in a fund's prospectus and the fund complies with the fees 
and gates requirements in the amended rule.\630\
---------------------------------------------------------------------------

    \630\ See rule 2a-7(c)(2)(iii). Any government money market fund 
that chooses not to rely on rule 2a-7(c)(2)(iii) may wish to 
consider providing notice to shareholders. We believe at least sixty 
days written notice of the fund's ability to impose fees and gates 
would be appropriate.
---------------------------------------------------------------------------

    With respect to the floating NAV reform, most commenters supported 
a reform that does not apply to government money market funds.\631\

[[Page 47792]]

Commenters noted that government funds pose significantly less risk of 
heavy investor redemptions than prime funds, have low default risk and 
are highly liquid even during market stress, and experienced net 
inflows during the financial crisis.\632\ Also, few commenters 
explicitly supported or opposed excluding government funds from the 
fees and gates reforms. Of these commenters, a few supported a narrowly 
tailored fees and gates reform that does not apply to government money 
market funds,\633\ and a few commenters argued that all types of money 
market funds--including government money market funds--should have the 
ability to apply a fee or gate.\634\
---------------------------------------------------------------------------

    \631\ See, e.g., J.P. Morgan Comment Letter; T. Rowe Price 
Comment Letter; Vanguard Comment Letter; ICI Comment Letter; IDC 
Comment Letter. But see Comment Letter of J. Huston McCulloch (Sept. 
13, 2013) (``McCulloch Comment Letter'') (suggesting that the 
floating NAV reform also apply to government money market funds and 
noting that even short-term treasury bills fluctuate in present 
value). As discussed below, we continue to believe that our floating 
NAV reform should not apply to government funds. Our belief is 
based, in part, on the strong commenter support in favor of a more 
targeted floating NAV reform that addresses the incremental 
incentive for institutional investors to redeem from prime funds, 
and our stated goal of preserving as much as possible the benefits 
of money market funds for most investors, while appropriately 
balancing concerns about the risks of heavy redemptions in prime 
funds during times of stress and the harm this can cause to short-
term funding markets.
    \632\ See, e.g., J.P Morgan Comment Letter; ICI Comment Letter; 
IDC Comment Letter; T. Rowe Price Comment Letter.
    \633\ See, e.g., BlackRock II Comment Letter, (``Government MMFs 
. . . should not be required to implement liquidity fees and 
gates.''); J.P. Morgan Comment Letter.
    \634\ See, e.g., U.S. Bancorp Comment Letter, (``If ultimately 
adopted, gating should be available to all classes of funds . . 
.''); HSBC Comment Letter, (``[W]e believe all MMFs should be 
required to have the power to apply a liquidity fee or gate so that 
the MMF provider can manage a low probability but high impact 
event.'').
---------------------------------------------------------------------------

    We continue to believe that government money market funds should 
not be subject to the fees and gates and floating NAV reforms. As 
discussed in the Proposing Release, government money market funds face 
different redemption pressures and have different risk characteristics 
than other money market funds because of their unique portfolio 
composition.\635\ The securities primarily held by government money 
market funds typically have a lower credit default risk than commercial 
paper and other securities held by prime money market funds and are 
highly liquid in even the most stressful market conditions.\636\ As 
noted in our proposal, government funds' primary risk is interest rate 
risk; that is, the risk that changes in the interest rates result in a 
change in the market value of portfolio securities.\637\ Even the 
interest rate risk of government money market funds, however, is 
generally mitigated because these funds typically hold assets that have 
short maturities and hold those assets to maturity.\638\
---------------------------------------------------------------------------

    \635\ Proposing Release, supra note 25, at section III.A.3. See 
also DERA Study, supra note 24, at 8-9.
    \636\ Proposing Release, supra note 25, at section III.A.3.; see 
also J.P. Morgan Comment Letter; Vanguard FSOC Comment Letter.
    \637\ See Proposing Release, supra note 25, at 66.
    \638\ See Proposing Release, supra note 25, n.173.
---------------------------------------------------------------------------

    As discussed in the DERA Study and below, government money market 
funds historically have experienced inflows, rather than outflows, in 
times of stress.\639\ In addition, the assets of government money 
market funds tend to appreciate in value in times of stress rather than 
depreciate.\640\ Most government money market funds always have at 
least 30% weekly liquid assets because of the nature of their portfolio 
(i.e., the securities they generally hold, by definition, are weekly 
liquid assets). Accordingly, with respect to fees and gates, the 
portfolio composition of government money market funds means that these 
funds are less likely to need to use these tools.
---------------------------------------------------------------------------

    \639\ See DERA Study, supra note 24, at 6-13.
    \640\ See Proposing Release, supra note 25, n.412.
---------------------------------------------------------------------------

    We have also determined not to impose the fees and gates and 
floating NAV reforms on government money market funds in an effort to 
facilitate investor choice by providing a money market fund investment 
option that maintains a stable NAV and that does not require investors 
to consider the imposition of fees and gates. As noted above, we expect 
that some money market fund investors may be unwilling or unable to 
invest in a money market fund that floats its NAV and/or can impose a 
fee or gate.\641\ By not subjecting government money market funds to 
the fees and gates and floating NAV reforms, fund sponsors will have 
the ability to offer money market fund investment products that meet 
investors' differing investment and liquidity needs.\642\ We also 
believe that this approach preserves some of the current benefits of 
money market funds for investors. Based on our evaluation of these 
considerations and tradeoffs, and the more limited risk of heavy 
redemptions in government money market funds, we believe it is 
preferable to tailor today's reforms and not apply the floating NAV 
requirement to government funds, but to permit them to implement the 
fees and gates reforms if they choose.\643\
---------------------------------------------------------------------------

    \641\ For example, there could be some types of investors, such 
as sweep accounts, that may be unwilling to invest in a money market 
fund that could impose a gate because such an investor generally 
requires the ability to immediately redeem at any point in time, 
regardless of whether the fund or the markets are distressed.
    \642\ To the extent a number of government funds opt in to the 
fees and gates requirements, and there exists investor demand to 
invest in government funds that are not subject to the fees and 
gates reforms, we believe market forces and competitive pressures 
may lead to the creation of new government funds that do not 
implement fees and gates.
    \643\ Although government money market funds may opt-in to fees 
and gates, we expect these funds will rarely impose fees and gates 
because their portfolio assets present little credit risk.
---------------------------------------------------------------------------

    We also sought comment on the appropriate size of the non-
government basket. Notwithstanding the relative safety and stability of 
government money market funds, we noted our concern that a credit event 
in this 20% basket or a shift in interest rates could trigger a decline 
in a fund's shadow price and therefore create an incentive for 
shareholders to redeem shares ahead of other investors (similar to that 
described for institutional prime funds subject to the floating NAV 
reform). We stated in the Proposing Release our preliminary belief that 
the benefits of retaining a stable share price money market fund option 
and the relative safety in a government money market fund's 80% basket 
appropriately counterbalances the risks associated with the 20% portion 
of a government money market fund's portfolio that may be invested in 
non-government securities.\644\
---------------------------------------------------------------------------

    \644\ The Proposing Release also would have required unaffected 
stable NAV funds, including government money market funds, to 
maintain a stable NAV through penny-rounding pricing (and generally 
eliminate amortized cost valuation except for securities with 
remaining maturities of 60 days or less). As discussed in section 
III.B.5, however, we have revised our approach and will permit 
stable NAV funds to continue to value portfolio securities using 
amortized cost and price fund shares using penny-rounding, as they 
do today. We are also providing expanded guidance on the use of 
amortized cost. See infra section III.D.
---------------------------------------------------------------------------

    A number of commenters, however, raised concerns that the proposed 
definition of government money market fund would permit these funds to 
invest up to 20% of their portfolio in non-government assets, and, 
contrary to the goals of our money market fund reforms, potentially 
increase risk as stable NAV government funds may use this 20% basket to 
reach for yield.\645\ One

[[Page 47793]]

commenter noted that, notwithstanding the current 20% non-government 
security basket, its government money market funds invest 100% of fund 
assets in government securities because doing so meets the expectations 
of government money market fund investors.\646\
---------------------------------------------------------------------------

    \645\ See, e.g., Goldman Sachs Comment Letter (suggesting that a 
new class of money market funds could emerge that would invest 19.9% 
of its assets in higher yield commercial paper and other privately 
issued debt while maintaining a stable NAV, and under Commission 
rules, holding itself out as a government money market fund); HSBC 
Comment Letter; CFA Institute Comment Letter; Systemic Risk Council 
Comment Letter; Invesco DERA Comment Letter. One commenter suggested 
reducing further the percentage of portfolio assets required to be 
invested in government securities and potentially including state 
and local government securities in the permissible investment 
basket. See Comment Letter of The Independent Trustees of the North 
Carolina Capital Management Trust (``Sept. 17, 2013) (``NC Cap. 
Mgmt. Trust Comment Letter''). We believe that the definition of a 
government money market fund should not include state and local 
government securities as suggested by this commenter. We discuss the 
risks present in these types of securities and municipal money 
market funds in general, infra section III.C.3. See also infra note 
773 and accompanying text. In addition, as discussed above, reducing 
further the percentage of assets that must be invested in government 
securities undercuts the goals of this rulemaking. A few commenters 
also raised concerns about the economic effects of not applying our 
floating NAV reform to government funds, including promoting the 
ability of the federal government to borrow at the expense of state 
and local governments and private issuers. See, e.g., Comment Letter 
of Arnold & Porter LLP on behalf of Federated Investors [Alternative 
1] (Sept. 13, 2013) (``Federated III Comment Letter''); Mass. 
Governor Comment Letter; Systemic Risk Council Comment Letter. We 
address the macroeconomic effects of the floating NAV requirement 
and related exemptions in section III.K. One commenter also noted 
that because stable NAV funds (including government money market 
funds) would no longer be permitted to value securities using 
amortized cost, these funds would still incur many of the same 
operational burdens as floating NAV funds. See Federated II Comment 
Letter; Federated III Comment Letter. As discussed in section 
III.B.5, however, we have revised our approach from the Proposing 
Release and will permit both retail and government money market 
funds to continue to value portfolio securities using amortized cost 
and use the penny-rounding method of pricing.
    \646\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    We agree with commenters who suggested that permitting government 
funds to invest potentially up to 20% of fund assets in riskier non-
government securities may promote a type of hybrid money market fund 
that presents new risks that are not consistent with the purposes of 
the money market reforms adopted today.\647\ One commenter suggested 
that without a 20% basket, there may be an oversupply of commercial 
paper that disrupts corporate funding (presumably a result of a shift 
of assets out of institutional prime funds required to adopt our 
floating NAV reform).\648\ As a result, this commenter suggested that 
the Commission wait until after final rules are adopted to evaluate the 
use of the 20% basket, including the effects on commercial paper 
supply, and then consider phasing the 20% basket out over time, if 
appropriate. We disagree. As stated above, the reason for not applying 
our fees and gates and floating NAV reforms to government money market 
funds is, in part, a recognition of the relative stability of this type 
of money market fund, through its lack of credit risk. It would limit 
the effectiveness of our floating NAV reform, for example, to allow a 
hybrid government fund to develop and potentially present credit risk 
to institutional investors seeking greater yield, while keeping the 
benefit of a stable NAV.
---------------------------------------------------------------------------

    \647\ See, e.g., Comment Letter of BlackRock, Inc. (June 6, 
2013) (``Blackrock I Comment Letter''); CFA Institute Comment Letter 
(noting that ``the 80 percent requirement [. . .] would undermine 
the implied NAV stability of a [g]overnment fund[']s structure. 
Allowing fund managers to invest as much as 20 percent of their 
assets in securities and instruments with greater volatility in 
value than government securities, while continuing to operate as 
stable NAV funds creates potential problems.'').
    \648\ See Blackrock DERA Comment Letter. We discuss in section 
III.K below the macroeconomic effects of a potential shift in assets 
out of institutional prime money market funds and into alternative 
investment products.
---------------------------------------------------------------------------

    As noted above, many commenters suggested completely eliminating 
the 20% basket.\649\ One commenter suggested a smaller de minimis 
basket, for example 5%.\650\ Our approach includes a 0.5% de minimis 
basket in which government funds may invest in non-government 
securities. In order to evaluate an appropriate de minimis amount of 
non-government securities, Commission staff, using Form N-MFP data, 
analyzed the exposure of government money market funds to non-
government securities between November 2010 and November 2013.\651\
---------------------------------------------------------------------------

    \649\ See, e.g., Goldman Sachs Comment Letter; HSBC Comment 
Letter; see Fidelity DERA Comment Letter.
    \650\ See CFA Institute Comment Letter.
    \651\ See DERA Memorandum regarding Government Money Market Fund 
Exposure to Non-Government Securities, dated March 17, 2014 (DERA 
Government MMF Exposure Memo'') available at http://www.sec.gov/comments/s7-03-13/s70313-322.pdf. This analysis categorized 
securities into two types: ``government securities'' and ``other 
securities.'' ``Government securities'' includes Treasury Debt, 
Treasury Repurchase Agreements, Government Agency Debt, and 
Government Agency Repurchase Agreements. ``Other securities'' 
includes all remaining non-government securities (as referred to 
above), such as non-government tri-party repurchase agreements, 
financial company commercial paper, and variable rate demand notes 
without a demand feature or guarantee. Although this analysis 
sought, where possible, to identify ``other securities'' that may 
actually qualify as ``government securities,'' it is possible that 
some assets classified as other securities may still qualify as 
government securities. Accordingly, the results of this analysis 
should be viewed as upper bounds on the extent to which government 
money market funds invest in ``other securities'' (i.e. non-
government securities).
---------------------------------------------------------------------------

    This analysis showed, among other things, that as of November 2013, 
approximately 17% of all money market funds were government funds and 
that average total net assets of government funds remained fairly 
constant at near $500 billion since March of 2012.\652\ An analysis of 
the data also showed that, between November 2010 and November 2013, 
government money market funds generally invested between 0.5% and 2.5% 
of their total amortized cost dollar holdings in non-government 
securities and, more recently closer to 0.5% in non-government 
securities from November 2012 to November 2013.\653\ For example, the 
90th percentile of reporting government money market funds demonstrates 
that investments in non-government securities declined from 12.7% 
(representing 11 funds) in November 2010 to nearly zero in November 
2013.\654\
---------------------------------------------------------------------------

    \652\ See id. (reporting based on Form N-MFP data, as of 
November 2013, 97 government money market funds out of 565 total 
money market funds).
    \653\ Id.
    \654\ Id.
---------------------------------------------------------------------------

    A few commenters suggested that this analysis is flawed because it 
inappropriately focuses on the historical use of the non-government 
securities basket to predict future use of the 20% basket, when we 
cannot accurately predict how investors will react following the 
adoption of proposed regulatory changes, such as a floating NAV.\655\ 
One commenter further suggested that the analysis instead should 
address the potential systemic risk posed by a hybrid fund.\656\ As 
other commenters noted, however, we recognize the potential for 
increased investor interest in hybrid government money market funds, 
and as discussed above, we are concerned that continuing to permit 
government money market funds to invest potentially up to 20% of fund 
assets in non-government securities presents risks that are contrary to 
goals of this rulemaking. In fact, the concern raised by these 
commenters, suggesting that the historical use of the 20% basket is 
irrelevant in the context of a future regulatory regime that includes a 
floating NAV reform, further supports our concern that retaining the 
20% non-government securities basket is likely to result in increased 
risk taking by

[[Page 47794]]

institutional prime fund investors who move to government money market 
funds in search of greater yield (but with the continued benefit of a 
stable NAV). We also note that our staff's analysis of the historical 
use of the 20% basket establishes the baseline (i.e., the extent to 
which government money market funds have used the 20% basket) for our 
economic analysis discussed below.
---------------------------------------------------------------------------

    \655\ See, e.g., Comment Letter of the Dreyfus Corporation (Apr. 
23, 2014, DERA Study) (``Dreyfus DERA Comment Letter'') (expecting 
that the staff's analysis would not show significant industry 
investment by government funds in non-government securities, but 
suggesting that this is a result of investor preference that must be 
viewed in the context of stable NAV money market funds and noting 
that investor interest in hybrid government money market funds may 
increase in a floating NAV context); Comment Letter of Wells Fargo 
Fund Management, LLC (Apr. 23, 2014, DERA Study) (``Wells Fargo DERA 
Comment Letter'') (suggesting that without the ability for 
government money market funds to diversify into prime and municipal 
securities, a significant inflow into government funds could force 
already low yields on short-term government securities to turn 
negative). Although we recognize the potentially adverse effects of 
negative yields (e.g., some funds might close to further investment, 
affecting capital formation), we believe that the potential risks 
associated with a government fund investing up to 20% of its total 
assets in non-government assets outweighs speculative concerns about 
future interest rates that may or may not remain at historic lows 
two years after the rules regarding our floating NAV reform become 
final.
    \656\ See Dreyfus DERA Comment Letter.
---------------------------------------------------------------------------

    One commenter stated its belief that allowing government money 
market funds to invest up to 20% in non-government securities will not 
materially increase the risks of these funds to investors or the 
financial system and that such a fund would have adequate liquidity to 
satisfy any increased redemption pressure that results from a credit 
event in the 20% basket.\657\ This commenter cites to our statement in 
the Proposing Release, where we characterized as ``minimal'' the risk 
of government money market funds that maintain at least 80% of their 
total assets in cash, government securities, or repurchase agreements 
that are collateralized by cash or government securities.\658\ We 
continue to believe, however, as we also stated in the Proposing 
Release, that ``a credit event in [the] 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.'' \659\ Even if we assume that a government fund had 
sufficient liquidity from its 80% basket of government securities to 
cover adequately increased redemptions that result from a credit event 
in the 20% basket, we note that the structural incentives that exist in 
stable NAV money market funds, and the associated first mover advantage 
and potential shareholder dilution concerns, still exist.\660\ And, 
indeed, after our floating NAV reform takes effect, the incentives 
could be even more pronounced in government funds if those 
institutional investors who are the most sensitive to risk move to 
government funds.
---------------------------------------------------------------------------

    \657\ See Wells Fargo DERA Comment Letter.
    \658\ See Proposing Release, supra note 25, at text accompanying 
n.176.
    \659\ See id. at text following n.173.
    \660\ See supra section III.B.3.
---------------------------------------------------------------------------

    Based on the staff's analysis, we expect that the 0.5% non-
conforming basket is consistent with current industry practices and 
strikes an appropriate balance between providing government money 
market fund managers with adequate flexibility to manage such funds 
while preventing them from taking on potentially high levels of risk 
associated with non-government assets. We therefore are revising the 
definition of a government fund to require that such a fund invest at 
least 99.5% (up from 80% in the proposal) of its assets in cash, 
government securities, and/or repurchase agreements that are 
collateralized by cash or government securities. A money market fund 
may not call itself or include in its name ``government money market 
fund'' or similar names unless the fund complies with this 
requirement.\661\
---------------------------------------------------------------------------

    \661\ Rule 2a-7(a)(16) defines a government money market fund 
and requires that such funds invest at least 99.5% of fund assets in 
cash, government securities, and repurchase agreements that are 
collateralized fully.
---------------------------------------------------------------------------

    Because we believe that the de minimis basket we are adopting is 
consistent with current industry practice, we do not believe that 
government funds will experience any material reduction in yield, based 
on current interest rates, as a result of our amendments. In addition, 
we do not believe that government funds will be required to make any 
systems modifications as a result of changing to a 0.5% de minimis 
basket because funds are already required to monitor compliance with 
the existing 20% non-government basket requirement. As discussed below, 
however, we do expect that money market funds may need to amend their 
policies and procedures to reflect the changes we are adopting today, 
including the new 0.5% de minimis basket.\662\ We estimate that it will 
cost each money market fund complex approximately $2,580 in one-time 
costs to amend their policies and procedures.\663\
---------------------------------------------------------------------------

    \662\ These costs are included as part of the Paperwork 
Reduction Act analysis. See infra section IV.A.
    \663\ Id.
---------------------------------------------------------------------------

    Because staff analysis shows that our 0.5% non-conforming basket is 
consistent with industry practice, we believe that any effect on 
efficiency, competition, or capital formation should be minimal. In 
addition, any government money market funds that do currently use the 
20% basket could roll out of any excess exposure to non-government 
assets by the time that funds are required to comply with the amended 
rule, given rule 2a-7's maturity limits on portfolio securities. 
Nevertheless, reducing the size of the basket could affect efficiency, 
competition, or capital formation in the future because decreasing the 
size of the basket reduces a government fund's flexibility to invest in 
non-government assets in the future. For example, decreasing the size 
of the basket could lead to a loss of efficiency if government funds 
are unable to invest in securities that government funds are currently 
permitted to purchase. Reducing the basket size could also restrict 
competition among money market funds because government funds would not 
be able to invest more than 0.5% in non-government assets and thus will 
have a reduced ability to compete with other money market funds based 
on yield. Finally, capital formation in the commercial paper market 
could be hindered by reducing the 20% basket and reducing these funds' 
ability to invest in commercial paper. We do not expect any such effect 
to be substantial, however, given the very small extent to which 
government funds have recently used the non-government basket.
    We also recognize the potential for a significant inflow of money 
market fund assets into government money market funds from 
institutional prime investors (seeking a stable NAV alternative) and 
investors that are unable or unwilling to invest in a product that may 
restrict liquidity (through our liquidity fees and gates reform). As we 
discuss in section III.K below, we do not anticipate that the impact 
from the final rule amendments, including those related to our floating 
NAV reform, will be large enough to constrain government funds and 
their potential investors.
2. Retail Money Market Funds
    As was proposed, our fees and gates reform will apply to retail 
money market funds, but our floating NAV reform will not. However, as 
discussed more below, we are revising the definition of a retail money 
market fund from our proposal to address concerns raised by commenters. 
As amended, a retail money market fund means a money market fund that 
has policies and procedures reasonably designed to limit all beneficial 
owners of the fund to natural persons.\664\
---------------------------------------------------------------------------

    \664\ See infra note 679 and accompanying text.
---------------------------------------------------------------------------

    As discussed in the Proposing Release and the DERA Study, retail 
investors historically have behaved differently from institutional 
investors in a crisis, being less likely to make large redemptions 
quickly in response to the first sign of market stress. During the 
financial crisis, institutional prime money market funds had 
substantially larger redemptions than prime money market funds that 
self-identify as retail.\665\ As noted in the Proposing Release, for 
example, approximately 4-5% of retail prime money market funds had 
outflows of greater than 5% on each

[[Page 47795]]

of September 17, 18, and 19, 2008, compared to 22-30% of institutional 
prime money market funds.\666\ 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.\667\ Studies of money 
market fund redemption patterns in times of market stress also have 
observed this difference.\668\ As we noted in the Proposing Release and 
discussed above, we believe that 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 more sophisticated tools to 
monitor and analyze the portfolio holdings of the funds in which they 
invest.\669\ We discuss below our fees and gates and floating NAV 
reforms and their application to retail money market funds, as defined 
by our amendments adopted today.
---------------------------------------------------------------------------

    \665\ See Proposing Release, supra note 25, at n.185 and 
accompanying text.
    \666\ See id.
    \667\ See Proposing Release, supra note 25, at n.187 and 
accompanying text. We noted that, based on iMoneyNet data, retail 
money market funds experienced 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. We have also reviewed the redemption activity for 
institutional prime funds during this same time period and note that 
institutional prime funds experienced net redemptions of 
approximately 9% between June 14, 2011 and July 5, 2011, and 46 
institutional prime money market funds had redemptions in excess of 
5% during that period (and of these funds 35 had redemptions in 
excess of 10% during this period), far greater redemptions than 
those incurred by retail funds.
    \668\ See, e.g., DERA Study, supra note 24, at 8; Cross Section, 
supra note 35, at 9 (noting that institutional prime money market 
funds experienced 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 
experienced net redemptions of $40 billion (or 5% of assets under 
management) during this same time period); Marcin Kacperczyk & 
Philipp Schnabl, How Safe are Money Market Funds?, 128 Q. J. Econ. 
1017 (April 5, 2013) (``Kacperczyk & Schnabl''); Wermers Study, 
supra note 35.
    \669\ We also understand that retail money market funds' 
shareholder base tends to be less concentrated and, thus, less 
likely to move large amounts of money at once. We believe this may 
be, in part, why retail money market funds experienced fewer 
redemptions during the financial crisis.
---------------------------------------------------------------------------

a. Fees and Gates
    Largely for the reasons discussed above, several commenters argued 
that our fees and gates reforms should not apply to retail money market 
funds, in the same way that our floating NAV reform would not apply to 
retail funds.\670\ More specifically, commenters argued that retail 
investors behave differently than institutional investors and, 
therefore, retail money market funds are insulated from runs and sudden 
losses of liquidity.\671\
---------------------------------------------------------------------------

    \670\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Comment 
Letter of United Services Automobile Association (Sept. 17, 2013) 
(``USAA Comment Letter''); MFDF Comment Letter; see also Fidelity 
Comment Letter (arguing that the fees and gates requirements should 
be limited to institutional prime funds).
    \671\ See, e.g., USAA Comment Letter; MFDF Comment Letter 
(``Because retail investors are demonstrably slower to redeem their 
shares, the fund's adviser will have greater ability to manage the 
fund's liquidity in a way necessary to meet redemptions, even in 
times of market stress, without necessitating the cost of that 
liquidity being imposed on redeeming retail shareholders.''); 
Comment Letter of Financial Services Institute (Sept. 17, 2013) 
(``Fin. Svcs. Inst. Comment Letter'') (``Retail investors pose a 
substantially lower risk of high redemption activities during 
periods of market stress . . . .'').
---------------------------------------------------------------------------

    Although, as discussed above, the evidence suggests that retail 
investors historically have exhibited much lower levels of redemptions 
or a slower pace of redemptions in times of stress,\672\ we cannot 
predict future investor behavior with certainty and, thus, we cannot 
rule out the potential for heavy redemptions in retail funds in the 
future. Empirical analyses of retail money market fund redemptions 
during the financial crisis show that at least some retail investors 
eventually began redeeming shares.\673\ Similarly, we note that when 
the Reserve Primary Fund, which was a mixed retail and institutional 
money market fund, ``broke the buck'' as a result of the Lehman 
Brothers bankruptcy, almost all of its investors ran--retail and 
institutional alike. Additionally, we note that it is possible that the 
introduction of the Treasury Temporary Guarantee Program on September 
19, 2008 (a few days after institutional prime money market funds 
experienced heavy redemptions) lessened the incentive for shareholders 
to redeem from retail money market funds. Moreover, as we recognized in 
the Proposing Release, retail prime money market funds, unlike 
government money market funds, generally are subject to the same credit 
and liquidity risks as institutional prime money market funds.\674\ As 
such, absent fees and gates, there would be nothing to help manage or 
prevent a run on retail prime money market funds in the future.
---------------------------------------------------------------------------

    \672\ See Proposing Release, supra note 25, at n.199 and 
accompanying text.
    \673\ See Proposing Release, supra note 25, at n.197 and 
accompanying text; see also Wermers Study, supra note 35.
    \674\ See Proposing Release, supra note 25, at 199.
---------------------------------------------------------------------------

    As noted in the Proposing Release, we also believe there is a 
difference in the anticipated shareholder behaviors we are trying to 
address by the fees and gates requirements and floating NAV requirement 
as applied to retail funds.\675\ The floating NAV requirement is 
specifically designed to address shareholders' incentive to redeem to 
take advantage of pricing discrepancies between a money market fund's 
market-based NAV per share and its stable share price. As discussed 
above, we believe this incentive likely is greatest among institutional 
investors because they are more likely to have significant sized 
investments at stake and the sophistication and resources to monitor 
actively such discrepancies.\676\ While retail investors are unlikely 
to be motivated to a substantial degree by the first-mover advantage 
created by money market funds' stable pricing convention, they may be 
motivated to redeem heavily in flights to quality, liquidity, and 
transparency (even if they may do so somewhat slower than institutional 
investors). Fees and gates are designed to address these types of 
redemptions.\677\ We also note that retail money market funds today 
operate with the potential for gates under rule 22e-3, which allows a 
fund board to permanently gate and liquidate a money market fund under 
certain circumstances. Today's amendments include a number of 
disclosure reforms that are designed to ensure that retail investors 
will understand this new additional fee and gate regime for money 
market funds.\678\
---------------------------------------------------------------------------

    \675\ See Proposing Release, supra note 25, at 200.
    \676\ See generally supra note 669 and accompanying text.
    \677\ See supra section III.B.1; see also Invesco Comment Letter 
(suggesting that liquidity fees would mitigate the ``first-mover'' 
advantage); UBS Comment Letter.
    \678\ See infra section III.E.
---------------------------------------------------------------------------

    In addition, the floating NAV requirement will affect a 
shareholder's experience with an institutional prime money market fund 
on a daily basis. It thus is a significant reform that is targeted only 
at those investors that we consider most likely to be motivated to 
redeem at least in part on the basis of pricing discrepancies in the 
fund. In contrast, and as discussed above, the fees and gates 
requirements will not affect a money market fund on a day-to-day basis; 
its effect will be felt only if the fund's weekly liquid assets fall 
below 30% of its total assets--i.e., unless it comes under potential 
stress--and even then, only if the board determines that a fee and/or 
gate is in

[[Page 47796]]

the best interests of the fund. Further, while we recognize that a 
retail money market fund may be less likely to experience strained 
liquidity (and thus less likely to need to impose a fee or gate), we 
believe there is still a sufficient risk of this occurring that we 
should allow such funds to impose a fee or gate to manage any related 
heavy redemptions when the weekly liquid assets fall below 30% and 
doing so is in the fund's best interests. For the same reasons, we 
believe requiring a fund to impose a liquidity fee when weekly liquid 
assets fall below 10% is also appropriate, unless the board determines 
otherwise based on the fund's best interests. Accordingly, retail money 
market funds will be subject to the fees and gates reform.
b. Floating NAV
i. Definition of Retail Money Market Fund
    As we proposed, however, we are not imposing the floating NAV 
reform on retail money market funds. For purposes of the floating NAV 
reform, we are defining a retail money market fund to mean a money 
market fund that has policies and procedures reasonably designed to 
limit all beneficial owners of the fund to natural persons (``retail 
funds'').\679\
---------------------------------------------------------------------------

    \679\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically 
means having voting and/or investment power. See, e.g., Securities 
Exchange Act rules 13d-3 and 16a-1(a)(2); Metropolitan Life 
Insurance Company, SEC Staff No-Action Letter (Nov. 23, 1999) (``Met 
Life No-Action Letter'') at n.9 and accompanying text. We note that 
our definition of retail money market fund is consistent with the 
way in which Congress defined a ``retail customer'' in section 
913(a) of the Dodd-Frank Act (defining ``retail customer,'' among 
other things, as a natural person). 15 U.S.C. 80b-11(g)(2). A retail 
fund may disclose in its prospectus that it limits investments to 
accounts beneficially owned by natural persons and describe in its 
policies and procedures how the fund complies with the retail fund 
limitation when a shareholder of record is an omnibus account holder 
that does not provide transparency down to the beneficial ownership 
level. We discuss omnibus account issues below. See infra section 
III.C.2.b.iii.
---------------------------------------------------------------------------

    Many commenters generally supported not applying a floating NAV 
requirement to retail money market funds, noting, for example, retail 
investors' moderate redemption activity during the financial crisis as 
compared with institutional prime funds and the importance of retaining 
a stable NAV investment product for retail investors that facilitates 
cash management, particularly where there are few alternatives offering 
diversification, stability, liquidity, and a market-based rate of 
return for these investors.\680\ Some commenters, however, objected to, 
or expressed concerns about not applying a floating NAV to retail 
funds. These commenters noted, for example, that (i) retail investors 
in the future may not behave the way we observed in 2008; (ii) 
increases in sophistication of retail investors (for example, through 
technological advancements) may lead retail investors to act more like 
institutional investors over time; and (iii) any differentiation 
between retail and institutional funds provides opportunities for 
gaming behavior by institutional investors.\681\
---------------------------------------------------------------------------

    \680\ See, e.g., Blackrock I Comment Letter; Blackrock II 
Comment Letter; Vanguard Comment Letter; T. Rowe Price Comment 
Letter; ICI Comment Letter.
    \681\ See, e.g., Goldman Comment Letter; J.P. Morgan Comment 
Letter; HSBC Comment Letter; Hanson et al. Comment Letter.
---------------------------------------------------------------------------

    We recognize, as discussed above, that we cannot be certain how 
retail investors would have reacted during the financial crisis had the 
Treasury Temporary Guarantee Program not been implemented. Similarly, 
we cannot predict whether retail investors, in light of new tools to 
manage liquidity (e.g., fees and gates) and enhanced disclosure and 
transparency, will behave more like institutional investors in the 
future. But the evidence to date suggests that retail investors do not 
present the same risks associated with high levels of redemptions posed 
by institutional investors.\682\ We continue to believe that the 
significant benefits of providing an alternative stable NAV fund option 
justify the risks associated with the potential for a shift in retail 
investors' behavior in the future, particularly given that retail money 
market funds will be able to use fees and gates as tools to stem heavy 
redemptions should they occur. We also note that, as discussed below, 
our revised approach to defining a retail fund based on shareholder 
characteristics should minimize the potential for gaming behavior by 
institutional investors.
---------------------------------------------------------------------------

    \682\ See supra notes 666 and 667 and accompanying text.
---------------------------------------------------------------------------

    As of February 28, 2014, funds that self-report as retail money 
market funds held nearly $998 billion in assets, which is approximately 
one-third of all assets held in money market funds.\683\ Unlike under 
our proposal, which would have required retail funds generally to value 
portfolio securities using market-based factors rather than amortized 
cost, money market funds that qualify as retail funds may continue to 
offer a stable value as they do today--and facilitate their stable 
price by use of amortized cost valuation and/or penny-rounding pricing 
of their portfolios. As discussed below, our definition of a retail 
fund reflects several modifications from our proposal (in which a 
retail fund was defined as a fund that limits redemptions to $1 million 
in a single business day) and reflects an approach suggested by a 
number of commenters.\684\
---------------------------------------------------------------------------

    \683\ Staff estimates were derived by using self-reported data 
from iMoneyNet as of February 28, 2014 to estimate percentages for 
retail and institutional segments by money market fund type. Staff 
then applied these percentages to the total market size segments 
based on Form N-MFP data as of February 28, 2014. Of these assets, 
approximately $593 billion are held by prime money market funds and 
another $209 billion are in government funds. Because the final 
rules do not subject government funds to the floating NAV 
requirement, funds that qualify as retail money market funds would 
be potentially relevant only to the investors holding the $593 
billion in retail prime funds.
    \684\ The definition of retail money market fund we are adopting 
is informed by a joint comment letter submitted by eight fund 
complexes that manage approximately $1.2 trillion of U.S. money 
market funds (representing approximately 45% of the total U.S. money 
market fund industry assets) as of September 30, 2013. See Comment 
Letter dated October 31, 2013 (submitted by BlackRock, Fidelity, 
Invesco, Legg Mason & Western Asset, Northern Trust, T. Rowe, 
Vanguard, and Wells Fargo) (``Retail Fund Joint Comment Letter'').
---------------------------------------------------------------------------

    We proposed to define a fund as retail, and thus not subject to the 
floating NAV reform, if it is a fund that restricts a shareholder of 
record from redeeming more than $1 million in any one business day. We 
explained our belief that this approach should be relatively simple to 
implement because it would only require a fund to establish a one-time, 
across-the-board redemption policy, unlike other approaches based on 
shareholder characteristics that would require ongoing monitoring by 
the fund. We also stated our belief that our proposed approach would 
reduce the risk that a retail fund would experience heavier redemption 
requests than it could effectively manage in a crisis because it would 
limit the total amount of redemptions a fund can experience in a single 
day and therefore provide the fund time to better predict and manage 
its liquidity.
    In the Proposing Release, we selected a $1 million redemption limit 
because we expected this amount would be high enough to make money 
market funds a viable cash management tool for retail investors, but 
low enough that institutional investors would likely self-select out of 
these funds because it would not satisfy their operational needs.\685\ 
Under the proposed retail fund definition, a fund would be able to 
permit an ``omnibus account holder'' to

[[Page 47797]]

redeem more than $1 million in a single business day provided the fund 
has policies and procedures reasonably designed to allow the conclusion 
that the omnibus account holder does not permit any beneficial owner to 
directly or indirectly redeem more than $1 million in a single 
day.\686\ The Proposing Release also considered and sought comment on 
other ways to distinguish a retail fund from an institutional fund, 
including applying limitations based on maximum account balance, 
shareholder concentration, or shareholder characteristics (e.g., a 
social security number that would identify the shareholder as an 
individual person and not an institution).\687\ We discuss below 
comments received on these alternative means for distinguishing retail 
funds from institutional funds.
---------------------------------------------------------------------------

    \685\ The Proposing Release also noted that a money market fund 
that sought to qualify as a retail fund would need to effectively 
describe that it is intended for retail investors and include in the 
fund's prospectus and advertising materials information about the 
fund's daily redemption limitations. See Proposing Release, supra 
note 25, at section III.A.4.b.i.
    \686\ We proposed to define an ``omnibus account holder'' 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).
    \687\ See infra note 701 and accompany text for a discussion of 
social security numbers as a means for distinguishing retail from 
institutional funds in the Proposing Release.
---------------------------------------------------------------------------

    A number of commenters supported (some with suggested scope 
modifications) our proposed approach to define a retail investor by 
means of a daily redemption limit.\688\ Many commenters, however, 
raised concerns with defining a retail fund as a fund that imposes a 
daily redemption limit on its investors, stating, for example, that the 
$1 million daily redemption limit would (i) unduly limit liquidity by 
prohibiting transactions by shareholders whose behavior does not 
present run risk; (ii) restrict full liquidity not only in times of 
market stress, but also when the markets are operating effectively; and 
(iii) be costly and difficult to implement, monitor, and enforce.\689\ 
As noted above, however, a number of commenters have suggested defining 
a retail money market fund as a fund that seeks to limit beneficial 
ownership interest to natural persons.\690\ After analyzing the 
comments received, we agree that defining a retail fund as a fund that 
has policies and procedures reasonably designed to limit beneficial 
ownership to natural persons (``natural person test'') provides a 
simpler and more cost-effective way to accomplish our goal of targeting 
the floating NAV reform to the type of money market fund that has 
exhibited greater tendencies to redeem first in times of market stress 
and has the investors most likely to seek to take advantage of any 
pricing discrepancies and therefore dilute the interests of remaining 
shareholders.\691\ We discuss below the operation of the natural person 
test and its economic effects.
---------------------------------------------------------------------------

    \688\ See, e.g., CFA Institute Comment Letter; Northern Trust 
Comment Letter; Schwab Comment Letter; USAA Comment Letter; Vanguard 
Comment Letter. These commenters also offered suggested scope 
modifications, including increasing or decreasing the daily 
redemption limit, creating an advance notice provision (pre-approved 
redemptions over $1 million in a single business day), applying the 
daily redemption limit on a per-account basis rather than a per-
shareholder basis, and exempting certain transactions from the daily 
redemption limit.
    \689\ See, e.g., Comment Letter of John D. Hawke, Jr., Arnold 
and Porter, LLP on behalf of Federated Investors, Inc., Washington, 
District of Columbia (Nov. 21, 2013) (``Federated XIII Comment 
Letter''); Federated II Comment Letter; Fidelity Comment Letter; ICI 
Comment Letter; SIFMA Comment Letter.
    \690\ See supra note 684 and accompanying text. In addition to 
the eight commenters who submitted a joint comment letter in support 
of defining a retail fund by limiting beneficial ownership to 
natural persons, a number of other commenters also supported this 
definition. See, e.g., SunTrust Comment Letter; ICI Comment Letter; 
SIFMA Comment Letter.
    \691\ A number of commenters supported alternate means of 
defining a retail investor. See, e.g., Schwab Comment Letter 
(supporting defining retail investors based on concentration risk); 
Deutsche Comment Letter (supporting defining retail investors based 
on a maximum account balance limit); SIFMA Comment Letter 
(supporting defining retail investors based on a minimum initial 
investment, but also supporting the ``natural person'' approach we 
are adopting today); Dreyfus Comment Letter (supporting defining 
retail investors based on settlement times); Fin. Svcs. Roundtable 
Comment Letter (supporting defining institutional investors, rather 
than retail investors, by, for example, reference to assets under 
management). We have carefully considered these alternative means of 
defining a retail investor, but we believe, as discussed below, that 
the ``natural person'' approach suggested by a number of other 
commenters is a simpler and more cost effective way to distinguish 
between institutional and retail investors.
---------------------------------------------------------------------------

ii. Operation of the Natural Person Test
    As discussed in the Proposing Release, it currently is difficult to 
distinguish precisely 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. We noted that the operational challenges of 
defining a retail fund are numerous and complex. In addition, as 
discussed below, drawing a distinction between retail and institutional 
investors is complicated by the extent to which shares of money market 
funds are held by investors through omnibus accounts and other 
financial intermediaries. We also recognize that any distinction 
between retail and institutional funds could result in ``gaming 
behavior'' whereby investors having the general attributes of an 
institution might attempt to fit within the confines of whatever retail 
fund definition we craft. We believe, however, that defining a retail 
fund using the natural person test will, as a practical matter, 
significantly reduce opportunities for gaming behavior because we 
believe that most funds will use social security numbers as part of 
their compliance process to limit beneficial ownership to natural 
persons, and institutional investors are not issued social security 
numbers.
    A money market fund that has policies and procedures reasonably 
designed to limit beneficial owners to natural persons will not be 
subject to the floating NAV reform. We expect that a fund that intends 
to qualify as a retail money market fund would disclose in its 
prospectus that it limits investments to accounts beneficially owned by 
natural persons.\692\ Funds will have flexibility in how they choose to 
comply with the natural person test. As noted by commenters, we expect 
that many funds will rely on social security numbers to confirm 
beneficial ownership by a natural person. The social security number is 
one well-established method of identification, issued to natural 
persons who qualify under the Social Security Administration's 
requirements. Because social security numbers are in nearly all cases 
obtained as part of the account-opening process (for natural persons) 
and are populated in transfer agent and intermediary recordkeeping 
systems, this approach should reduce significantly the required 
enhancements to systems, processes, and procedures that would be 
required under alternative approaches, including our proposed daily 
redemption limit.\693\ In addition, for intermediaries using omnibus 
account registrations where the beneficial owners are natural persons 
(e.g., retail brokerage accounts, certain trust accounts, and defined 
contribution plan accounts), a social security number is a key 
component of customer account-opening procedures and compliance and 
therefore should allow intermediaries to distinguish retail from 
institutional investors (and therefore assist retail funds in 
satisfying the retail fund definition).\694\ In many cases, funds and 
intermediaries already collect this data to comply with ``know your 
customer'' practices and anti-money laundering laws and should easily 
be

[[Page 47798]]

able to identify if a beneficial owner is a natural person.\695\
---------------------------------------------------------------------------

    \692\ For example, a fund could disclose that it is a retail-
only money market fund not subject to the floating NAV requirement, 
consistent with the requirements of Form N-1A. See, e.g., Item 6 and 
Item 11 of Form N-1A; see also infra note 940 and accompanying text.
    \693\ See, e.g., ICI Comment Letter.
    \694\ Id.
    \695\ Id.
---------------------------------------------------------------------------

    As commenters noted, defining a retail fund in this way encompasses 
a large majority of individual investors who use retail accounts 
today.\696\ For example, we understand that many tax-advantaged savings 
accounts and ordinary trusts are beneficially owned by natural persons, 
and therefore would likely qualify under the natural person test.\697\ 
We understand that, often, in these types of accounts, natural persons 
are responsible for making the decision to redeem from a fund during a 
time of crisis (rather than an institutional decision maker). We 
acknowledge, however, that a fund may still qualify as a retail money 
market fund notwithstanding having an institutional decision maker 
(e.g., a plan sponsor in certain retirement arrangements, or an 
investment adviser managing discretionary investment accounts) that 
could eliminate or change an investment option, such as offering or 
investing in a money market fund. We also recognize that there is a 
potential risk that an institutional decision maker may react 
differently in times of market stress than the individuals that we 
expect will invest in retail money market funds as defined under our 
amended rule. We believe that in many instances, however, this risk can 
be mitigated. A number of commenters noted, for example, that under 
section 3(34) of ERISA, the plan sponsor of a defined contribution plan 
can eliminate or change an investment option without providing notice 
of the change, but stated that the plan sponsor would likely provide 30 
days' notice of any change in order to obtain the benefit of the 
fiduciary safe harbor in section 404(c) of ERISA.\698\ To the extent 
that there remains a risk that an institutional decision maker 
associated with a qualifying retail fund makes decisions inconsistent 
with how we understand retail funds generally behave, we believe that 
our approach appropriately balances this potential risk against the 
substantial benefits of providing a simple and cost-effective way to 
distinguish retail funds and provide a targeted floating NAV 
requirement.
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    \696\ See Retail Fund Joint Comment Letter.
    \697\ Natural persons often invest in money market funds through 
a variety of tax-advantaged accounts and trusts, including, for 
example: (i) participant-directed defined contribution plans 
(section 3(34) of the Employee Retirement Income Security Act 
(``ERISA'')); (ii) individual retirement accounts (section 408 or 
408A of the Internal Revenue Code (``IRC'')); (iii) simplified 
employee pension arrangements (section 408(k) of the IRC); (iv) 
simple retirement accounts (section 408(p) of the IRC); (v) 
custodial accounts (section 403(b)(7) of the IRC); (vi) deferred 
compensation plans for government or tax-exempt organization 
employees (section 457 of the IRC); (vii) Keogh plans (section 
401(a) of the IRC); (viii) Archer medical savings accounts (section 
220(d) of the IRC); (ix) college savings plans (section 529 of the 
IRC); (x) health savings account plans (section 223 of the IRC); and 
(xi) ordinary trusts (section 7701 of the IRC). Accounts that are 
not beneficially owned by natural persons (for example, accounts not 
associated with social security numbers), such as those opened by 
businesses, including small businesses, defined benefit plans, or 
endowments, would not qualify as retail money market funds.
    \698\ See Retail Fund Joint Comment Letter.
---------------------------------------------------------------------------

    As noted above, funds that intend to satisfy the retail fund 
definition will be required to adopt and implement policies and 
procedures reasonably designed to restrict beneficial ownership to 
natural persons.\699\ For example, funds could have policies and 
procedures that will help enable the fund to ``look through'' these 
types of accounts and reasonably conclude that the beneficial owners 
are natural persons. A fund's policies and procedures could, for 
example, require that the fund reasonably conclude that ownership is 
limited to natural persons and do so (i) directly, such as when the 
investor provides a social security number to the fund adviser, when 
opening a taxable or tax-deferred account through the adviser's 
transfer agent or brokerage division; or (ii) indirectly, such as when 
a social security number is provided to the fund adviser in connection 
with recordkeeping for a retirement plan, or a trust account is opened 
with information regarding the individual beneficiaries. We note that 
our definition of a retail money market fund provides a fund with the 
flexibility to develop policies and procedures that best suit its 
investor base and does not require that the fund use social security 
numbers to reasonably conclude that investors are natural persons. For 
example, a money market fund or the appropriate intermediary could 
determine the beneficial ownership of a non-U.S. natural person by 
obtaining other government-issued identification, for example, a 
passport.\700\
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    \699\ See rule 2a-7(a)(25).
    \700\ See, e.g., 31 CFR 1023.220(a)(2)(i)(A)(4)(ii) (requiring a 
broker-dealer to obtain for non-U.S. persons [a] taxpayer 
identification number, a passport number and country of issuance, an 
alien identification card number, or the number and country of 
issuance of any other government-issued document evidencing 
nationality or residence and bearing a photograph or similar 
safeguard).
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    In the Proposing Release, we discussed as an alternative to the 
daily redemption limit approach requiring that funds consider 
shareholder characteristics, such as whether the investor has a social 
security number or a taxpayer identification number. We noted our 
concern, however, that social security numbers do not necessarily 
correlate to an individual, and taxpayer identification numbers do not 
necessarily correlate to a business (for example, businesses operated 
as pass-through entities).\701\ One commenter reiterated this 
concern.\702\ We note, however, that the definition of a retail fund 
does not rely solely on each investor having a social security number. 
Rather, our approach recognizes that in most cases, a fund or 
intermediary may often satisfy the natural person test by implementing 
policies and procedures that require verifying a social security number 
at the time of account opening. But, the fund or intermediary may, for 
example, determine that a non-U.S. investor who does not have a social 
security number is a natural person (e.g., using a passport).
---------------------------------------------------------------------------

    \701\ See Proposing Release, supra note 25, at section 
III.A.4.c.iii.
    \702\ See Schwab Comment Letter (suggesting that any final rule 
identify accounts that are inherently retail and include them as 
part of the definition of a retail fund so that, for example, 
estates and trusts would qualify to invest in a retail money market 
fund (despite having a tax identification number, rather than a 
social security number). We note that an estate or trust would be 
able to qualify for investment in a retail fund under our 
definition, provided the fund reasonably concludes that the 
beneficial owner(s) is a natural person.
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    Finally, we note that, currently, it is not uncommon for a money 
market fund to be owned by both retail and institutional investors, 
typically through a retail and institutional share class, 
respectively.\703\ In order to qualify as a retail money market fund, 
funds with separate share classes for different types of investors (as 
well as single-class funds for both types of investors) will need to 
reorganize into separate money market funds for retail and 
institutional investors, which may be separate series of the fund.\704\ 
In the case of a money market fund with retail and institutional

[[Page 47799]]

share classes, two commenters suggested that the Commission provide 
relief from section 18(f)(1) of the Act (designed, in part, to prohibit 
material differences among the rights of shareholders in a fund) \705\ 
to allow the fund to reorganize the classes into separate money market 
funds.\706\
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    \703\ Rule 18f-3 under the Investment Company Act enables a 
money market fund to offer retail and institutional share classes by 
providing an exemption from sections 18(f)(1) and 18(i) of the 
Investment Company Act. We are amending, as proposed, rule 18f-3 
(the multiple class rule) to replace the phrase ``that determines 
net asset value using the amortized cost method permitted by Sec.  
270.2a-7'' with ``that operates in compliance with Sec.  270.2a-7'' 
because the money market funds that are subject the floating NAV 
requirement would not use the amortized cost method to a greater 
extent than mutual funds generally.
    \704\ Each series of a series investment company is a separate 
investment company under the Investment Company Act. See, e.g., Fair 
and Equitable Treatment of Series Type Investment Company 
Shareholders, Rel. No. IC-7276 (Aug. 8, 1972). See also J.R. 
Fleming, Regulation of Series Investment Companies under the 
Investment Company Act of 1940, 44 Bus. Law. 1179 (Aug. 1989).
    \705\ See Exemption for Open-End Management Investment Companies 
Issuing Multiple Classes of Shares; Disclosure by Multiple Class and 
Master-Feeder Funds, Investment Company Act Release No. 19955 (Dec. 
15, 1993), at n.19 and accompanying text.
    \706\ See Dechert Comment Letter; NYC Bar Committee Comment 
Letter. Section 18(f)(1) of the Act generally prohibits a fund from 
issuing any ``senior security'' and section 18(i) of the Act 
generally requires that every share of stock issued by a fund 
``shall be a voting stock and have equal voting rights with every 
other outstanding voting stock.'' Rule 18f-3 under the Act provides 
a conditional exemption from sections 18(f)(1) and 18(i) of the Act, 
but Rule 18f-3 does not provide an exemption to permit a fund with 
multiple classes of shares to separate a class from the other 
class(es) and reorganize it into a separate fund, and such a 
reorganization may implicate the concerns underlying sections 
18(f)(1) and 18(i) of the Act.
---------------------------------------------------------------------------

    We recognize that a reorganization of a share class of a money 
market fund into a new series may implicate section 18 of the 
Investment Company Act, as well as section 17(a) of the Investment 
Company Act (section 17(a) prohibits, among other things, certain 
transactions between a fund and an affiliated person of the fund to 
prevent unfairness to the fund or overreaching by the affiliated 
person).\707\ Notwithstanding the prohibitions in sections 17(a) and 
18(f)(1) and 18(i) of the Act, in the context of distinguishing between 
retail and institutional money market funds when implementing the 
reforms we are adopting today, the Commission is of the view that a 
reorganization of a class of a fund into a new fund may take place 
without separate exemptive relief, provided that the fund's board of 
directors, including a majority of the directors who are not interested 
persons of the fund, determines that the reorganization results in a 
fair and approximately pro rata allocation of the fund's assets between 
the class being reorganized and the class remaining in the fund.\708\ 
As is the case with any board determination, the basis for the fund 
board's determination should be documented fully in the fund's 
corporate minutes.\709\ We believe that a reorganization accomplished 
in this manner would be consistent with the investor protection 
concerns in sections 17(a) and 18 of the Act in this context. More 
specifically, we believe that this board determination, in the context 
of a one-time reorganization related specifically to effectuating a 
split of separate share classes in order to qualify as a retail money 
market fund, addresses the primary concerns that sections 17 and 18 of 
the Act are intended, in part, to address--to ensure that shareholders 
in a fund are treated fairly and prohibit overreaching by affiliates.
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    \707\ See section 17(b) (setting forth, among other things, the 
standards for exempting a transaction from the prohibition). Section 
17(a) of the Act, among other things, generally prohibits any 
affiliated person of a fund, acting as principal, from knowingly 
selling to or buying from the fund, any security or other property, 
with certain limited exceptions. A fund whose class of shares is 
being reorganized into a new fund may be an affiliated person of the 
new fund, due to, among other possibilities, sharing an investment 
adviser or board of directors. Similarly, the new fund may be an 
affiliated person of the fund. Accordingly, the sale of the assets 
of the fund to the new fund, and the new fund's purchase of those 
assets from the fund, in a reorganization of a class of the fund may 
be prohibited under sections 17(a)(1) and (2) of the Act. Rule 17a-8 
under the Act provides an exemption from sections 17(a)(1) and 
17(a)(2) of the Act for a transaction that is a ``merger, 
consolidation, or purchase or sale of substantially all of the 
assets'' of a fund that meets the rule's conditions. A 
reorganization of a class of a fund into a new fund may not be 
covered by rule 17a-8.
    \708\ A pro rata allocation ensures, for example, that portfolio 
securities with different liquidity and/or quality characteristics 
are distributed equally among each fund class. The board's 
determination requires a finding that the reorganization results in 
a fair and approximately pro rata allocation of the fund's assets in 
order to acknowledge that there may be limited situations in which a 
100% pro rata allocation may not be practical (e.g., an odd-lot 
portfolio security).
    \709\ All registered investment companies, including money 
market funds, must maintain as part of their records minute books 
for board of directors' meetings and preserve such records 
permanently, the first two years in an easily accessible place. See 
rules 31a-1(b)(4) and 31a-2(a)(1).
---------------------------------------------------------------------------

    The Commission's position is that, as part of implementing a 
reorganization in response to the amendments we are adopting today, a 
money market fund may involuntarily redeem certain investors that will 
no longer be eligible to invest in the newly established or existing 
money market fund. We recognize that such an involuntary redemption (or 
cancellation) of fund shares may implicate section 22(e) of the Act, 
which, among other things, generally prohibits a fund from suspending 
(or postponing) the right of redemption for any redeemable security for 
more than seven days after tender of such shares.\710\ Our staff has, 
in the past, however, provided no-action relief under section 22(e) of 
the Act in similar situations (e.g., where an investor's account 
balance falls below a certain value, provided shareholders are notified 
in advance).\711\ Notwithstanding the prohibitions in section 22(e) of 
the Act, in the context of a one-time reorganization to distinguish 
between retail and institutional money market funds (either in 
separating classes into new funds or in ensuring that an existing fund 
only has retail or institutional investors), the Commission's position 
is that a fund may involuntarily redeem investors who no longer meet 
the eligibility requirements in a fund's retail and/or institutional 
money market funds without separate exemptive relief, provided that the 
fund notifies in writing such investors who become ineligible to invest 
in a particular fund at least 60 days before the redemption occurs.
---------------------------------------------------------------------------

    \710\ For example, if a shareholder may not redeem a portion of 
his shares without causing an involuntary redemption of his or her 
entire account balance, the shareholder may be deprived of the right 
to redeem that portion of his account balance, in contravention of 
section 22(e).
    \711\ See, e.g., Scudder Group of Funds (pub. avail. Sept. 15, 
1992) (no-action relief granted to a fund that proposed to, upon 
providing 30 days' notice, involuntarily redeem accounts whose 
shareholders failed to provide taxpayer identification numbers); DFA 
U.S. Large Cap Portfolio Inc. (pub. avail. Sept. 7, 1990) (no-action 
relief provided to a fund that may, upon providing 30 days' notice, 
involuntarily redeem investors who failed to maintain at least $15 
million in a private advisory account with the investment adviser 
that produced annual advisory fees of at least $100,000; Axe-
Houghton Income Fund, Inc. (pub. avail. Mar. 19, 1981) (no-action 
relief provided to a fund that may, upon providing a number of 
notice and delayed effectiveness provisions, involuntarily redeem 
investors whose account balances fall below a prescribed threshold).
---------------------------------------------------------------------------

    Accordingly, the Commission is exercising its authority under 
section 6(c) of the Act to provide exemptions from these provisions of 
the Act to permit a money market fund to reorganize a class of a fund 
into a new fund in order to qualify as a retail money market fund and 
make certain involuntary redemptions as discussed above.\712\ As 
discussed above, 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 discuss the potential costs of 
reorganizing funds below.\713\
---------------------------------------------------------------------------

    \712\ See section 6(c).
    \713\ We expect that money market funds that choose to rely on 
our exemptive relief above and make this determination in order to 
separate an existing retail share class into a new fund would do so 
only where the fund's adviser believes it would result in cost 
savings as compared with the costs of establishing entirely new 
funds (these costs are estimated below). We do not estimate any 
additional costs for funds to document the board's determination 
that the reorganization results in a fair and approximately pro rata 
allocation of the fund's assets. See supra note 709.
---------------------------------------------------------------------------

iii. Omnibus Account Issues
    As we discussed in the Proposing Release, most money market funds 
do

[[Page 47800]]

not have the ability to look through omnibus accounts to determine the 
characteristics 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, net redemptions, and they 
often present a single buy and single sell order to the fund. 
Accordingly, omnibus accountholders may make it more difficult for a 
money market fund to assure itself that it is able to operate as a 
retail fund.\714\
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    \714\ As we noted in the Proposing Release, the challenges of 
managing implementation of fund policies through omnibus accounts 
are not unique to distinguishing between retail and institutional 
funds. 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. Service providers also offer services designed to 
facilitate compliance and evaluation of intermediary activities.
---------------------------------------------------------------------------

    A money market fund that seeks to qualify as a retail fund must 
have policies and procedures that are reasonably designed to limit the 
fund's beneficial owners to natural persons. Because an omnibus 
accountholder is the shareholder of record (and not the beneficial 
owner), retail funds will need to determine that the underlying 
beneficial owners of the omnibus account are natural persons. We are 
not prescribing the ways in which a fund may seek to satisfy the retail 
fund definition, including how the fund will reasonably conclude that 
underlying beneficial owners of an omnibus account are natural 
persons.\715\ There are many ways for a fund to effectively manage 
their relationships with their intermediaries, including contractual 
arrangements or periodic certifications. Funds may manage these 
relations in the manner that best suits their circumstances. We note 
that a fund's policies and procedures could include, for example, 
relying on periodic representations of a third-party intermediary or 
other verification methods to confirm the individual's ownership 
interest, such as when a fund is providing investment only services to 
a retirement plan or an omnibus provider is unable or unwilling to 
share information that would identify the individual. Regardless of the 
specific policies and procedures followed by a fund in reasonably 
concluding that the underlying beneficial owners of an omnibus account 
are natural persons, we expect that a fund will periodically review the 
adequacy of such policies and procedures and the effectiveness of their 
implementation.\716\ Accordingly, such periodic reviews would likely 
assist funds in detecting and correcting any gaps in funds' policies 
and procedures, including a fund's ability to reasonably conclude that 
the underlying beneficial owners of an omnibus account are natural 
persons. As discussed below in the economic analysis, we have included 
in our aggregate cost estimate costs for funds to establish policies 
and procedures with respect to omnibus accounts, but we expect that 
funds generally will rely on financial intermediaries to implement such 
policies (rather than, for example, entering into contractual 
arrangements).
---------------------------------------------------------------------------

    \715\ We note that although it is a fund's obligation to satisfy 
the retail fund definition, an intermediary could nonetheless be 
held liable for violations of other federal securities laws, 
including the antifraud provisions, where institutional investors 
are improperly funneled into retail funds.
    \716\ See rule 38a-1(a)(3).
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iv. Economic Analysis
    In addition to the costs and benefits discussed above, implementing 
any reform that distinguishes between retail and institutional money 
market funds will likely have similar effects on efficiency, 
competition, and capital formation, regardless of how we define a 
retail money market fund (or retail investor). We discussed these 
effects in the Proposing Release and they are described below.\717\ To 
the extent that retail investors prefer a stable NAV money market fund, 
our floating NAV reform (that does not apply to retail funds) helps to 
maintain the utility of such a money market fund investment product. 
However, to the extent that funds seek to maintain a stable NAV by 
qualifying as a retail fund, there may be an adverse effect on capital 
formation if the associated costs incurred by funds are passed on to 
shareholders. Funds that choose to qualify as retail money market funds 
will incur some operational costs (discussed below) and, depending on 
their magnitude, these costs might affect capital formation and 
competition (depending on the varied ability of funds to absorb these 
costs).
---------------------------------------------------------------------------

    \717\ Commenters did not specifically address our discussion in 
the Proposing Release of the effects on efficiency, competition, and 
capital formation. A few commenters raised concerns about the costs 
associated with reorganizing money market funds into separate retail 
and institutional funds (or series), but did not quantify those 
costs or object specifically to the costs we estimated in the 
Proposing Release. See, e.g., Goldman Sachs Comment Letter; UBS 
Comment Letter.
---------------------------------------------------------------------------

    To the extent that retail investors prefer a stable NAV product and 
funds seek to qualify as retail money market funds under the amended 
rules, there may be negative effects on competition by benefitting fund 
groups with large percentages of retail investors relative to other 
funds. The Commission estimates that, as of February 28, 2014, 39 fund 
complexes (or 46% of all fund complexes) have 75% or more of their 
total assets self-reported as ``retail.'' \718\ There also could be a 
negative effect on competition to the extent that certain fund groups 
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 (retail and institutional). The Commission estimates 
that, as of February 28, 2014, there are approximately 76 fund 
complexes that currently offer separately designated retail and 
institutional money market funds (or series).\719\ 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 an 
existing structure that includes separate retail and institutional 
funds.
---------------------------------------------------------------------------

    \718\ Based on iMoneyNet data (39 fund complexes / 84 total fund 
complexes reported = 46%).
    \719\ Based on data from iMoneyNet.
---------------------------------------------------------------------------

    Two commenters also suggested that a bifurcation of existing assets 
in money market funds into retail and institutional funds might lead to 
a significant reduction in scale and therefore some funds may become 
uneconomical to operate, leading to further consolidation in the 
industry and a reduction in competition.\720\ As noted above, many fund 
complexes already operate under structures that separate retail and 
institutional investors, either by established funds, series, or 
classes, and therefore demonstrate that doing so is not uneconomical. 
We recognize, however, that to the extent there are money market funds 
or fund groups that determine that it would not be economical to 
operate separate retail and institutional individual money market 
funds, there may be a reduction in competition. We believe that such 
effects would be relatively small, as discussed in section III.K below. 
Finally, we note that there may be an adverse effect on competition to 
the extent that large money market funds are able, based on information 
from broker-dealers and other intermediaries, to receive full 
transparency into

[[Page 47801]]

beneficial owners. In this way, larger money market funds may find it 
easier to comply with their policies and procedures (and, in 
particular, with regard to omnibus account holders) to qualify as 
retail money market funds.
---------------------------------------------------------------------------

    \720\ See HSBC Comment Letter; M&T Bank Comment Letter.
---------------------------------------------------------------------------

    To the extent that money market funds are not able to distinguish 
effectively institutional from retail shareholders, it may have 
negative effects on efficiency by permitting ``gaming behavior'' by 
shareholders with institutional behavior patterns who nonetheless 
invest in retail funds. As discussed above, however, we believe the 
natural person test we are adopting reduces significantly the 
opportunity for ``gaming behavior'' when compared with our proposal. We 
also recognize that establishing qualifying retail money market funds 
may also negatively affect fund efficiency to the extent that 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.\721\ The costs of such a re-
organization are discussed below.
---------------------------------------------------------------------------

    \721\ We provide exemptive relief from certain provisions of the 
Act to facilitate the ability of money market funds to convert an 
existing retail fund share class into a separate retail fund series. 
See supra notes 706-709 and accompanying text.
---------------------------------------------------------------------------

    The costs and benefits of the natural person test are discussed 
above. In the Proposing Release, we also quantified the operational 
costs that money market funds, intermediaries, and money market fund 
service providers might incur in implementing and administering a $1 
million daily redemption limit.\722\ As commenters noted, however, we 
expect that the approach we are adopting today, based on limiting 
beneficial ownership to natural persons, is a simpler and more cost-
effective way to achieve our goals. Commenters noted that the natural 
person approach provides a front-end qualifying test that effectively 
requires intermediaries and/or fund advisers to verify the nature of 
each investor only once. As a result, the natural person test reduces 
operational complexity and eliminates some of the need for costly 
programming and ongoing monitoring.\723\ These commenters also noted 
that, although this approach will require some refinements to existing 
systems, these modifications will be significantly less costly than 
building a new system for tracking and aggregating daily shareholder 
redemption activity (as would be required under our proposal). Below, 
we quantify the estimated operational costs associated with 
implementing the natural person test.\724\
---------------------------------------------------------------------------

    \722\ We estimated that the initial costs would range from 
$1,000,000 to $1,500,000 for each fund that chooses to qualify as a 
retail money market fund and that money market funds and 
intermediaries implementing policies and procedures to qualify as 
retail money market funds likely would incur ongoing costs of 20%-
30% of the one-time costs, or between $200,000 and $450,000 per 
year. See Proposing Release, supra note 25, at nn.245 and 246 and 
accompanying text.
    \723\ See Retail Fund Joint Comment Letter.
    \724\ Our cost estimates are informed by the analysis in the 
Proposing Release, comments received, and adjusted to reflect the 
definition of a retail money market fund we are adopting today. See 
Proposing Release, supra note 25, at section III.A.4.d.
---------------------------------------------------------------------------

    The Commission estimates that based on those money market funds 
that self-report as ``retail,'' approximately 195 money market funds 
are likely to seek to qualify as a retail money market fund under our 
amended rules.\725\ We have estimated the ranges of hours and costs 
associated with the natural person test that may be required to perform 
activities typically involved in making systems modifications, 
implementing fund policies and procedures, and performing related 
activities.\726\ Although we do not have the information necessary to 
provide a point estimate of the potential costs associated with the 
natural person test, these estimates include one-time and ongoing costs 
to establish separate funds (or series) if necessary, modify systems 
and related procedures and controls, update disclosure in a fund's 
prospectus, as well as ongoing operational costs. All estimates are 
based on the staff's experience, commenter estimates, and discussions 
with industry representatives. We expect that only funds that determine 
that the benefits of qualifying as a retail money market fund justify 
the costs would seek to qualify and thus bear these costs. Otherwise, 
they would incur the costs of implementing a floating NAV generally or 
decide to liquidate the fund.
---------------------------------------------------------------------------

    \725\ Based on iMoneyNet, as of February 28, 2014.
    \726\ The costs estimated in this section would be spread among 
money market funds, intermediaries, and money market fund service 
providers (e.g., transfer agents and custodians). 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, we have 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.
---------------------------------------------------------------------------

    As discussed above, many money market funds currently are owned by 
both retail and institutional investors, although they often are 
separated into retail and institutional share classes. A fund that 
seeks to qualify as a retail money market fund under our amended rules 
will need to be structured to limit beneficial ownership to only 
natural persons, 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. In addition, funds may 
have one-time costs to obtain shareholder approval to the extent that a 
money market fund's charter documents and/or applicable state law 
require shareholder approval to effect a reorganization into separate 
retail and institutional money market funds.\727\ Funds and 
intermediaries also may incur one-time costs in training staff to 
understand the operation of the fund and effectively implement the 
natural person test.
---------------------------------------------------------------------------

    \727\ One commenter provided survey data suggesting that the 
one-time range of costs of a shareholder vote to segregate retail 
from institutional investors could range from $2 million--$5 million 
(57% of respondents) or $1 million--$2 million (14% of respondents). 
See SIFMA Comment Letter. No other commenters provided cost 
estimates regarding shareholder votes.
---------------------------------------------------------------------------

    In order to qualify as a retail money market fund, a fund will be 
required to adopt and implement policies and procedures reasonably 
designed to restrict beneficial owners to natural persons. Adopting 
such policies and procedures and modifying systems to identify an 
investor as a natural person who is eligible for investment in the fund 
also would involve one-time costs for funds and intermediaries. 
Regarding omnibus accounts, the rule does not prescribe the way in 
which funds should determine that underlying beneficial owners of an 
omnibus account are natural persons. We note that a fund may require 
(as a matter of doing business) that its intermediaries implement its 
policies, including those related to qualification as a retail fund. 
However, there are also other ways for a fund to manage their 
relationships with their intermediaries, such as entering into a 
contractual arrangement or obtaining certifications from the omnibus 
account holder. In preparing

[[Page 47802]]

the following cost estimates, we assumed that funds will generally rely 
on financial intermediaries to implement their policies without 
undergoing the costs of entering into a contractual arrangement with 
the financial intermediaries because funds and intermediaries would 
typically take the approach that is the least expensive. However, some 
funds may choose to undertake voluntarily the costs of obtaining an 
explicit contractual arrangement despite the expense.\728\
---------------------------------------------------------------------------

    \728\ A fund might, as a general business practice, prefer to 
enter into a formal contractual arrangement.
---------------------------------------------------------------------------

    In our proposal, we estimated that the initial costs would range 
from $1,000,000 to $1,500,000 for each fund that seeks to satisfy the 
retail money market fund definition (as proposed, using a daily 
redemption limit).\729\ One commenter provided specific cost estimates 
related to our proposal to define a retail money market fund based on a 
$1,000,000 daily redemption limit, estimating that it would cost the 
fund complex $11,200,000, or $311,000 per fund.\730\
---------------------------------------------------------------------------

    \729\ See supra note 722.
    \730\ See Federated X Comment Letter (``Federated would have to 
create new funds and fund classes in order to implement retail vs. 
institutional fund structures. This would cost approximately $1.7 
million. In order to accomplish client outreach, effect shareholder 
votes, print new regulatory documents, create new sales literature 
and engage with investors as to the new nature of their shares and 
alternatives, we estimate that Federated will expend another $4 
million. Revisiting and revising contractual relationships with 
broker-dealers and other intermediaries to provide for enforcement 
of the $1 million redemption limit would cost a further $1.3 
million. Charges from independent pricing services, custodians, 
record-keepers, and transfer agents are expected at nearly $3 
million. Upgrades to Federated's internal systems and systems that 
interface with customers and transfer agents would cost another $1.2 
million.''). These costs total $11,200,000. Averaged across the 
number of money market funds offered, this commenter estimates the 
one-time implementation costs to be $311,000 per fund ($11,200,000 / 
36 money market funds). See supra note 586 (using Form N-MFP data, 
Federated manages 36 money market funds).
---------------------------------------------------------------------------

    Based on staff experience and review of the comments received, as 
well as the changes to the retail definition in the final amendments, 
we estimate that the one-time costs necessary to implement policies and 
procedures and/or for a fund to qualify as a retail money market fund 
under our amended rules, including the various organizational, 
operational, training, and other costs discussed above, will range from 
$830,000 to $1,300,000 per entity.\731\ Our estimates represent a 
decrease of $170,000 on the low end, and a decrease of $200,000 on the 
high end from our proposed range of estimated operational costs.\732\ 
Our revised cost estimates reflect, as noted by commenters, a more 
cost-effective way to define a retail money market fund. Accordingly, 
our cost estimates take into account the fact that most money market 
funds will largely be able to satisfy the natural person test using 
information that funds already collect and have readily available, and 
reduce the estimated amount of resources necessary, for example, to 
program systems capable of tracking and aggregating daily shareholder 
redemption activity (that would have been required under our 
proposal).\733\
---------------------------------------------------------------------------

    \731\ Estimates also include costs to intermediaries to 
implement systems and procedures to satisfy money market fund 
requirements regarding omnibus accounts. We estimate that the 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 
documents necessary to reorganize fund structures into retail and 
institutional funds; and (iii) preparing training materials and 
administering training sessions for staff in affected areas. Our 
estimates of these operational and related costs, and those 
discussed 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 2013 at infra note 
2214. See infra note 2228 for the various types of professionals we 
estimate 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 estimates generally are based on our assumption that 
funds would use 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.A.2 of this Release.
    \732\ These amounts are calculated as follows: $1,000,000 
(proposed)--$830,000 = $170,000 (low end); $1,500,000 (proposed)--
$1,300,000 = $200,000 (high end). See Proposing Release, supra note 
25, at n.245 and accompanying text.
    \733\ See supra notes 722-724 and accompanying text.
---------------------------------------------------------------------------

    In addition to these one-time costs, as discussed above, funds may 
have one-time costs to obtain shareholder approval to the extent that a 
money market fund's charter documents and/or applicable state law 
require shareholder approval to effect a reorganization into separate 
retail and institutional money market funds. One commenter provided 
survey data that estimated the one-time costs would be between 
$1,000,000 to $5,000,000.\734\ We note, however, that the survey 
respondents are asset managers, many of whom may be responsible for 
fund complexes, and it is not clear whether these cost estimates 
represent costs to a fund complex or to a single fund. Although the 
Commission does not have the information necessary to estimate the 
number of funds that may seek shareholder approval to effect a 
reorganization, we estimate that it will cost, on average, 
approximately $100,000 per fund in connection with a shareholder 
vote.\735\ Finally, money market funds that seek to qualify as retail 
funds will be required to adopt policies and procedures that are 
reasonably designed to limit beneficial owners of the fund to natural 
persons. As discussed in section IV.A.2 (Retail Funds) below, we 
estimate that the initial time costs associated with adopting policies 
and procedures will be $492,800 for all fund complexes.
---------------------------------------------------------------------------

    \734\ See supra note 727.
    \735\ Our estimate is based on the most recently approved 
Paperwork Reduction Act renewal for rule 17a-8 under the Act 
(Mergers of Affiliated Companies), OMB Control No. 3235-0235, 
available at http://reginfo.gov/public/do/PRAViewICR?ref_nbr=201304-3235-015. Our estimate includes legal, mailing, printing, 
solicitation, and tabulation costs in connection with a shareholder 
vote.
---------------------------------------------------------------------------

    Funds that intend to qualify as retail money market funds will 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. Other ongoing costs may include 
systems maintenance, periodic review and updates of policies and 
procedures, and additional staff training. Finally, our estimates 
include ongoing costs for funds to manage and monitor intermediaries' 
compliance with fund policies regarding omnibus accounts. Accordingly, 
we continue to estimate, as we did in the proposal, that money market 
funds and intermediaries likely will incur ongoing costs related to 
implementation of a retail money market fund definition of 20%-30% of 
the one-time costs, or between $166,000 and $390,000 per year.\736\ We 
received no comments on this aspect of our proposal.
---------------------------------------------------------------------------

    \736\ We 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.
---------------------------------------------------------------------------

3. Municipal Money Market Funds
    Both the fees and gates reform and floating NAV reform will apply 
to municipal money market funds (or tax-exempt funds \737\). We discuss 
below the

[[Page 47803]]

key characteristics of tax-exempt funds, commenter concerns regarding 
our proposal (and final amendments) to apply the fees and gates and 
floating NAV reforms to tax-exempt funds, and an analysis of potential 
economic effects. We note, as addressed below, that the majority of the 
comments received relating to tax-exempt funds were given in the 
context of our floating NAV reform.\738\
---------------------------------------------------------------------------

    \737\ ``Municipal money market fund'' and ``tax-exempt fund'' 
are used interchangeably throughout this Release. A municipal money 
market fund that qualifies as a retail money market fund would not 
be subject to the floating NAV reform. See supra section III.C.2.
    \738\ Section III.C.7 below discusses more general reasons for 
not excluding specific types of money market funds from the fees and 
gates amendments. These reasons apply equally to our analysis of 
municipal money market funds and the fees and gates amendments.
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a. Background
    Tax-exempt funds primarily hold obligations of state and local 
governments and their instrumentalities, which pay interest that 
generally is exempt from federal income taxes.\739\ Thus, the majority 
of investors in tax-exempt money market funds are those investors who 
are subject to federal income tax and therefore can benefit from the 
funds' tax-exempt interest. As discussed below, state and local 
governments rely in part on tax-exempt funds to fund public 
projects.\740\ As of February 28, 2014, tax-exempt funds held 
approximately $279 billion of assets, out of approximately $3.0 
trillion in total money market fund assets.\741\
---------------------------------------------------------------------------

    \739\ See 2009 Proposing Release, supra note 66.
    \740\ See infra section III.C.3.c; see also Investment Company 
Institute, Report of the Money Market Working Group, at 18 (Mar. 17, 
2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI 
Report'').
    \741\ Based on data from Form N-MFP.
---------------------------------------------------------------------------

    Industry data suggests institutional investors hold approximately 
29% ($82 billion) of municipal money market fund assets.\742\ This 
estimate is likely high, as omnibus accounts (which often represent 
retail investors) are often categorized as institutional by third-party 
researchers. One commenter, for example, surveyed its institutional 
tax-exempt money market funds, and found that approximately 50% of the 
assets in these ``institutional'' funds were beneficially owned by 
institutions.\743\
---------------------------------------------------------------------------

    \742\ Based on data from iMoneyNet and Form N-MFP as of February 
28, 2014. See supra note 683.
    \743\ See Comment Letter of the Dreyfus Corporation (Mar. 5, 
2014) (``Dreyfus II Comment Letter'').
---------------------------------------------------------------------------

    On average, over 70% of tax-exempt funds' assets (valued based upon 
amortized cost) are comprised of municipal securities issued as 
variable-rate demand notes (``VRDNs'').\744\ The interest rates on 
VRDNs are typically reset either daily or every seven days.\745\ VRDNs 
include a demand feature that provides the investor with the option to 
put the issue back to the trustee at a price of par value plus accrued 
interest.\746\ This demand feature is supported by a liquidity facility 
such as letters of credit, lines of credit, or standby purchase 
agreements provided by financial institutions.\747\ The interest-rate 
reset and demand features shorten the duration of the security and 
allow it to qualify as an eligible security under rule 2a-7. Tax-exempt 
funds also invest in tender option bonds (``TOBs''), which typically 
are floating rate securities that provide the holder with a put option 
at par, supported by a liquidity facility provided by a commercial 
bank.\748\
---------------------------------------------------------------------------

    \744\ Based on Form N-MFP data as of February 28, 2014 (the 
remaining holdings are ``other municipal debt'').
    \745\ See Frank J. Fabozzi & Steven V. Mann eds, Handbook of 
Fixed Income Securities 237 (8th ed. 2012).
    \746\ Id.
    \747\ See Neil O'Hara, The Fundamentals of Municipal Bonds 40-41 
(6th ed. 2012).
    \748\ See id. at 43-44.
---------------------------------------------------------------------------

b. Discussion
    In the Proposing Release, we noted that because most municipal 
money market funds tend to be owned by retail investors, who are among 
the greatest beneficiaries of the funds' tax advantages, most tax-
exempt funds would qualify under our proposed definition of retail 
money market fund and therefore would continue to offer a stable share 
price.\749\ We stated that, although there are some tax-exempt money 
market funds that self-classify as institutional funds, we believed 
these funds' shareholder base typically is comprised of omnibus 
accounts with underlying individual investors. As noted by commenters 
and discussed below, we now understand that only some (and not all) of 
these funds' shareholder base is comprised of omnibus accounts with 
underlying individual investors. We also stated our belief that, like 
many securities in prime funds, municipal securities present greater 
credit and liquidity risk than U.S. government securities and could 
come under pressure in times of stress.
---------------------------------------------------------------------------

    \749\ A few commenters noted that, in addition to individuals, 
corporations, partnerships, and other business entities may enjoy 
the tax benefits of investments in tax-exempt funds. See, e.g., 
Comment Letter of Federated Investors (Regulation of Tax-Exempt 
Money Market Funds) (Sept. 16, 2013) (``Federated VII Comment 
Letter''). One commenter noted that, while corporations may not 
enjoy the tax advantages afforded under the Internal Revenue Code to 
exempt dividends to the full degree that individuals can enjoy them, 
eligible corporations can benefit from a tax exemption under certain 
conditions (such as meeting a minimum holding period). See Dreyfus 
II Comment Letter.
---------------------------------------------------------------------------

    Many commenters suggested that we not apply our floating NAV reform 
\750\ or our fees and gates reform \751\ to municipal money market 
funds. Commenters raised specific concerns about the ability and extent 
to which tax-exempt funds would qualify as retail money market funds as 
proposed (and therefore be permitted to maintain a stable NAV). Several 
commenters noted that high-net-worth individuals, who often invest in 
tax-exempt funds because of the tax benefits, engage in periodic 
transactions that exceed the proposed $1 million daily redemption 
limit, which would effectively disqualify them from investing in a 
retail municipal fund, as proposed.\752\ We are addressing these 
concerns by adopting a definition of retail money market fund that will 
allow many of these individuals to invest in tax-exempt funds that 
offer a stable NAV. Funds that wish to qualify as retail money market 
funds will be required to limit beneficial ownership interests to 
``natural persons'' (e.g., individual accounts registered with social 
security numbers). Because the retail money market fund definition is 
not conditioned on a daily redemption limitation, but instead requires 
that retail money market funds restrict beneficial ownership to natural 
persons, high-net-worth individuals will not be subject to a redemption 
limit and thus should be able to continue investing in tax-exempt funds 
much like they do today.\753\
---------------------------------------------------------------------------

    \750\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; ICI Comment Letter.
    \751\ See, e.g., ICI Comment Letter; J.P. Morgan Comment Letter; 
Vanguard Comment Letter; see also Dreyfus II Comment Letter, 
(suggesting the fees and gates requirements should be limited to 
taxable prime funds); Legg Mason & Western Asset Comment Letter.
    \752\ See, e.g., Fidelity Comment Letter; Dechert Comment 
Letter; Fin. Svcs. Roundtable Comment Letter.
    \753\ Tax-exempt funds would, however, be potentially subject to 
our fees and gates reform.
---------------------------------------------------------------------------

    Several commenters expressed concern that a number of municipal 
money market funds would not qualify as retail money market funds, as 
proposed, because institutional investors hold them. Commenters noted 
that approximately 30% (and historically between 25% and 40%\754\) of 
tax-exempt funds currently self-report as institutional funds.\755\ We 
understand that some but not all of these funds' shareholder base is 
comprised of

[[Page 47804]]

omnibus accounts with underlying individual investors. A number of 
commenters supported the view that most investors in tax-exempt funds 
are individuals.\756\ One commenter stated its belief, however, that 
institutions rather than individuals or natural persons beneficially 
own a significant, if not majority, portion of the assets invested in 
these self-reported institutional tax-exempt funds.\757\ Although we 
understand that some omnibus accounts may be comprised of institutions 
without underlying individual beneficial owners, the lack of a 
statutory or regulatory definition of institutional and retail funds, 
along with a lack of information regarding investor attributes in 
omnibus accounts, prevents us from estimating with precision the 
portion of investors and assets in tax-exempt funds that self-report as 
institutional that are beneficially owned by institutions. As discussed 
above, however, industry data suggests that approximately 30% of 
municipal money market fund assets are held by institutional 
investors--investors that may not qualify to invest in a retail 
municipal money market fund.\758\
---------------------------------------------------------------------------

    \754\ Our staff's analysis, based on iMoneyNet data, shows that 
the amount of municipal money market fund assets held by 
institutional investors varied between 25% to 43% between 2001 to 
2013.
    \755\ See, e.g., BlackRock II Comment Letter; Federated VII 
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment 
Letter.
    \756\ See, e.g., T. Rowe Price Comment Letter (``[t]he tax-
exempt money market is retail-dominated''); Schwab Comment Letter; 
SIFMA Comment Letter.
    \757\ See Dreyfus II Comment Letter, supra note 743 and 
accompanying text. This commenter provided data suggesting that 
approximately 50% of the assets of its self-reported 
``institutional'' tax-exempt funds are beneficially owned by 
institutional investors. We acknowledge that certain tax-exempt 
funds may be beneficially owned by a large number of institutional 
investors. However, this data, which reflects only an analysis of 
this commenter's money market funds (rather than industry-wide 
data), does not necessarily support a finding that a majority of 
such assets is ``institutional'' in nature.
    \758\ See supra note 742.
---------------------------------------------------------------------------

    Several commenters argued that tax-exempt funds should not be 
subject to the fees and gates and floating NAV reforms because the 
municipal money market fund industry is not systemically risky. In 
support, commenters pointed to the relatively small amount of assets 
managed by municipal money market funds, the stability of tax-exempt 
funds during recent periods of market stress, and the diversity of the 
municipal issuer market.\759\ As discussed above, we acknowledge that 
the current institutional municipal money market fund industry is small 
relative to the overall money market fund industry. Despite its 
relatively small size, however, we are concerned that institutional 
investors that currently hold prime funds might be incentivized to 
shift assets from prime funds to municipal money market funds as an 
alternative stable NAV investment. This could undermine the goals of 
reform with respect to the floating NAV requirement by providing an 
easy way for institutional investors to keep stable value pricing while 
continuing to invest in funds with assets that, relatively speaking, 
have a risk character that is significantly closer to prime funds than 
government funds.\760\
---------------------------------------------------------------------------

    \759\ See, e.g., Fidelity Comment Letter; Schwab Comment Letter; 
Deutsche Comment Letter; T. Rowe Price Comment Letter; Dreyfus 
Comment Letter.
    \760\ In addition, as discussed below, municipal money market 
funds may be subject to heavy redemptions, even if they have not 
been in the past. The fees and gates amendments are intended to give 
funds and their boards tools to stem such heavy redemptions.
---------------------------------------------------------------------------

    Commenters argued that historical shareholder flows in municipal 
money market funds, as well as their past resiliency, demonstrate that 
they are not prone to runs or especially risky.\761\ They pointed out 
that shareholder flows from tax-exempt funds were moderate during times 
of recent market stress compared to significant outflows from 
institutional prime money market funds.\762\ A review of money market 
fund industry asset flows during the market stress in 2008 and 2011 
shows that tax-exempt funds remained relatively flat and tracked 
investor flows in other retail prime funds.\763\ We believe that some 
of this stability may be attributable to municipal money market funds' 
significant retail investor base rather than low portfolio risk.\764\ 
In this regard, we note that although investors did not flee municipal 
funds in times of market stress, they also did not move assets into 
municipal funds as they did into government funds.\765\ Accordingly, it 
appears that those investors did not perceive the risk characteristics 
of municipal funds to be similar to those of government funds. 
Consistent with this observation, our analysis indicates that the 
shadow price of tax-exempt funds is distributed more similarly to that 
of prime funds than government funds.\766\ Specifically, the volatility 
of the distribution of municipal money market fund shadow prices is 
significantly larger than the volatility of government funds.\767\ In 
addition, our staff's analysis of historical shadow prices shows that 
tax-exempt funds are more likely than government funds to experience 
large losses.\768\ Thus, we believe municipal funds are more similar in 
nature to prime funds than government funds for purposes of the 
floating NAV reform.
---------------------------------------------------------------------------

    \761\ See, e.g., Fidelity Comment Letter (noting that, more 
recently, the largest municipal bankruptcy (City of Detroit) had no 
discernible effects on money market funds); ICI Comment Letter; J.P. 
Morgan Comment Letter. A number of commenters also noted that during 
these periods of market stress, tax-exempt funds did not experience 
contagion from heavy redemptions like those experienced by 
institutional prime funds. See, e.g., ICI Comment Letter (noting 
that a tax-exempt fund sponsored by Lehman Brothers (the Neuberger 
Berman Tax-Free Fund) had two-thirds of its total net assets 
redeemed, but had no ripple effect on other tax-exempt funds or the 
broader municipal market); Dechert Comment Letter; BlackRock II 
Comment Letter.
    \762\ Id.
    \763\ See iMoneyNet (analyzing money market fund industry flows 
from September 12-December 19, 2008 and June 1-November 16, 2011). 
See also DERA Study, supra note 24, at 11, Figure 3.
    \764\ See ICI Comment Letter (stating that ``[t]he calm response 
of tax-exempt money market fund investors to events in Detroit is 
characteristic of how retail [emphasis added] investors are 
generally perceived to respond to market stresses.'').
    \765\ See DERA Study, supra note 24, at 7-8.
    \766\ Using data collected from Form N-MFP and iMoneyNet, the 
standard deviation of shadow prices (which is a measure used to 
assess the overall riskiness of a fund) estimated over the time 
period from November 2010 to February 2014 are 0.00023, 0.00039, and 
0.00052 for government, prime, and tax-exempt funds, respectively. 
This data shows that the standard deviation of tax-exempt funds is 
statistically significantly larger than the other two types of funds 
with a 99% confidence level. Furthermore, the frequency at which the 
shadow prices for tax-exempt funds is less than 1.000 is greater 
than for government funds and is increasing at lower shadow price 
values. Accordingly, this means that the likelihood for large 
negative returns and hence large losses is greater for tax-exempt 
funds than for government funds.
    \767\ Id.
    \768\ Id.
---------------------------------------------------------------------------

    Several commenters noted that the diversity of the municipal issuer 
market reduces the risks associated with municipal money market 
funds.\769\ We note that although there is some diversity among the 
direct issuers of municipal securities, the providers of most of the 
demand features for the VRDNs, most of which are financial services 
firms, are highly concentrated.\770\ This is a significant 
countervailing consideration because VRDNs comprise the majority of 
tax-exempt funds' portfolios.\771\ This level of concentration 
increases municipal funds' exposure to financial sector risk relative 
to, for example, government funds.\772\ And, in this regard, we are 
mindful of the potential for increased sector risk to the financial 
services firms that provide the demand features if investors reallocate 
assets to tax-exempt funds that are not subject to the fees and gates 
and floating NAV reforms.
---------------------------------------------------------------------------

    \769\ See supra note 759 and accompanying text.
    \770\ See DERA memo ``Municipal Money Market Funds Exposure to 
Parents of Guarantors'' http://www.sec.gov/comments/s7-03-13/s70313-323.pdf.
    \771\ See supra note 744 and accompanying text.
    \772\ Based on a review of Form N-MFP data as of February 28, 
2014, over 10% of the amortized cost value of VRDNs are guaranteed 
by a single bank, and approximately 54% of the amortized cost value 
is guaranteed by 10 banks.
---------------------------------------------------------------------------

    A number of commenters cited the resilient portfolio construction 
of municipal money market funds and

[[Page 47805]]

argued that the liquidity risk, interest rate risk, issuer risk, and 
credit/default risk of tax-exempt funds are more similar to government 
funds than prime funds.\773\ As discussed above, however, staff 
analysis shows that the distribution of fluctuations in the shadow NAV 
of tax-exempt funds is more similar to that of prime funds than 
government funds.\774\ Municipal securities typically present greater 
credit and liquidity risk than government securities.\775\ We believe 
that recent municipal bankruptcies have highlighted liquidity concerns 
related to municipal money market funds and note that, although 
municipal money market funds have previously weathered these events, 
there is no guarantee that they will be able to do so in the future.
---------------------------------------------------------------------------

    \773\ See, e.g., Fidelity Comment Letter (weekly liquid assets 
of tax-exempt funds is typically more than double the current 30% 
requirement under rule 2a-7). See also, e.g., ICI Comment Letter; 
SIFMA Comment Letter; Invesco Comment Letter; Legg Mason & Western 
Asset Comment Letter. Interest rate risk, as measured by weighted 
average maturity, is consistently lower for tax-exempt funds 
(averaging 35 days, well below the 60-day requirement in rule 2a-7) 
than prime and government funds. See Fidelity Comment Letter (citing 
iMoneyNet). Commenters also argued that the credit risk of tax-
exempt funds is more similar to government funds than prime funds. 
See, e.g., ICI Comment Letter (tax-exempt securities have low credit 
risk because municipalities are not generally interconnected and 
deterioration occurs over a protracted time); Dreyfus Comment Letter 
(many distressed issues (e.g., City of Detroit) become ineligible 
under rule 2a-7s risk-limiting conditions and therefore bankruptcy 
does not affect direct holdings of tax-exempt funds).
    \774\ See supra note 766.
    \775\ See, e.g., Notice of the City of Detroit, Michigan's 
bankruptcy filing with the United States Bankruptcy Court, Eastern 
District of Michigan, available at http://www.mieb.uscourts.gov/sites/default/files/detroit/Chp%209%20Detroit.pdf.
---------------------------------------------------------------------------

    Further, although we recognize that the structural features of 
VRDNs may provide tax-exempt funds with higher levels of weekly liquid 
assets and reduced interest rate risk as compared with prime funds, we 
do not find that on balance that warrants treating municipal funds more 
like government funds than prime funds. This is so because, among other 
things, the liquidity risk, interest rate risk, and credit risk 
characteristics result from concentrated exposure to VRDNs, and not 
because the municipal debt securities underlying the VRDNs or the 
related structural support are inherently liquid, free from interest 
rate risk, or immune from credit risks in the way that government 
securities generally are.\776\ Indeed, long-term municipal debt 
securities underlie most VRDNs, and these securities infrequently 
trade.\777\ Instead, the liquidity is provided through the demand 
feature to a concentrated number of financial institutions, and money 
market funds have experienced problems in the past when a large number 
of puts on securities were exercised at the same time.\778\
---------------------------------------------------------------------------

    \776\ See supra note 744 and accompanying text.
    \777\ See supra notes 744-748 and accompanying text.
    \778\ See DERA Study, supra note 24, at Table 1 (discussing how 
money market funds were adversely affected because of credit events 
that resulted in large numbers of securities being ``put'' back to 
demand feature providers, which resulted in bankruptcy, including 
Mutual Benefit Life Insurance Company and General American Life 
Insurance Co.).
---------------------------------------------------------------------------

    In fact, when we adopted the 2010 amendments to rule 2a-7, we cited 
to commenter concerns regarding the market structure of VRDNs and heavy 
reliance of tax-exempt funds on these security investments in 
determining not to require that municipal money market funds meet the 
10% daily liquid asset requirement that other money market funds must 
satisfy.\779\ Commenters did not generally support adding such a 
requirement, but the lack of a mandated supply of daily liquid assets 
leaves these funds more exposed to potential increases in redemptions 
in times of fund and market stress.\780\ As a result, the portfolio 
composition of some tax-exempt funds may change and present different 
risks in the future. In addition, because of the daily liquidity issues 
associated with VRDNs and the fact that tax-exempt money market funds 
are not required to maintain 10% daily liquid assets,\781\ these funds 
in particular may experience stress on their liquidity necessitating 
the use of fees and gates to manage redemptions (even with respect to 
the lower level of redemptions expected in a tax-exempt retail money 
market fund as compared to an institutional prime fund).
---------------------------------------------------------------------------

    \779\ See 2010 Adopting Release, supra note 17, at nn.240-243 
and accompanying text.
    \780\ See Fidelity Comment Letter; but see Wells Fargo Comment 
Letter. We note also that new regulations also may affect the 
issuance of the dominant types of securities that now provide the 
stability of tax-exempt funds. For example, because TOB programs are 
not exempt from the Volcker rule, banks and their affiliates will no 
longer be able to sponsor or provide support to a TOB program. See 
Volcker Rule, infra note 782. As a result, the portfolio composition 
of some tax-exempt funds may change and present different risks in 
the future.
    \781\ See rule 2a-7(d)(4)(ii).
---------------------------------------------------------------------------

    Several commenters also argued that certain structural features of 
tax-exempt funds make them more stable than prime money market funds 
and therefore these commenters believe that the floating NAV reform 
should not apply to tax-exempt funds. For example, these commenters 
observed that a tax-exempt fund's investments, primarily VRDNs, and, to 
a lesser extent, TOBs,\782\ have structural features (e.g., contractual 
credit enhancements or liquidity support provided by highly rated banks 
and one-to-seven day interest rate resets) that facilitate trading at 
par in the secondary market.\783\ We agree that these features lower 
the risk of portfolio holdings as compared to prime money market funds, 
but also recognize that holding municipal money market funds presents 
higher risks than those associated with government or Treasury funds. 
Not all VRDNs have credit support,\784\ and tax-exempt funds present 
credit risk.\785\ Accordingly, we

[[Page 47806]]

do not agree with commenters that, as noted above, suggest that the 
credit risk of tax-exempt funds is more similar to government funds 
than prime funds.
---------------------------------------------------------------------------

    \782\ Participation by banks and their affiliates in TOB 
programs are subject to the prohibitions and restrictions applicable 
to covered funds under the recently adopted Volcker Rule 
(implemented by Title VI of the Dodd-Frank Act, named for former 
Federal Reserve Chairman Paul Volcker, Section 619 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (12 U.S.C. 1851) 
(``Volcker Rule'')).
    \783\ See, e.g., Fidelity Comment Letter; ICI Comment Letter; 
SIFMA Comment Letter.
    \784\ Based on Form N-MFP data as of February 28, 2014, only 57% 
of VRDNs, which make up a majority of the assets in municipal money 
market funds, have a guarantee that protects a fund in case of 
default. In comparison, the federal government guarantees all 
government securities held by government funds.
    \785\ Credit risk may result from the financial health of the 
issuer itself, such as when the city of Detroit recently filed for 
bankruptcy, becoming the largest municipal issuer default in U.S. 
history, leading to significant outflows from municipal bond funds. 
See Jeff Benjamin, Detroit bankruptcy has surprising long-term 
implications for muni bond market, Crain's Detroit Business (Dec. 3, 
2013) http://www.crainsdetroit.com/article/20131203/NEWS/131209950/detroit-bankruptcy-has-surprising-long-term-implications-for-muni#. 
Although Detroit's credit deteriorated over a long period of time 
and thus the bankruptcy did not cause tax-exempt money market funds, 
which had largely anticipated the event, to experience significant 
losses, in the past there have not have not been significant lead 
times before a municipality evidenced a credit deterioration. See, 
e.g., ICI Comment Letter. For example, Orange County, California, 
had high-quality bond credit ratings just before filing one of the 
largest municipal bankruptcies in U.S. history on December 6, 1994. 
See Handbook of Fixed Income Securities, supra note 745, at 239. 
Orange County caused one money market fund to break the buck and 
several sponsors to inject millions of dollars of additional cash to 
rescue their funds. See, e.g., Viral V. Acharya et al, Regulating 
Wall Street: The Dodd-Frank Act and the New Architecture of Global 
Finance 308 (2011); see also Suzanne Barlyn, Investing Strategy What 
the Orange County Fiasco Means to the Muni Bond Market, Fortune 
(Jan. 16, 1995), http://archive.fortune.com/magazines/fortune/fortune_archive/1995/01/16/201819/index.htm. Another type of credit 
risk arises when financial institutions provide credit enhancement 
to municipal securities. For example, in 1992, Mutual Benefit Life 
Insurance Company (``Mutual Benefit'') went into conservatorship 
with the New Jersey Insurance Commissioner. The company had 
guaranteed forty-three municipal bond issues totaling $600 million, 
which financed money-losing real estate projects. Mutual Benefit's 
insolvency resulted in the termination of its guarantee on the bonds 
and halted interest payments resulting in losses for investors. See 
C. Richard Lehmann, Municipal Bond Defaults, in The Handbook of 
Municipal Bonds 509 (Susan C. Heide et al. eds., 1994).
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    For all of the above reasons, we believe that tax-exempt funds 
should be subject to the fees and gates and floating NAV reforms. As 
discussed, the risk profile of institutional municipal money market 
funds more closely approximates that of prime funds than government 
funds. Tax-exempt funds present credit risk, typically rely on a 
concentrated number of financial sector put or guarantee providers, and 
have portfolios comprised largely of a single type of structured 
investment product--all of which may present future risks that may be 
exacerbated by a potential migration of investors from prime funds that 
are unable or unwilling to invest in a floating NAV money market fund 
or money market fund that may impose fees and gates. Accordingly, we 
believe that tax-exempt funds should be subject to the fees and gates 
and floating NAV reforms adopted today.\786\
---------------------------------------------------------------------------

    \786\ Our rationale is consistent with our finding, discussed 
above, that we no longer believe that exempting institutional prime 
money market funds under section 6(c) of the Act is appropriate. See 
supra note 446 and accompanying text .
---------------------------------------------------------------------------

c. Economic Analysis of FNAV
    Although we expect that many tax-exempt funds will qualify as 
retail money market funds and therefore be able to maintain a stable 
NAV (as they do today), there are, as we discussed above, some 
institutional investors in municipal money market funds that may be 
unable or unwilling to invest in a floating NAV fund.\787\ To the 
extent that institutional investors continue to invest in a floating 
NAV municipal money market fund, the benefits of a floating NAV 
discussed in section III.B extend to these types of funds. Because a 
floating NAV requirement may reduce investment in those funds, however, 
we recognize that there will likely be costs for the sponsors of tax-
exempt funds, the institutions that invest in these types of funds, and 
tax-exempt issuers. These costs are the same as those described in 
section III.B for institutional prime funds and the costs described in 
section III.I for corporate issuers.
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    \787\ We believe that the economic analysis that follows would 
apply equally in the context of the fees and gates reform. For a 
discussion of the economic implications that may arise for 
investors, including retail investors who may be unable or unwilling 
to invest in a fund that can impose fees and gates, including 
potential implications on state and local funding, see infra section 
III.K.
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    To the extent that institutions currently invest in tax-exempt 
funds and are unwilling to invest in a floating NAV tax-exempt fund, 
the demand for municipal securities, for example, may fall and the 
costs of financing for municipalities may rise.\788\ We anticipate the 
impact, however, will likely be relatively small. As of the last 
quarter of 2012, tax-exempt funds held approximately 7% of the 
municipal debt outstanding.\789\ Of that 7%, institutional investors, 
who might divest their municipal fund assets if they do not want to 
invest in a floating NAV fund, held approximately 30% of municipal 
money market fund assets.\790\ Accordingly, we estimate institutional 
tax-exempt funds hold approximately 2% of the total municipal debt 
outstanding and thus 2% is at risk of leaving the municipal debt 
market.\791\ Although this could impact capital formation for 
municipalities, there are several reasons to believe that the impact 
would likely be small (including minimal impact on efficiency and 
competition, if any). First, institutional investors that currently 
invest in municipal funds likely value the tax benefits of these funds 
and many may choose to remain invested in them to take advantage of the 
tax benefits even though they might otherwise prefer stable to floating 
NAV funds. Second, to the extent that institutional investors divesting 
municipal funds lead to a decreased demand for municipal debt 
instruments, other investors may fill the gap. As discussed in the 
Proposing Release, ``Between the end of 2008 and the end of 2012, money 
market funds decreased their holdings of municipal debt by 34% or 
$172.8 billion.\792\ Despite this reduction in holdings by money market 
funds, municipal issuers increased aggregate borrowings by over 4% 
between the end of 2008 and the end of 2012. Municipalities were able 
to fill the gap by attracting other investor types. Other types of 
mutual funds, for example, increased their municipal securities 
holdings by 61% or $238.6 billion.'' \793\
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    \788\ A number of commenters argued that applying our floating 
NAV reform to tax-exempt funds would reduce demand for municipal 
securities and raise the costs of financing. See, e.g., Fidelity 
Comment Letter (noting that tax-exempt funds purchase approximately 
65% of short-term municipal securities and that fewer institutional 
investors in tax-exempt funds will lead to less purchasing of short-
term municipal securities by tax-exempt funds and a corresponding 
higher yield paid by municipal issuers to attract new investors); 
BlackRock II Comment Letter; Federated VII Comment Letter; ICI 
Comment Letter; Comment Letter of Mayors, City of Irving, TX, et al 
(Sept. 12, 2013) (``U.S. Mayors Comment Letter'').
    \789\ Other published data is consistent with this estimate. 
See, for example, the Federal Reserve Board ``Flow of Funds Accounts 
of the United States'' (Z.1), which details the flows and levels of 
municipal securities and loans, to estimate outstanding municipal 
debt (March 6, 2014), available at http://www.federalreserve.gov/releases/z1/current/. These estimates are consistent with previous 
estimates presented in U.S. Securities and Exchange Commission. 2012 
Report on the Municipal Securities Market. The estimates in the 2012 
report were based on data from Mergent's Municipal Bond Securities 
Database.
    \790\ See supra note 742 and accompanying text.
    \791\ This estimate is calculated as follows: tax-exempt funds 
hold 7% of municipal debt outstanding x 30% of tax-exempt assets 
held by institutional investors = 2.1% of total tax-exempt debt held 
by institutions.
    \792\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data.
    \793\ See Proposing Release, supra note 25, at 309.
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    Although institutional municipal funds represent a relatively small 
portion of the municipal debt market, we recognize that these funds 
represent a significant portion of the short-term municipal debt 
market.\794\ According to Form N-MFP data, municipal money market funds 
held $256 billion in VRDNs and short-term municipal debt as of the last 
quarter of 2013.\795\ Effectively, municipal money market funds 
absorbed nearly 100% of the outstanding VRDNs and short-term municipal 
debt. Considering that institutional tax-exempt funds represented 
approximately 30% of the municipal money market fund market, it follows 
that institutional tax-exempt funds likely held about $77 billion in 
VRDNs and short-term municipal debt. Any reduction in municipal funds 
therefore could have an appreciable impact on the ability of 
municipalities to obtain short-term lending. That said, this impact 
could be substantially mitigated because, as discussed above, other 
market participants may buy these securities or municipalities will 
adapt to a changing market by, for example, altering their debt 
structure. As discussed in the Proposing Release, ``[t]o make their 
issues attractive to alternative lenders, municipalities lengthened the 
terms of some of their debt securities,'' \796\ in the face of changing 
market conditions in recent years. To the extent that other market 
participants step in and fill the potential gap in demand, competition 
may increase. To the extent other market participants do not step in 
and fill the gap, capital formation may be adversely affected. Finally, 
if municipalities are required to alter their debt structure to foster 
demand for their securities (e.g.,

[[Page 47807]]

because demand declined as a result of our amendments), there may be an 
adverse effect on efficiency. Although we discuss above ways in which 
the short-term municipal debt market may adapt to continue to raise 
capital as it does today, we acknowledge that our floating NAV reform 
will impact institutional investors in tax-exempt funds and therefore 
likely impact the short-term municipal markets. On balance, however, we 
believe that realizing the goals of this rulemaking, including 
recognizing the concerns discussed above with respect to the risks 
presented by tax-exempt funds, justifies the potential adverse effects 
on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \794\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter.
    \795\ Based on data from N-MFP and iMoneyNet.
    \796\ See Proposing Release, supra note 25, at 309.
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4. Implications for Local Government Investment Pools
    As we discussed in the Proposing Release, we recognize that many 
states have established local government investment pools (``LGIPs''), 
money market fund-like investment pools that invest in short-term 
securities,\797\ which are required by law or investment policies to 
maintain a stable NAV per share.\798\ Accordingly, as we discussed in 
the Proposing Release, the floating NAV reform may have implications 
for LGIPs, including the possibility that state statutes and policies 
may need to be amended to permit the operation of investment pools that 
adhere to amended rule 2a-7.\799\ In addition, some commenters 
suggested that our floating NAV reform, as well as the liquidity fees 
and gates requirement, may result in outflows of LGIP assets into 
alternative investments that provide a stable NAV and/or do not 
restrict liquidity.\800\
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    \797\ LGIPs tend to emulate typical money market funds by 
maintaining a stable NAV per share through investments in short-term 
securities. See infra III.K.1, Table 1, note N.
    \798\ See, e.g., Comment Letter of U.S. Chamber of Commerce to 
the Hon. Elisse Walter (Feb. 13, 2013) (``Chamber III Comment 
Letter''), 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. Sec.  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.K.1, Table 1, note N.
    \799\ GASB states that LGIPs that are operated in a manner 
consistent with rule 2a-7 (i.e., a ``2a-7-like pool'') may use 
amortized cost to value securities (and presumably, facilitate 
maintaining a stable NAV per share). See GASB, Statement No. 31, 
Accounting and Financial Reporting for Certain Investments and for 
External Investment Pools (Mar. 1997).
    \800\ See, e.g., Comment Letter of TRACS Financial/Institute of 
Public Investment Management (Sept. 17, 2013) (``TRACS Financial 
Comment Letter''); Comment Letter of Treasurer, State of Georgia 
(Sept. 16, 2013) (``Ga. Treasurer Comment Letter''); Comment Letter 
of County of San Diego Treasurer-Tax Collector (Sept. 17, 2013) 
(``San Diego Treasurer Comment Letter''). Because we are unable to 
predict how GASB will respond to our final amendments to rule 2a-7, 
we cannot quantify the extent to which LGIP assets may migrate into 
alternative investments.
---------------------------------------------------------------------------

    A few commenters noted that it is the GASB reference to ``2a-7 
like'' funds that links LGIPs to rule 2a-7, and not state 
statutes.\801\ Some commenters noted that our money market fund reforms 
do not directly affect LGIPs because the decision as to whether LGIPs 
follow our changes to rule 2a-7 is determined by GASB and the states, 
not the Commission.\802\ Some commenters suggested that, in response to 
our floating NAV reform, GASB and the states might decouple LGIP 
regulation from rule 2a-7 and continue to operate at a stable 
value.\803\ A few commenters suggested that we make clear that the 
changes we are adopting to rule 2a-7 are not intended to apply to 
LGIPs,\804\ and also reiterated concerns similar to those raised by 
other commenters on our floating NAV reform more generally (e.g., 
concerns about using market-based valuation, rather than amortized 
cost).\805\
---------------------------------------------------------------------------

    \801\ See, e.g., TRACS Financial Comment Letter; Federated IX 
Comment Letter.
    \802\ See, e.g., Federated II Comment Letter; Ga. Treasurer 
Comment Letter; Va. Treasury Comment Letter.
    \803\ See, e.g., Federated II, Comment Letter; Federated IV 
Comment Letter; TRACS Financial Comment Letter.
    \804\ See, e.g., Ga. Treasurer Comment Letter; Va. Treasury 
Comment Letter.
    \805\ See Ga. Comment Letter; Comment Letter of West Virginia 
Board of Treasury Investments (Sept. 17, 2013) (``WV Bd. of Treas. 
Invs. Comment Letter'').
---------------------------------------------------------------------------

    We acknowledge, as noted by commenters, that there may be effects 
and costs imposed on LGIPs as a result of the reforms we are adopting 
today. We expect it is likely that GASB will reevaluate its accounting 
standards in light of the final amendments to rule 2a-7 that we are 
adopting today and take action as it determines appropriate.\806\ We do 
not, however, have authority over the actions that GASB may or may not 
take, nor do we regulate LGIPs under rule 2a-7 or otherwise. In order 
for certain investors to continue to invest in LGIPs as they do today, 
state legislatures may determine that they need to amend state statutes 
and policies to permit investment in investment pools that adhere to 
rule 2a-7 as amended (unless GASB were to de-couple LGIP accounting 
standards from rule 2a-7). GASB and state legislatures may address 
these issues during the two-year compliance period for the fees and 
gates and floating NAV reforms.\807\ As noted above, a few commenters 
suggested that state statutes and investment policies may need to be 
amended, but did not provide us with information regarding how various 
state legislatures and other market participants might react. 
Accordingly, we remain unable to predict how various state legislatures 
and other market participants will react to our reforms, nor do we have 
the information necessary to provide a reasonable estimate of the 
impact on LGIPs or the potential effects on efficiency, competition, 
and capital formation.\808\
---------------------------------------------------------------------------

    \806\ GASB has currently included as a potential project in 2014 
an agenda item to identify potential alternative pool structures 
that could be suitable in the event that the Commission amends the 
way in which money market funds operate under rule 2a-7, including a 
move to a floating NAV. See Government Accounting Standards Board, 
Technical Plan for the First Third of 2014: Technical Projects (2a7-
Like External Investment Pools), available at http://gasb.org/cs/ContentServer?c=Document_C&pagename=GASB%2FDocument_C%2FGASBDocumentPage&cid=1176163713461.
    \807\ See infra section III.N.
    \808\ As noted above, we do not have authority over the actions 
of GASB and/or its decision to facilitate the operation of LGIPs as 
stable value investment vehicles through linkage to rule 2a-7 
(including, as amended today).
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5. Unregistered Money Market Funds Operating Under Rule 12d1-1
    Several commenters expressed concern regarding amended rule 2a-7's 
effect on unregistered money market funds that choose to operate under 
certain provisions of rule 12d1-1 under the Investment Company 
Act.\809\ Rule 12d1-1 permits investment companies (``acquiring 
investment companies'') to acquire shares of registered money market 
funds in the same or in a different fund group in excess of the 
limitations set forth in section 12(d)(1) of the Investment Company 
Act.\810\ In

[[Page 47808]]

addition to providing an exemption from section 12(d)(1) of the 
Investment Company Act, rule 12d1-1 also provides exemptions from 
section 17(a) and rule 17d-1, which restrict a fund's ability to enter 
into transactions and joint arrangements with affiliated persons.\811\ 
A fund's investments in unregistered money market funds is not 
restricted by section 12(d)(1).\812\ Nonetheless, these investments are 
subject to the affiliate transaction restrictions in section 17(a) and 
rule 17d-1 and therefore require exemptive relief from such 
restrictions.\813\ Rule 12d1-1 thus permits a fund to invest in an 
unregistered money market fund without having to comply with the 
affiliate transaction restrictions in section 17(a) and rule 17d-1, 
provided that the unregistered money market fund satisfies certain 
conditions in rule 12d1-1.
---------------------------------------------------------------------------

    \809\ Dechert Comment Letter; Comment Letter of Russell 
Investments (Sept. 17, 2013) (``Russell Comment Letter''); 
Oppenheimer Comment Letter; UBS Comment Letter. See also Wells Fargo 
Comment Letter (arguing that proposed amendments to Form PF should 
not apply to unregistered liquidity vehicles owned exclusively by 
registered funds and complying with rule 12d1-1 under the Investment 
Company Act). We address the Form PF requirements for unregistered 
money market funds below. See infra section III.H.
    \810\ Under section 12(d)(1)(A), an investment company (and 
companies or funds it controls) is generally prohibited from 
acquiring more than three percent of another investment company's 
outstanding voting securities, investing more than five percent of 
its total assets in any given investment company, and investing more 
than 10 percent of its total assets in investment companies in the 
aggregate. See also section 12(d)(1)(B) (limiting the sale of 
registered open-end fund shares to other funds).
    \811\ Section 17(a) generally prohibits affiliated persons of a 
registered fund (``first-tier affiliates'') or affiliated persons of 
the fund's affiliated persons (``second-tier affiliates'') from 
selling securities or other property to the fund (or any company the 
fund controls). Section 17(d) of the Investment Company Act makes it 
unlawful for first- and second-tier affiliates, the fund's principal 
underwriters, and affiliated persons of the fund's principal 
underwriters, acting as principal, to effect any transaction in 
which the fund, or a company it controls, is a joint or a joint and 
several participant in contravention of Commission rules. Rule 17d-
1(a) prohibits first- and second-tier affiliates of a registered 
fund, the fund's principal underwriters, and affiliated persons of 
the fund's principal underwriter, acting as principal, from 
participating in or effecting any transaction in connection with any 
joint enterprise or other joint arrangement or profit-sharing plan 
in which the fund (or any company it controls) is a participant 
unless an application regarding the enterprise, arrangement or plan 
has been filed with the Commission and has been granted.
    \812\ Private funds are generally excluded from the definition 
of an ``investment company'' for purposes of the Investment Company 
Act. However, private funds that fall under section 3(c)(1) or 
3(c)(7) are deemed to be an investment company for purposes of the 
limitations set forth in section 12(d)(1)(A)(i) and 12(d)(1)(B)(i) 
governing the purchase or other acquisition by such private fund of 
any security issued by any registered investment company and the 
sale of any securities issued by any registered investment company 
to any such private fund. Although a private fund is subject to the 
limitations set forth in section 12(d) with respect to its 
investment in a registered investment company, a registered 
investment company is not subject to the limitations set forth in 
section 12(d) with respect to its investment in any such private 
fund.
    \813\ See Funds of Funds Investments, Investment Company Act 
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)].
---------------------------------------------------------------------------

    Unregistered money market funds typically are organized by a fund 
adviser for the purpose of managing the cash of other investment 
companies in a fund complex and operate in almost all respects as a 
registered money market fund, except that their securities are 
privately offered and thus not registered under the Securities 
Act.\814\ For purposes of investments in an unregistered money market 
fund, the rule 12d1-1 exemption from the affiliate transaction 
restrictions is available only for investments in an unregistered money 
market fund that operates like a money market fund registered under the 
Investment Company Act. To be eligible, an unregistered money market 
fund is required to (i) limit its investments to those in which a money 
market fund may invest under rule 2a-7, and (ii) undertake to comply 
with all other provisions of rule 2a-7.\815\ Therefore, unless 
otherwise exempted, unregistered money market funds choosing to operate 
under rule 12d1-1 would need to comply with the amendments to rule 2a-7 
we are adopting today.
---------------------------------------------------------------------------

    \814\ Id.
    \815\ Rule 12d1-1(d)(2)(ii). In addition, the unregistered money 
market fund's adviser must be registered as an investment adviser 
with the Commission. See rule 12d1-1(b)(2)(ii). In order for a 
registered fund to invest in reliance on rule 12d1-1 in an 
unregistered money market fund that does not have a board of 
directors, the unregistered money market fund's investment adviser 
must perform the duties required of a money market fund's board of 
directors under rule 2a-7. See rule 12d1-1(d)(2)(ii)(B). Lastly, the 
investment company is also required to reasonably believe that the 
unregistered money market fund operates like a registered money 
market fund and that it complies with certain provisions of the 
Investment Company Act. See rule 12d1-1(b)(2)(i).
---------------------------------------------------------------------------

    Several commenters argued that unregistered money market funds that 
currently conform their operations to the requirements of rule 12d1-1 
should not be required to comply with certain provisions of our 
amendments to rule 2a-7, particularly our floating NAV and liquidity 
fees and gates amendments,\816\ and no commenters argued otherwise. 
Some of these commenters argued that the ability to invest in 
unregistered money market funds is a valuable tool for investment 
companies, because such unregistered money market funds are designed to 
accommodate the daily inflows and outflows of cash of the acquiring 
investment company, and can be operated at a lower cost than registered 
investment companies.\817\ Some of these commenters also argued that 
requiring unregistered money market funds to adopt a floating NAV would 
reduce the attractiveness of unregistered money market funds and 
possibly eliminate the unregistered fund as a cash management tool for 
an acquiring investment company.\818\
---------------------------------------------------------------------------

    \816\ Dechert Comment Letter; Russell Comment Letter; 
Oppenheimer Comment Letter; UBS Comment Letter.
    \817\ See, e.g., Dechert Comment Letter; Russell Comment Letter; 
UBS Comment Letter.
    \818\ See, e.g., Dechert Comment Letter; Russell Comment Letter.
---------------------------------------------------------------------------

    Although we recognize the benefits of using unregistered money 
market funds for these purposes, we do not believe that these types of 
funds are immune from the risks posed by money market funds generally. 
Several commenters argued that unregistered money market funds relying 
on rule 12d1-1 do not present the type of risk that our amendments are 
designed to reduce.\819\ These commenters also argued that, given that 
unregistered money market funds often are created solely for investment 
by acquiring investment companies and typically have the same sponsor, 
there is little concern of unforeseeable large-scale redemptions or 
runs on these funds.\820\
---------------------------------------------------------------------------

    \819\ Id.
    \820\ Id.
---------------------------------------------------------------------------

    We disagree, and we believe that if registered funds invest in 
unregistered money market funds in a different fund complex, these 
unregistered funds are equally susceptible to the concerns that our 
amendments are designed to address, including concerns about the risks 
of investors' incentives to redeem ahead of other investors in times of 
market stress and the resulting potential dilution of investor shares. 
For example, if multiple registered funds are investing in an 
unregistered money market fund in a different fund complex, a 
registered fund in one fund complex may have an incentive to redeem 
shares in times of market stress prior to the redemption of shares by 
funds in other fund complexes. This redemption could have a potentially 
negative impact on the remaining registered funds that are investing in 
the unregistered money market and could increase the risk of dilution 
of shares for the remaining registered funds.
    We also believe that unregistered money market funds that are being 
used solely as investments by investment companies in the same fund 
complex remain susceptible to redemptions in times of fund and market 
stress. For example, if multiple registered funds are invested in an 
unregistered money market fund in the same fund complex, a portfolio 
manager of one registered fund may have an incentive to redeem shares 
in times of market stress, which could have a potentially negative 
impact on the other registered funds that may also be invested in the 
unregistered fund. After further consideration regarding the 
comparability of risk in these funds, we believe that it is appropriate 
that our floating NAV

[[Page 47809]]

amendments apply to unregistered money market funds that conform their 
operations to the requirements of rule 12d1-1.\821\
---------------------------------------------------------------------------

    \821\ We note that unregistered money market funds that 
otherwise meet the definition of a government money market fund as 
defined in rule 2a-7(c)(2)(iii) would not be subject to the floating 
NAV requirement. See rule 2a-7(a)(16).
---------------------------------------------------------------------------

    Some commenters also argued that our liquidity fees and gates 
amendments are ill-suited for unregistered money market funds.\822\ 
Specifically, these commenters noted that under rule 12d1-1, the 
adviser typically performs the function of the unregistered fund's 
board for purposes of compliance with rule 2a-7.\823\ Therefore, these 
commenters argued, if fees and gates are implemented, the adviser would 
be called upon to make decisions about liquidity fees and gates, which 
could present a potential conflict of interest in situations when an 
affiliated investment company advised by the same adviser would be the 
redeeming shareholder.\824\
---------------------------------------------------------------------------

    \822\ See Dechert Comment Letter; Russell Comment Letter; UBS 
Comment Letter.
    \823\ Id.
    \824\ Id.
---------------------------------------------------------------------------

    We recognize that in many cases the adviser to an unregistered 
money market fund typically performs the function of the fund's 
board,\825\ and that this may create conflicts of interest. We continue 
to believe that, as discussed above in section III.A.2.b and given the 
role of independent directors, a fund's board is in the best position 
to determine whether a fee or gate is in the best interests of the 
fund. However, when there is no board of directors, we believe that it 
is appropriate for the adviser to the fund to determine when and how a 
fund will impose liquidity fees and/or redemption gates. We have 
previously stated that, in order for a registered fund to invest in 
reliance on rule 12d1-1 in an unregistered money market fund that does 
not have a board of directors (because, for example, it is organized as 
a limited partnership), the unregistered money market fund's investment 
adviser must perform the duties required of a money market fund's board 
of directors under rule 2a-7.\826\ In addition, we note that investment 
advisers are subject to a fiduciary duty, which requires them, when 
faced with conflicts of interest, to fully disclose to clients all 
material information, a duty that is intended ``to eliminate, or at 
least expose, all conflicts of interest which might include an 
investment adviser--consciously or unconsciously--to render advice 
which was not disinterested.'' \827\ While we cannot determine whether 
a conflict of interest exists in every case of an adviser advising both 
a registered fund and unregistered money market fund under rule 12d1-1, 
we note that the adviser is subject to the requirement to adopt and 
implement written policies and procedures reasonably designed to 
prevent violation of the Advisers Act and the rules thereunder, as 
required by rule 206(4)-7 under the Advisers Act.\828\
---------------------------------------------------------------------------

    \825\ See supra note 815.
    \826\ See Funds of Funds Release, supra note 813, at n.42. See 
also supra note 815.
    \827\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 
194 (1963).
    \828\ See rule 206(4)-7 of the Advisers Act (making it unlawful 
for an investment adviser registered with the Commission to provide 
investment advice unless the adviser has adopted and implemented 
written policies and procedures reasonably designed to prevent 
violation of the Advisers Act by the adviser or any of its 
supervised persons).
---------------------------------------------------------------------------

6. Master/Feeder Funds--Fees and Gates Requirements
    We are adopting, as suggested by a commenter, a provision 
specifying the treatment of feeder funds in a master/feeder fund 
structure under the fees and gates requirements.\829\ This provision 
will not allow a feeder fund to independently impose a fee or gate in 
reliance on today's amendments.\830\ However, under the amended rule, a 
feeder fund will be required to pass through to its investors a fee or 
gate imposed by the master fund in which it invests.\831\ In response 
to our request for comment on whether particular funds or redemptions 
should not be subject to fees and gates, a commenter recommended that 
we permit a master fund and its board, but not a feeder fund and its 
board, to impose and set the terms of a fee or gate.\832\ The feeder 
fund would then have to ``institute'' the fee or gate on its 
redemptions ``at the times and in the amounts instituted by the master 
fund.'' \833\ Another commenter suggested, however, that fund boards 
should be given discretion to impose fees and/or gates on either or 
both a master or feeder fund(s).\834\
---------------------------------------------------------------------------

    \829\ See rule 2a-7(c)(2)(v) (defining ``feeder fund'' as any 
money market fund that owns, pursuant to section 12(d)(1)(E), shares 
of another money market fund).
    \830\ See id.
    \831\ Id.
    \832\ See Stradley Ronon Comment Letter.
    \833\ Id.
    \834\ See UBS Comment Letter.
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    We have considered the comments received and have been persuaded 
that a feeder fund in a master/feeder structure should only be 
permitted to pass through the fees and gates imposed by the master 
fund.\835\ The master/feeder structure is unique in that the feeder 
fund serves as a conduit to the master fund--the master fund being the 
fund that actually invests in money market securities. As a commenter 
pointed out, ``the master feeder structure comprises one pool of 
assets, managed by the master fund's investment adviser, under the 
oversight of the master fund's board of directors.'' \836\ Because the 
feeder fund's investments consist of the master fund's securities, its 
liquidity is determined by the master fund's liquidity. Accordingly, 
because a feeder fund's liquidity is dictated by the liquidity of the 
master fund, we believe the master fund and its board are best suited, 
in consultation with the master fund's adviser, to determine whether 
liquidity is under stress and a fee or gate should be imposed. We note 
that we took a similar approach with respect to master/feeder funds in 
rule 22e-3.\837\
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    \835\ For example, if a master fund's board determines that the 
master fund should impose a liquidity fee, a feeder fund must pass 
through that liquidity fee to its investors and we would expect it 
would subsequently remit such fee to the master fund.
    \836\ See Stradley Ronon Comment Letter. We note that only the 
master fund has an investment adviser because a master fund's shares 
are the only investment securities that may be held by the feeder 
fund. See section 12(d)(1)(E).
    \837\ See rule 22e-3(b).
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7. Application of Fees and Gates to Other Types of Funds and Certain 
Redemptions
    We have determined that all money market funds, other than 
government money market funds and feeder funds in a master/feeder fund 
structure, should be subject to the fees and gates requirements. We 
received a number of comments suggesting types of funds that should not 
be subject to the fees and gates requirements.\838\ In addition to the 
comments we received regarding the application of fees and gates to the 
types of funds discussed above, commenters also proposed other specific 
types of funds or entities that should not be subject to the fees and 
gates requirements, including, for example, money market funds with 
assets of less than $25 billion under management,\839\ or securities 
lending cash collateral reinvestment pools.\840\
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    \838\ See, e.g., supra sections III.C.2 and III.C.3 (discussing 
commenter support for excluding retail and municipal money market 
funds); but see, HSBC Comment Letter (``[W]e believe all MMFs should 
be required to have the power to apply a liquidity fee or gate so 
that the MMF provider can manage a low probability but high impact 
event.''); U.S. Bancorp Comment Letter.
    \839\ See PFM Asset Mgmt. Comment Letter.
    \840\ See State Street Comment Letter.
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    Because of the board flexibility and discretion included in the 
fees and gates amendments we are adopting today, as well as for the 
reasons discussed

[[Page 47810]]

below,\841\ we are requiring all funds, other than government money 
market funds and feeder funds in a master/feeder structure (for the 
reasons discussed above),\842\ to comply with the fees and gates 
requirements. As noted above, the fees and gates amendments do not 
require a fund to impose fees and gates if it is not in the fund's best 
interests. Thus, even if a particular type of fund is subject to the 
fees and gates provisions, it does not have to impose fees and gates. 
Rather, a fund's board may use fees and gates as tools to limit heavy 
redemptions and must act in the best interests of the fund in 
determining whether fees and gates should be imposed.
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    \841\ See also supra sections III.C.2-III.C.5 for a discussion 
of reasons specific to certain types of funds.
    \842\ See supra sections III.C.1 and III.C.6. As discussed above 
with respect to feeder funds, we believe feeder funds in a master/
feeder structure are distinguishable from other funds in that their 
liquidity is dictated by the liquidity of the master fund. Thus, we 
believe the flexibility and discretion afforded to boards in today's 
amendments should be limited to a master fund's board. We note that 
although feeder funds may not individually impose fees and gates in 
reliance on today's amendments, master funds are subject to today's 
amendments and their imposition of fees and gates will be passed 
through to feeder funds' investors.
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    In addition, we note that the fees and gates amendments will not 
affect a money market fund's investors unless the fund's weekly liquid 
assets fall below 30% of its total assets--i.e., the fund shows 
possible signs of heavy redemption pressure--and even then, it is up to 
the board to determine whether or not such measures are in the best 
interests of the fund. Allowing specific types of money market funds 
(other than government funds and feeder funds for the reasons discussed 
above) to not be subject to the fees and gates requirements could leave 
funds and their boards without adequate tools to protect shareholders 
in times of stress. Also, allowing funds not to comply with the fees 
and gates requirements would merely relieve a fund during normal market 
conditions of the costs and burdens created by the prospect that the 
fund could impose a fee or gate if someday it was subject to heavy 
redemptions.\843\ In considering these risks, costs, and burdens, as 
well as the possibility of unprotected shareholders and broader 
contagion to the short-term funding markets, we believe it is 
appropriate to subject all money market funds (other than government 
funds and feeder funds for the reasons discussed above) to the fees and 
gates requirements.
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    \843\ We noted in the Proposing Release that retail money market 
funds experienced fewer redemptions than institutional money market 
funds during the financial crisis and thus may be less likely to 
suffer heavy redemptions in the future. Nonetheless, we cannot 
predict if this will be the case if there is a future financial 
crisis.
---------------------------------------------------------------------------

    In addition to the reasons discussed above, we describe more fully 
below our rationale for subjecting particular types of funds and 
redemptions to the fees and gates amendments.
a. Small Redemptions and Irrevocable Redemptions
    Some commenters suggested that small redemptions should not be 
subject to fees and gates because they are less likely to materially 
impact the liquidity position of a fund.\844\ As discussed in the 
Proposing Release, we also have considered whether irrevocable 
redemption requests (i.e. requests that cannot be rescinded) that are 
submitted at least a certain period in advance should not be subject to 
fees and gates as the fund should be able to plan for such liquidity 
demands and hold sufficient liquid assets.\845\ We are concerned, 
however, that shareholders could try to ``game'' the fees and gates 
requirements if we took such an approach with respect to these 
redemptions, for example, by redeeming small amounts every day to fit 
under a redemption size limit or by redeeming a certain irrevocable 
amount every week and then reinvesting the redemption proceeds 
immediately if the cash is not needed.\846\ We also remain concerned 
that allowing certain redemptions to not be subject to fees and gates 
could add cost and complexity to the fees and gates requirements both 
as an operational matter (e.g., fund groups would need to be able to 
separately track which shares are subject to a fee or gate and which 
are not, and create the system and policies to do so) and in terms of 
ease of shareholder understanding without providing substantial 
benefits.\847\
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    \844\ See, e.g., Fin. Info. Forum Comment Letter.
    \845\ See Proposing Release, supra note 25, at 200-201.
    \846\ See supra note 315 and accompanying text. Commenters 
suggested that concerns over gaming could be addressed by putting 
additional policies in place, such as placing limits on the number 
of redemptions in any given period. See, e.g., Fin. Info. Forum 
Comment Letter. We believe that such a solution to gaming, much like 
an exception to the fees and gates requirements, would create 
additional cost and complexity to the amendments without substantial 
benefit.
    \847\ See supra note 315 and accompanying text.
---------------------------------------------------------------------------

b. ERISA and Other Tax-Exempt Plans
    Many commenters raised concerns regarding the application of fees 
and gates to funds offered in Employee Retirement Income Security Act 
(``ERISA'') and/or other tax-exempt plans.\848\ Some commenters 
expressed concern that fees and gates would create issues for these 
plans.\849\ For example, commenters were worried about potential 
violations of certain minimum required distribution rules that could be 
impeded by the imposition of a gate,\850\ potential taxation as a 
result of an inability to process certain mandatory refunds on a timely 
basis,\851\ problems arising in plan conversions or rollovers in the 
event of a fee or gate,\852\ possible conflicts with the Department of 
Labor's (``DOL'') qualified default investment (``QDIA'') rules,\853\ 
and certain general fiduciary requirements on plan fiduciaries with 
respect to adequate liquidity in their plan.\854\
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    \848\ See, e.g., Schwab Comment Letter; Fin. Svcs. Inst. Comment 
Letter; Oppenheimer Comment Letter; TIAA-CREF Comment Letter.
    \849\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab 
Comment Letter; Comment Letter of American Benefits Council (Sept. 
16, 2013) (``American Benefits Council Comment Letter'').
    \850\ See, e.g., Schwab Comment Letter; American Benefits 
Council Comment Letter; SPARK Comment Letter.
    \851\ See, e.g., id.
    \852\ See, e.g., American Benefits Council Comment Letter (``In 
some circumstances, retirement assets must be moved because of 
mandatory rollover requirements or because a plan has been 
abandoned. Certain safe harbor regulations and prohibited 
transaction class exemptions effectively require that funds be 
placed in an investment that seeks to maintain the dollar value that 
is equal to the amount invested, generally is liquid and does not 
impose `substantial restrictions' on redemptions.'') (citations 
omitted); Schwab Comment Letter.
    \853\ See, e.g., Schwab Comment Letter; American Benefits 
Council Comment Letter.
    \854\ See, e.g., American Bankers Ass'n Comment Letter; American 
Benefits Council Comment Letter.
---------------------------------------------------------------------------

    As an initial point, we note that money market funds are currently 
permitted to use a redemption gate and liquidate under rule 22e-3, and 
they still continue to be offered as investment options under tax-
qualified plans. However, in light of the commenters' concerns, we have 
consulted the DOL's Employee Benefits Security Administration 
(``EBSA'') regarding potential issues under ERISA. With respect to 
general fiduciary requirements on plan fiduciaries obligating them to 
prudently manage the anticipated liquidity needs of their plan, EBSA 
staff advised our staff that a money market fund's liquidity and its 
potential for redemption restrictions is just one of many factors a 
plan fiduciary would consider in evaluating the role that a money 
market fund would play in assuring adequate liquidity in a plan's 
investment portfolio.
    Additionally, we believe that certain other potential concerns 
presented by commenters, such as concerns regarding QDIAs and the 
imposition of a fee or

[[Page 47811]]

gate within 90 days of a participant's first investment, are unlikely 
to materialize. We understand that the imposition of a liquidity fee or 
gate would have to relate to a liquidation or transfer request within 
this 90-day period in order to create an issue with QDIA fiduciary 
relief. Even if this occurred with respect to a specific participant, 
steps may be taken to avoid concerns with the QDIA. We understand, for 
instance, that a liquidity fee otherwise assessed to the account of a 
plan participant or beneficiary could be paid by the plan sponsor or a 
service provider, and not by the participant, beneficiary or plan.\855\ 
In addition, a plan sponsor or other party in interest could loan funds 
to the plan for the payment of ordinary operating expenses of the plan 
or for a purpose incidental to the ordinary operation of the plan to 
avoid the effects of a gate.\856\ We understand that if necessary, 
other steps may also exist.
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    \855\ See Department of Labor, Employee Benefits Security 
Administration Field Assistance Bulletin 2008-03, Q11 (Apr. 29, 
2008).
    \856\ See Prohibited Transaction Exemption 80-26, [45 FR 28545 
(Apr. 29, 1980)], as amended at, [65 FR 17540 (Apr. 3, 2000)], [67 
FR 9485 (Mar. 1, 2002)] and [71 FR 17917 (Apr. 7, 2006)].
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    DOL staff has also advised the SEC that the ``substantial 
restrictions'' requirement, contained in Prohibited Transaction 
Exemptions 2004-16 \857\ and 2006-06,\858\ does not apply to money 
market funds.\859\ DOL staff further indicated to us, however, that a 
liquidity fee could raise issues under the conditions of these 
prohibited transaction exemptions that require that the IRA owner be 
able to transfer funds to another investment or another IRA ``within a 
reasonable period of time after his or her request and without penalty 
to the principal amount of the investment.'' \860\ We understand that 
while a gate of no longer than 10 business days would not amount to an 
unreasonable period of time under the conditions, DOL staff has advised 
us that, in order for a fiduciary to continue to rely on the exemptions 
for the prohibited transactions arising from the initial decision to 
roll over amounts to a money market fund that is sponsored by or 
affiliated with the fiduciary, additional steps would need to be taken 
to protect the principal amount rolled over in the event that a 
liquidity fee is imposed. We understand that examples of such 
additional steps would include a contractual commitment by the 
fiduciary or its affiliate to pay any liquidity fee otherwise assessed 
to the IRA, to the extent such fee would be deducted from the principal 
amount rolled over. Additionally, to the extent plan fiduciaries do not 
wish to take such steps, they can instead select government money 
market funds, which are not subject to the fees and gates amendments, 
or other funds that do not create prohibited transactions issues.
---------------------------------------------------------------------------

    \857\ [69 FR 57964 (Sept. 28, 2004)].
    \858\ [71 FR 20856 (Apr. 21, 2006)], as amended, [73 FR 58629 
(Oct. 7, 2008)].
    \859\ See section IV(e) of PTE 2004-16 and section V(c) of PTE 
2006-06.
    \860\ See section II(i) of PTE 2004-16 and section III(h) of PTE 
2006-06.
---------------------------------------------------------------------------

    Staff at EBSA have communicated that they will work with staff at 
the SEC to provide additional guidance as needed.
    With respect to the minimum distribution requirement and the 
ability to process certain mandatory distributions or refunds on a 
timely basis, we understand that although gates can hypothetically 
prevent required distributions or refunds, in practice it will be 
unlikely to occur as participants are unlikely to have their entire 
account invested in prime money market funds or, more precisely, one or 
more prime money market funds that determine to impose a gate at the 
same time.\861\ In addition, to the extent a gate does prevent a timely 
minimum distribution or refund, we understand that there are potential 
steps an individual or plan/IRA can take to avoid the negative 
consequences that may result from failure to meet the minimum 
distribution or refund requirements. For example, with respect to the 
minimum distribution requirement, an individual who fails to meet this 
requirement as a result of a gate is entitled to request a waiver with 
respect to potential excise taxes by filing a form with the IRS that 
explains the rationale for the waiver.\862\ In addition, with respect 
to plan qualification issues that may arise in the event a plan does 
not make timely minimum required distributions or refunds as a result 
of a gate, we understand that a plan sponsor may obtain relief pursuant 
to the Employee Plans Compliance Resolution System (``EPCRS'').\863\
---------------------------------------------------------------------------

    \861\ In addition, with respect to the minimum distribution 
requirement, we note that participants could be encouraged to take 
required distributions before the deadline to avoid the possibility 
that a gate could prevent them from meeting the requirements.
    \862\ See section 4974(d) of the Tax Code. We understand that to 
request a waiver, a taxpayer would file Form 5329 with the IRS. 
Whether to grant a waiver request is within the IRS's discretion.
    \863\ See Rev. Proc. 2013-12. We understand that, pursuant to 
the EPCRS, if a minimum required distribution or refund timing 
failure is insignificant or is corrected within a limited time 
period, and certain other requirements are satisfied, then the 
failure can be voluntarily corrected without filing with the IRS. 
Otherwise, we understand that a filing is required to correct 
qualification failures.
---------------------------------------------------------------------------

c. Insurance Funds
    A few commenters requested special treatment for money market funds 
underlying variable annuity contracts or other insurance products, 
citing contractual and state law restrictions affecting insurance and 
annuity products that would conflict with the ability of a money market 
fund's board to impose a fee or gate.\864\ Some commenters further 
noted that money market funds underlying variable contract separate 
accounts are not prone to runs.\865\ Another commenter noted that most 
insurance products have ``free-look'' provisions, allowing an owner to 
return his/her contract for full value if he/she is not satisfied with 
its terms.\866\ During such initial periods, insurance companies 
typically keep client funds in money market funds, which might be 
incompatible with fees and gates.\867\
---------------------------------------------------------------------------

    \864\ See, .e.g., Dechert Comment Letter; Comment Letter of 
American Council of Life Insurers (Sept. 17, 2013) (``ACLI Comment 
Letter''); TIAA-CREF Comment Letter.
    \865\ See ACLI Comment Letter; Comment Letter of Committee of 
Annuity Insurers (Sept. 17, 2013) (``CAI Comment Letter'').
    \866\ See Comment Letter of John Sklar (July 9, 2013) (``Sklar 
Comment Letter'').
    \867\ See id.
---------------------------------------------------------------------------

    We have determined not to provide special treatment for money 
market funds underlying variable annuity contracts or other insurance 
products for the fees and gates requirements. We recognize money market 
funds underlying variable annuity contracts or other insurance products 
may be indirectly subject to certain restrictions or requirements that 
do not apply to other money market funds. We note, however, that these 
same funds currently are permitted to suspend redemptions pursuant to 
rule 22e-3 and their ability to do so has not prevented them from being 
offered in connection with variable annuity and other insurance 
products. In addition, to the extent today's fees and gates amendments 
are incompatible with contractual or state law, or with free look 
provisions, we note that an insurance company can instead offer a 
government money market fund as an investment option under its 
contract(s).\868\ Moreover, fees and gates will not affect the everyday 
activities of money market funds. They are instead

[[Page 47812]]

designed to be used during times of potential stress.\869\ If the 
market or a money market fund is experiencing stress, an insurance 
company could choose not to place contract holders' investments into a 
money market fund during free look periods, subject to contractual 
provisions and prospectus disclosures.
---------------------------------------------------------------------------

    \868\ To the extent an insurance company determines to offer a 
government money market fund as a new investment option under a 
contract, we recognize that there may be costs associated with this 
process, including costs associated with disclosing a new investment 
option to contract-holders, negotiating arrangements with new 
government money market funds, and filing with the Commission a 
substitution application under section 26(c).
    \869\ We note that if, as suggested by commenters, money market 
funds underlying variable annuity or other insurance contracts are 
less prone to runs, then under the terms of our final rule 
amendments, such funds may be less likely to reach the liquidity 
thresholds that would trigger board consideration of fees or gates 
and, thus, may be less likely to be affected by today's amendments. 
See supra text accompanying note 865.
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D. Guidance on the Amortized Cost Method of Valuation and Other 
Valuation Concerns

    After further consideration, and as suggested by a number of 
commenters, our final rules will permit stable NAV money market funds 
(i.e., government and retail money market funds) to maintain a stable 
NAV by using amortized cost valuation and/or the penny rounding method 
of pricing.\870\ In addition, all other registered investment companies 
and business development companies (including floating NAV money market 
funds under our amendments) may, in accordance with Commission 
guidance, continue to use amortized cost to value debt securities with 
remaining maturities of 60 days or less if fund directors, in good 
faith, determine that the fair value of the debt securities is their 
amortized cost value, unless the particular circumstances warrant 
otherwise.\871\ Accordingly, even for floating NAV money market funds, 
amortized cost will continue to be an important part of the valuation 
of money market fund portfolio securities.\872\
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    \870\ See supra section III.B.5.
    \871\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5. 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.' ''
    \872\ For a mutual fund not regulated under rule 2a-7, the 
Investment Company Act and applicable rules generally require that 
it price its shares at the current NAV by valuing portfolio 
securities for which market quotations are readily available 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) and rules 2a-4 and 22c-1. 
Notwithstanding these provisions, rule 2a-7 currently permits money 
market funds to use the amortized cost method of valuation and/or 
the penny rounding method of pricing. See current rule 2a-7(c).
---------------------------------------------------------------------------

    We believe the expanded valuation guidance, discussed below, will 
help advance the goals of our money market fund reform rulemaking, 
because, among other things, stronger valuation practices may lessen a 
money market fund's susceptibility to heavy redemptions by decreasing 
the likelihood of sudden portfolio write-downs that may encourage 
financially sophisticated investors to redeem early. We provide below 
expanded guidance on the use of amortized cost valuation as well as 
other related valuation issues.\873\
---------------------------------------------------------------------------

    \873\ Although discussed here primarily in the context of money 
market funds, except as noted below, this guidance is applicable to 
all registered investment companies and business development 
companies. For ease of reference, throughout this section we refer 
to all of these entities as ``funds.'' We note that stable NAV money 
market funds that qualify as retail or government money market funds 
may use the amortized cost method of valuation to compute the 
current share price provided, among other things, the board of 
directors believes that the amortized cost method of valuation 
fairly reflects the market-based NAV and does not believe that such 
valuation may result in material dilution or other unfair results to 
investors or existing shareholders. See generally rule 2a-7(c)(1)(i) 
and rule 2a-7(g)(1)(i)(A)-(C). We also note that stable NAV money 
market funds that qualify as retail or government money market funds 
may not rely on this guidance to use amortized cost valuation in 
shadow pricing because rule 2a-7 specifically requires shadow prices 
to reflect ``the current net asset value per share calculated using 
available market quotations (or an appropriate substitute that 
reflects current market conditions),'' and we would not consider 
amortized cost valuation to be an appropriate substitute that 
reflects current market conditions. See also 1983 Adopting Release, 
supra note 3, at n.44 and accompanying text (``In determining the 
market-based value of the portfolio for purposes of computing the 
amount of deviation, all portfolio instruments, regardless of the 
time to maturity, should be valued based upon market factors and not 
their amortized cost value.'').
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1. Use of Amortized Cost Valuation
    We consider it important, for a number of reasons, that funds and 
their investment advisers and boards of directors have clear guidance 
regarding amortized cost valuation. Typically, money market funds hold 
a significant portion of portfolio securities with remaining maturities 
of 60 days or less,\874\ and therefore, a floating NAV money market 
fund may use the amortized cost method to value these portfolio 
securities if the fund's board determines that the amortized cost value 
of the security is fair value. In addition, managers of floating NAV 
money market funds may have an incentive to use amortized cost 
valuation whenever possible in order to help stabilize the funds' NAV 
per share.
---------------------------------------------------------------------------

    \874\ For example, we estimate that approximately 56% of prime 
money market funds' portfolio securities had remaining maturities of 
60 days or less (not including interest-rate resets) as of February 
28, 2014. This estimate is based on Form N-MFP data.
---------------------------------------------------------------------------

    As noted above, under existing Commission guidance, funds would not 
be able to use amortized cost valuation to value certain debt 
securities when circumstances dictate that the amortized cost value of 
the security is not fair value.\875\ The Commission's guidance in the 
Proposing Release construed the statute to effectively limit the use of 
amortized cost valuation to circumstances where it is the same as 
valuation using market-based factors.\876\ Some commenters objected to 
this interpretation and suggested that the Commission more generally 
clarify this guidance.\877\
---------------------------------------------------------------------------

    \875\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5 (``Although 
debt securities with remaining maturities in excess of 60 days 
should not be valued at amortized cost, the Commission will not 
object if the board of directors of a money market fund, in good 
faith, determines that the fair value of debt securities originally 
purchased with remaining maturities of 60 days or less shall be 
their amortized cost value, unless the particular circumstances 
dictate otherwise. Nor will the Commission object if, under similar 
circumstances, the fair value of debt securities originally 
purchased with maturities of in excess of 60 days, but which 
currently have maturities of 60 days or less, is determined by using 
amortized cost valuation for the 60 days prior to maturity, such 
amortization being based upon the market or fair value of the 
securities on the 61st day prior to maturity'' (footnotes omitted)).
    \876\ See Proposing Release, supra note 25, n.136.
    \877\ See, e.g., Invesco Comment Letter (``one of the footnotes 
to the Proposed Rule . . . refers to amortized cost pricing being 
available when it is the same as valuation based on market factors, 
implying that MMF could be barred from using amortized cost pricing 
if it differs even minutely from the market value of the securities. 
While we believe this implication to have been unintentional, we 
nevertheless request the Commission to reaffirm clearly that MMFs, 
as all other mutual funds, can continue to use amortized cost 
pricing for securities with maturities of 60 days and less.'' 
(internal citations omitted)); ICI Comment Letter (also referring to 
this footnote and stating ``It is unclear whether this means that 
amortized cost must at all times be identical to market-based price, 
or whether it is just another way of saying funds must use market-
based pricing and not amortized cost. We urge the SEC to clarify 
that ASR 219 and its interpretations remain unchanged.'').
---------------------------------------------------------------------------

    We recognize that existing valuation guidance may not be clear on 
how frequently funds should compare a debt security's amortized cost 
value to its fair value determined using market-based factors and what 
extent of deviation between the two values is permissible. We generally 
believe that a fund may only use the amortized cost method to value a 
portfolio security with a remaining maturity of 60 days or less when it 
can reasonably conclude, at each time it makes a valuation 
determination,\878\ that the amortized

[[Page 47813]]

cost value of the portfolio security is approximately the same as the 
fair value of the security as determined without the use of amortized 
cost valuation. Existing credit, liquidity, or interest rate conditions 
in the relevant markets and issuer specific circumstances at each such 
time should be taken into account in making such an evaluation.
---------------------------------------------------------------------------

    \878\ As discussed below, we believe that, in some circumstances 
(e.g., intraday), a fund may rely on the last obtained market-based 
data to assist it when valuing its portfolio securities using 
amortized cost.
---------------------------------------------------------------------------

    Accordingly, it would not be appropriate for a fund to use 
amortized cost to value a debt security with a remaining maturity of 60 
days or less and thereafter not continue to review whether amortized 
cost continues to be approximately fair value until, for example, there 
is a significant change in interest rates or credit deterioration. We 
generally believe that a fund should, at each time it makes a valuation 
determination, evaluate the use of amortized cost for portfolio 
securities, not only quarterly or each time the fund produces financial 
statements. We note that, under the final rules, each money market fund 
will be required to value, on a daily basis, the fund's portfolio 
securities using market-based factors and disclose the fund's share 
price (or shadow price) rounded to four decimal places on the fund's 
Web site. As a result, we believe that each money market fund should 
have readily available market-based data to assist it in monitoring any 
potential deviation between a security's amortized cost and fair value 
determined using market-based factors. We believe that, in certain 
circumstances, such as intraday, a fund may rely on the last obtained 
market-based data to assist it when valuing its portfolio securities 
using amortized cost. To address this, a fund's policies and procedures 
could be designed to ensure that the fund's adviser is actively 
monitoring both market and issuer-specific developments that may 
indicate that the market-based fair value of a portfolio security has 
changed during the day, and therefore indicate that the use of 
amortized cost valuation for that security may no longer be 
appropriate.
2. Other Valuation Matters
    Rule 2a-4 under the Investment Company Act provides that 
``[p]ortfolio securities with respect to which market quotations are 
readily available shall be valued at current market value, and other 
securities and assets shall be valued at fair value as determined in 
good faith by the board of directors of the registered company.'' As we 
discussed in the Proposing Release, the vast majority of money market 
fund portfolio securities do not have readily available market 
quotations because most portfolio securities such as commercial paper, 
repos, and certificates of deposit are not actively traded in the 
secondary markets.\879\ Accordingly, most money market fund portfolio 
securities are valued largely based upon ``mark-to-model'' or ``matrix 
pricing'' estimates.\880\ In matrix pricing, portfolio asset values are 
derived from a range of different inputs, with varying weights attached 
to each input, such as pricing of new issues, yield curve information, 
spread information, and yields or prices of securities of comparable 
quality, coupon, maturity, and type.\881\ Money market funds also may 
consider evaluated prices from third-party pricing services, which may 
take into account these inputs as well as prices quoted from dealers 
that make markets in these instruments and financial models.\882\
---------------------------------------------------------------------------

    \879\ See Proposing Release, supra note 25, at section II.B.1.
    \880\ See, e.g., Harvard Business School FSOC Comment Letter 
(``secondary markets for commercial paper and other private money 
market assets such as CDs are highly illiquid. 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%20use%20of%20amortised%20cost%20accounting%20by%20MMF.pdf
 (noting that investors typically hold money market instruments to 
maturity and therefore there are relatively few prices from the 
secondary market or broker quotes).
    \881\ See, e.g., Federated VI Comment Letter; Hai Jin, et al., 
Liquidity Risk and Expected Corporate Bond Returns, 99 J. of Fin. 
Econ. 628, at n.4 (2011) (``Matrix prices are set according to some 
algorithm based on prices of bonds with similar characteristics'').
    \882\ See, e.g., Federated VI Comment Letter; Angel Comment 
Letter.
---------------------------------------------------------------------------

    We received a number of comments regarding the utility of market-
based valuation for money market securities and other securities that 
do not frequently trade in secondary markets. We also received comments 
discussing certain other valuation matters more generally, such as the 
use of pricing services in valuing such securities. Together, these 
comments indicated to us the need for further guidance in this area, 
which we provide below.
a. Fair Value for Thinly Traded Securities
    First, some commenters suggested that market-based valuations of 
money market fund portfolio securities are not particularly meaningful, 
given the infrequent trading in money market fund portfolio securities 
and the use of matrix or model-based pricing or evaluated prices from 
third-party pricing services.\883\ One commenter stated that ``it does 
not follow that the normal arguments for using actual market prices for 
calculating mutual fund NAVs apply to using noisy guesstimates of true 
value of non-traded assets.'' \884\ Another commenter stated that, with 
regard to matrix-priced money market fund portfolio securities, 
``[m]arket-based valuations are not more accurate valuations than 
amortized cost.'' \885\
---------------------------------------------------------------------------

    \883\ See, e.g., Federated IV Comment Letter; Legg Mason & 
Western Asset Comment Letter; Chamber II Comment Letter.
    \884\ See Angel Comment Letter.
    \885\ See Federated VI Comment Letter (``Pricing experts have 
confirmed to us that only a small percentage of money market 
instruments actually trade daily in secondary markets. While the 
amortized cost method of valuing MMF portfolios is a simple and 
accurate means of valuing these types of high-quality, short-term 
instruments that generally are held to maturity, the effort to 
arrive at market-based valuations for these types of instruments is 
time-consuming, complicated and less exact.'').
---------------------------------------------------------------------------

    We acknowledge that matrix pricing and similar pricing methods 
involve estimates and judgments--and thus may introduce some ``noise'' 
into portfolio security prices, and therefore into the fund's NAV per 
share when rounded to one basis point. However, we do not agree that 
market-based prices of portfolio securities do not provide meaningful 
information or that amortized cost generally provides better or more 
accurate values of securities that do not frequently trade or that may 
or may not be held to maturity given the fund's statutory obligation to 
investors to satisfy redemptions within seven days (and a fund's 
disclosure commitment to generally satisfy redemptions much 
sooner).\886\ Indeed, many debt securities held by other types of funds 
do not frequently trade, but our long-standing guidance on the use of 
amortized cost valuation is limited to debt securities with remaining 
maturities of 60 days or less and even then only if the amortized cost 
value of these securities is fair value.\887\ This guidance was based 
on our concern that ``the use of the amortized cost method i[n] valuing 
portfolio securities of registered investment companies may result in 
overvaluation or undervaluation of the portfolios of such

[[Page 47814]]

companies, relative to the value of the portfolios determined with 
reference to current market-based factors.'' \888\ Such guidance is 
based on a preference embodied in the Investment Company Act that funds 
value portfolio securities taking into account current market 
information.\889\
---------------------------------------------------------------------------

    \886\ Many money market funds promise in fund disclosures to 
satisfy redemption requests on the same day as the request, except 
in extraordinary conditions. In addition, funds that are sold 
through broker-dealers seek to satisfy redemption requests within 
three business days because broker-dealers are subject to Securities 
Exchange Act rule 15c6-1, which establishes three business days as 
the standard settlement period for securities trades effected by a 
broker or a dealer.
    \887\ See ASR 219, Financial Reporting Codification (CCH) 
section 404.05.a and .b (May 31, 1977), supra note 5. We have said 
that it is inconsistent with rule 2a-4 to use the amortized cost 
method of valuation to determine the fair value of debt securities 
that mature at a date more than 60 days after the valuation date.
    \888\ Id.
    \889\ Section 22(c) and rules 2a-4 and 22c-1(a).
---------------------------------------------------------------------------

    Because most money market fund portfolio securities are not 
frequently traded and thus are not securities for which market 
quotations are readily available, we understand that they are typically 
fair valued in good faith by the fund's board.\890\ As a general 
principle, the fair value of a security is the amount that a fund might 
reasonably expect to receive for the security upon its current 
sale.\891\ Determining fair value requires taking into account market 
conditions existing at that time. Accordingly, funds holding debt 
securities generally should not fair value these securities at par or 
amortized cost based on the expectation that the funds will hold those 
securities until maturity, if the funds could not reasonably expect to 
receive approximately that value upon the current sale of those 
securities under current market conditions.\892\ We recognize that 
valuing thinly traded debt securities can be more complicated and time-
consuming than valuing liquid equity securities based on readily 
available market quotations or than valuing debt securities using the 
amortized cost method. However, given the redeemable nature of mutual 
fund shares and the mandates of the Investment Company Act to sell and 
redeem fund shares at prices based on the current net asset values of 
those shares, we believe it is important for funds to take steps to 
ensure that they are properly valuing fund shares and treating all 
shareholders fairly.
---------------------------------------------------------------------------

    \890\ As discussed further below, although a fund's directors 
cannot delegate their statutory duty to determine the fair value of 
fund portfolio securities, the board may appoint others, such as the 
fund's investment adviser or a valuation committee, to assist them 
in determining fair value. See infra note 898 and accompanying text.
    \891\ See Securities and Exchange Commission Codification of 
Financial Reporting Policies, Statement Regarding ``Restricted 
Securities,'' Investment Company Act Release No. 5847 (Oct. 21, 
1969) [35 FR 19989 (Dec. 31, 1970)] (``ASR 113''); Investment 
Companies, Investment Company Act Release No. 6295 (Dec. 23, 1970) 
[35 FR 19986 (Dec. 31, 1970)], Financial Reporting Codification 
(CCH) section 404.03 (Apr. 15, 1982) (``ASR 118''). We generally 
believe that the current sale standard appropriately reflects the 
fair value of securities and other assets for which market 
quotations are not readily available within the meaning of section 
2(a)(41)(B). The price that an unrelated willing buyer would pay for 
a security or other asset under current market conditions is 
indicative of the value of the security or asset. See also FASB ASC 
paragraph 820-10-35-3 and FASB ASC paragraph 820-10-20 (``A fair 
value measurement assumes that the asset or liability is exchanged 
in an orderly transaction between market participants to sell the 
asset or transfer the liability at the measurement date under 
current market conditions.''; Fair Value means ``the price that 
would be received to sell an asset or paid to transfer a liability 
in an orderly transaction between market participants at the 
measurement date'').
    \892\ As we have previously stated: ``Fair value cannot be based 
on what a buyer might pay at some later time, such as when the 
market ultimately recognizes the security's true value as currently 
perceived by the portfolio manager. Funds also may not fair value 
portfolio securities at prices not achievable on a current basis on 
the belief that the fund would not currently need to sell those 
securities.'' See, e.g., In the Matter of Jon D. Hammes, et al., 
Investment Company Act Release No. 26290 (Dec. 11, 2003) at n.5 
(settlement). See also FASB ASC 820, at paragraph 820-10-35-54H (``A 
reporting entity's intention to hold the asset or to settle or 
otherwise fulfill the liability is not relevant when measuring fair 
value because fair value is a market-based measurement, not an 
entity-specific measurement.'').
---------------------------------------------------------------------------

b. Use of Pricing Services
    As noted above, many funds, including many money market funds, use 
evaluated prices provided by third-party pricing services to assist 
them in determining the fair values of their portfolio securities. Some 
commenters have raised concerns that money market funds will place 
undue reliance on a small market of third-party pricing vendors, even 
though they acknowledge that they provide only ``good faith'' opinions 
on valuation.\893\ A few commenters argued that eliminating amortized 
cost valuation for money market funds and requiring market-based 
pricing could provide third-party pricing services with a much greater 
degree of influence on fund's portfolio valuation, which could increase 
operational complexity and risks.\894\
---------------------------------------------------------------------------

    \893\ See, e.g., Federated VI Comment Letter; SIFMA Comment 
Letter; Angel Comment Letter.
    \894\ See, e.g., Federated VI Comment Letter; Chamber II Comment 
Letter.
---------------------------------------------------------------------------

    We recognize that pricing services employ a wide variety of pricing 
methodologies in arriving at the evaluated prices they provide, and the 
quality of those prices may vary widely. We note that the evaluated 
prices provided by pricing services are not, by themselves, ``readily 
available'' market quotations or fair values ``as determined in good 
faith by the board of directors'' as required under the Investment 
Company Act.\895\ To the extent that certain money market funds are no 
longer permitted to use the amortized cost method to value all of their 
portfolio securities and all money market funds will be required to 
perform daily market-based valuations, funds may decide to rely more 
heavily on third parties, such as pricing services, to provide market-
based valuation data. Accordingly, we believe it is important to 
provide guidance to funds and their boards regarding reliance on 
pricing services.
---------------------------------------------------------------------------

    \895\ See section 2(a)(41)(B) and rule 2a-4.
---------------------------------------------------------------------------

    We note that a fund's board of directors has a non-delegable 
responsibility to determine whether an evaluated price provided by a 
pricing service, or some other price, constitutes a fair value for a 
fund's portfolio security.\896\ In addition, we have stated that ``it 
is incumbent upon the [fund's] Board of Directors to satisfy themselves 
that all appropriate factors relevant to the value of securities for 
which market quotations are not readily available have been 
considered,'' and that fund directors ``must . . . continuously review 
the appropriateness of the method used in valuing each issue of 
security in the [fund's] portfolio.'' \897\ Although a fund's directors 
cannot delegate their statutory duty to determine the fair value of 
fund portfolio securities for which market quotations are not readily 
available, the board may appoint others, such as the fund's investment 
adviser or a valuation committee, to assist them in determining fair 
value, and to make the actual calculations pursuant to the fair 
valuation methodologies previously approved by the directors.\898\
---------------------------------------------------------------------------

    \896\ See ASR 118, supra note 891 (``[i]t is incumbent upon the 
Board of Directors to satisfy themselves that all appropriate 
factors relevant to the fair value of securities for which market 
quotations are not readily available have been considered and to 
determine the method of arriving at the fair value of each such 
security.'' A fund's directors cannot delegate this responsibility 
to anyone else). See, e.g., In the Matter of Seaboard Associates, 
Inc. (Report of Investigation Pursuant to Section 21(a) of the 
Exchange Act), Investment Company Act Release No. 13890 (Apr. 16, 
1984) (``The Commission wishes to emphasize that the directors of a 
registered investment company may not delegate to others the 
ultimate responsibility of determining the fair value of any asset 
not having a readily ascertainable market value. . . .'').
    \897\ See ASR 118, supra note 891.
    \898\ See id.
---------------------------------------------------------------------------

    Before deciding to use evaluated prices from a pricing service to 
assist it in determining the fair values of a fund's portfolio 
securities, the fund's board of directors may want to consider the 
inputs, methods, models, and assumptions used by the pricing service to 
determine its evaluated prices, and how those inputs, methods, models, 
and assumptions are affected (if at all) as market conditions change. 
In choosing a particular pricing service, a fund's board may want to 
assess, among other things, the quality of the evaluated prices 
provided by the service and the extent to which the service determines 
its evaluated prices as close as possible to the time as of which the 
fund calculates its net asset value. In addition, the

[[Page 47815]]

fund's board should generally consider the appropriateness of using 
evaluated prices provided by pricing services as the fair values of the 
fund's portfolio securities where, for example, the fund's board of 
directors does not have a good faith basis for believing that the 
pricing service's pricing methodologies produce evaluated prices that 
reflect what the fund could reasonably expect to obtain for the 
securities in a current sale under current market conditions.\899\
---------------------------------------------------------------------------

    \899\ See ASR 113 and ASR 118, supra note 891; see also 1983 
Adopting Release supra note 3 (``If the [money market] fund uses an 
outside service to provide this type of pricing for its portfolio 
instruments, it may not delegate to the provider of the service the 
ultimate responsibility to check the accuracy of the system.'').
---------------------------------------------------------------------------

E. Amendments to Disclosure Requirements

    We are amending a number of disclosure requirements related to the 
liquidity fees and gates and floating NAV requirements adopted today, 
as well as other disclosure enhancements discussed in the proposal. 
These disclosure amendments improve transparency related to money 
market funds' operations, as well as their overall risk profile and any 
use of affiliate financial support. In the sections that follow, we 
first discuss amendments to rule and form provisions applicable to 
various disclosure documents, including disclosures in money market 
funds' advertisements, the summary section of the prospectus, and the 
statement of additional information (``SAI'').\900\ Next, we discuss 
amendments to the disclosure requirements applicable to money market 
fund Web sites, including information about money market funds' 
liquidity levels, shareholder flows, market-based NAV per share 
(rounded to four decimal places), imposition of liquidity fees and 
gates, and any use of affiliate sponsor support.
---------------------------------------------------------------------------

    \900\ In keeping with the enhanced disclosure framework we 
adopted in 2009, the amendments are intended to provide a layered 
approach to disclosure in which key information about the 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. See 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).
---------------------------------------------------------------------------

1. Required Disclosure Statement
a. Overview of Disclosure Statement Requirements
    As discussed in the Proposing Release, and as modified to reflect 
commenters' concerns, we are adopting amendments to rule 482 under the 
Securities Act and Item 4 of Form N-1A to revise the disclosure 
statement requirements concerning the risks of investing in a money 
market fund in its advertisements or other sales materials that it 
disseminates (including on the fund Web site) and in the summary 
section of its prospectus (and, accordingly, in any summary prospectus, 
if used).
    Money market funds are currently required to include a specific 
statement concerning the risks of investing in their advertisements or 
other sales materials and in the summary section of the fund's 
prospectus (and, accordingly, in any summary prospectus, if used).\901\ 
In the Proposing Release, we proposed to modify the format and content 
of this required disclosure. Specifically, we proposed to require money 
market funds to present certain disclosure statements in a bulleted 
format. The content of the proposed disclosure statements would have 
differed under each of the proposed reform alternatives. Under each 
reform alternative, the proposed statement would have included 
identical wording changes designed to clarify, and inform investors 
about, the primary risks of investing in money market funds generally, 
including new disclosure emphasizing that money market fund sponsors 
are not obligated to provide financial support. Additionally, the 
proposed statement under the fees and gates alternative would have 
included disclosure that would call attention to the risks of investing 
in a money market fund that could impose liquidity fees or gates, and 
the proposed statement under the floating NAV alternative would have 
included disclosure to emphasize the particular risks of investing in a 
floating NAV money market fund.
---------------------------------------------------------------------------

    \901\ Rule 482(b)(4); Item 4(b)(1)(ii) of Form N-1A. Money 
market funds are currently required to include the following 
statement: 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.
---------------------------------------------------------------------------

    Comments regarding the amended disclosure statement were mixed. Two 
commenters generally supported the proposed amendments to the 
disclosure statement under both alternatives, and one commenter 
expressed general support for the proposed disclosure under the fees 
and gates alternative.\902\ Two commenters generally opposed the 
proposed disclosure statement, arguing that it would overstate the 
risks relative to other mutual funds and overwhelm investors with 
standardized mandated legends, which investors might ignore as 
``boilerplate.'' \903\ Some commenters expressed concerns with 
particular aspects of the proposed disclosure, such as the required 
disclosure regarding sponsor support.\904\ These comments are discussed 
in more detail below.
---------------------------------------------------------------------------

    \902\ See CFA Institute Comment Letter (noting that the proposed 
disclosures would put investors on notice that money market funds 
are not riskless and would provide the information in a clear and 
succinct manner); HSBC Comment Letter (generally supporting both 
statements but suggesting additions to cross-reference the 
prospectus's risk warnings and to make clear fees and gates would be 
used to protect investors); Federated II Comment Letter; Comment 
Letter of Federated Investors (Disclosure Requirements for Money 
Market Funds and Current Requirements of Rule 2a-7) (Sept. 17, 2013) 
(``Federated VIII Comment Letter'') (concurring with the risk 
disclosure under the fees and gates alternative).
    \903\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
    \904\ See, e.g., Dreyfus Comment Letter; NYC Bar Committee 
Comment Letter.
---------------------------------------------------------------------------

    Today we are adopting amendments to the requirements for disclosure 
statements that must appear in money market funds' advertisements or 
other sales materials, and in the summary section of money market 
funds' statutory prospectus. As discussed in more detail below, these 
amendments are being adopted largely as proposed, but with some 
modifications to the proposed format and content. These modifications 
respond to comments we received and also reflect that we are adopting a 
liquidity fees and gates requirement for all non-government money 
market funds, including municipal money market funds, as well as a 
floating NAV requirement for institutional prime funds. As we stated in 
the Proposing Release, we are modifying the current disclosure 
requirements because we believe that enhancing the disclosure required 
to be included in fund advertisements and other sales materials, and in 
the summary section of the prospectus, will help change the investment 
expectations of money market fund investors, including any erroneous 
expectation that a money market fund is a riskless investment.\905\ In 
addition, without such modifications, we believe that investors may not 
be fully aware of potential restrictions on fund redemptions or, for 
floating NAV funds, the fact that the value of their money market fund 
shares will, as a result of

[[Page 47816]]

these reforms, increase and decrease as a result of the changes in the 
value of the underlying securities.\906\
---------------------------------------------------------------------------

    \905\ See Proposing Release, supra note 25, at sections III.A.8 
and III.B.8.
    \906\ Id.
---------------------------------------------------------------------------

    Specifically, we are requiring money market funds that maintain a 
stable NAV to include the following disclosure statement in their 
advertisements or other sales materials and in the summary section of 
the statutory prospectus:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. The Fund may impose a fee upon 
the sale of your shares or may temporarily suspend your ability to 
sell shares if the Fund's liquidity falls below required minimums 
because of market conditions or other factors.\907\ 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.\908\
---------------------------------------------------------------------------

    \907\ Government funds that are not subject to the fees and 
gates requirements pursuant to rule 2a-7(c)(2)(iii) may omit the 
following sentence: ``The Fund may impose a fee upon the sale of 
your shares or may temporarily suspend your ability to sell shares 
if the fund's liquidity falls below required minimums because of 
market conditions or other factors.'' See rule 482(b)(4)(iii); Form 
N-1A Item 4(b)(1)(ii)(C).
    \908\ See Rule 482(b)(4)(ii); Form N-1A Item 4(b)(1)(ii)(B). 
Besides the amendments to the disclosure statement requirements set 
forth in Rule 482(b)(4)(ii) and Form N-1A Item 4(b)(1)(ii)(B), we 
also are adopting non-substantive changes to the text of these rule 
and form provisions. If an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
contractually committed to provide financial support to the fund, 
the fund would be permitted to omit the last sentence from the 
disclosure statement in advertisements and sales materials for the 
term of the agreement. See Note to paragraph (b)(4), rule 482(b)(4). 
Likewise, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such person, has 
contractually committed 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 sentence from the 
disclosure statement that appears in the fund's registration 
statement. See Instruction to Item 4(b)(1)(ii) of Form N-1A.
    The proposal likewise would have permitted a similar omission 
from the proposed disclosure statement. See Proposing Release, supra 
note 25, at nn.429 and 431. As proposed, such omission would have 
been permitted 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.'' We have modified the language of the Note to paragraph 
(b)(4), rule 482(b)(4) and the Instruction to Item 4(b)(1)(ii) of 
Form N-1A to clarify that the omission would be permitted only in 
the case of contractual commitments to provide financial support, 
and not in the case of informal agreements that may not be 
enforceable.
    As discussed in more detail below, we are adopting amendments 
that would require money market funds to disclose current and 
historical instances of affiliate financial support on Form N-CR and 
Form N-1A, respectively. See infra sections III.F.3, III.E.7.

    Funds with a floating NAV will also be required to include a 
similar disclosure statement in their advertisements or other sales 
materials and in the summary section of the statutory prospectus, 
modified to account for the characteristics of a floating NAV, as 
---------------------------------------------------------------------------
follows:

    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may 
be worth more or less than what you originally paid for them. The 
Fund may impose a fee upon the sale of your shares or may 
temporarily suspend your ability to sell shares if the Fund's 
liquidity falls below required minimums because of market conditions 
or other factors. 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.\909\
---------------------------------------------------------------------------

    \909\ See Rule 482(b)(4)(i); Form N-1A Item 4(b)(1)(ii)(A). 
Besides the amendments to the disclosure statement requirements set 
forth in Rule 482(b)(4)(i) and Form N-1A Item 4(b)(1)(ii)(A), we 
also are adopting non-substantive changes to the text of these rule 
and form provisions. Funds may omit the last sentence regarding 
sponsor support under certain circumstances, such as when a fund's 
sponsor has contractually committed to provide support to the fund. 
See supra note 908; Instructions to Item 4(b)(1)(ii) of Form N-1A; 
Note to paragraph (b)(4), rule 482(b)(4). The proposal likewise 
would have permitted this omission from the proposed disclosure 
statement. See Proposing Release, supra note 25, at nn.307 and 313. 
As discussed in more detail below, we are adopting amendments that 
would require money market funds to disclose current and historical 
instances of affiliate financial support on Form N-CR and Form N-1A, 
respectively. See infra sections III.F.3, III.E.7.

    Below we describe in detail the ways in which the format and 
content of the required disclosure statement that we are adopting today 
differ from that which we proposed, as well as the reasons for these 
differences.
b. Format of the Statement
    We have decided not to adopt the proposed requirement that funds 
provide the statement in a bulleted format. One commenter argued that 
prescribing a specific graphical format is not necessary and might be 
difficult to execute in certain forms of advertising, such as social 
media.\910\ We agree. We also believe that refraining from requiring 
funds to provide the disclosure statement in a bulleted format, in 
combination with other modifications discussed below that shorten the 
disclosure statement, addresses concerns raised by commenters that the 
length of the proposed disclosure statement could draw attention away 
from other important information in an advertisement or sales 
materials.\911\
---------------------------------------------------------------------------

    \910\ See ABA Business Law Section Comment Letter.
    \911\ See NYC Bar Committee Comment Letter (noting that, 
particularly in inherently brief formats like advertisements, there 
is a risk that mandated legends may crowd out material informational 
content); ABA Business Law Section Comment Letter (arguing that the 
proposed disclosure statement could take up so much of the space 
available in an advertisement that it will discourage investors from 
viewing other important information in the communication).
---------------------------------------------------------------------------

c. Disclosure Concerning General Risk of Investment Loss
    As proposed, the required disclosure statement would have included 
a bulleted statement providing: ``You could lose money by investing in 
the Fund.'' We are adopting identical content in the required 
disclosure statement. As discussed in the proposal, we have taken into 
consideration investor preferences for clear, concise, and 
understandable language in adopting the required disclosure and also 
have considered whether strongly-worded disclaimer language would more 
effectively convey the particular risks associated with money market 
funds than more moderately-worded language would.\912\ We received one 
comment on this language arguing that it is duplicative with other 
language in the required disclosure statement.\913\ We have responded 
to this comment by shortening and modifying the required disclosure 
statement.\914\
---------------------------------------------------------------------------

    \912\ See Proposing Release, supra note 25, at nn.316-317.
    \913\ See Federated VIII Comment Letter.
    \914\ As proposed, the required disclosure statement included 
the statements ``You could lose money by investing in the Fund'' and 
``Your investment in the Fund therefore may experience losses.'' As 
adopted, the required disclosure statement no longer includes the 
second statement, which could be construed to be repetitive with the 
first.
---------------------------------------------------------------------------

d. Disclosure Concerning Fees and Gates
    As proposed, the required disclosure statement would have included 
bulleted statements providing: ``The Fund may impose a fee upon sale of 
your shares when the Fund is under considerable stress'' and ``The Fund 
may temporarily suspend your ability to sell shares of the Fund when 
the Fund is under considerable stress.'' Instead of including these 
bullet points in the required disclosure, we are adopting similar 
content in the required disclosure statement providing: ``The Fund may 
impose a fee upon the sale of your shares or may temporarily suspend 
your ability to sell shares if the Fund's liquidity falls below 
required

[[Page 47817]]

minimums because of market conditions or other factors.'' One 
commenter, while generally supporting the proposed statement, suggested 
that the statement be amended to say that the fund could impose a fee 
or a gate ``in order to protect shareholders of the Fund.'' \915\ One 
commenter expressed concerns about requiring the inclusion of 
statements about fees and gates in advertisements or other sales 
materials, arguing that the description of circumstances and conditions 
under which fees and gates might be imposed is difficult to reduce to a 
brief statement.\916\ No commenters explicitly supported the inclusion 
of the term ``considerable stress,'' and several commenters argued that 
this term was not clear, and may cause investors to believe that funds 
could impose fees and gates arbitrarily or, conversely, only during 
extreme market events.\917\ To address this concern, one commenter 
suggested requiring a different term than ``considerable stress,'' 
arguing that this term overstates the prospect for imposing fees or 
gates.\918\ Other commenters suggested that the disclosure state 
explicitly that a fee or gate could be imposed as a result of a 
reduction in the fund's liquidity.\919\ Commenters also suggested that 
any disclosure regarding fees and gates could be combined into a single 
statement.
---------------------------------------------------------------------------

    \915\ See HSBC Comment Letter.
    \916\ See NYC Bar Committee Comment Letter.
    \917\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter; Dreyfus Comment Letter.
    \918\ See Dreyfus Comment Letter.
    \919\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter.
---------------------------------------------------------------------------

    After considering the comments, we continue to believe that 
disclosure about fees or gates should be included in advertisements, 
sales materials, and the summary section of the prospectus. Even some 
commenters that expressed concerns about including the disclosure in 
advertisements acknowledged that the possible imposition of fees and 
gates is information that is likely to be important to investors.\920\ 
As we stated in the Proposing Release, we are concerned that investors 
will not be fully aware of potential restrictions on fund redemptions. 
To address commenters' concerns regarding the ambiguity of the term 
``considerable stress,'' we have revised the statement, as suggested by 
commenters, to make clear that funds could impose a fee or gate in 
response to a reduction in the fund's liquidity. The statement does not 
include a reference that a fee or gate could be imposed ``to protect 
investors of the fund,'' as suggested by one commenter. We believe that 
including the additional suggested language could detract from the 
statement's emphasis that a fee or gate could be imposed, which could 
in turn diminish shareholders' awareness of potential restrictions on 
fund redemptions. The language we have adopted reflects commenter 
suggestions that any disclosure regarding fees or gates be combined 
into a single statement. We believe that the adopted language also 
responds to commenter concerns about the difficulty of briefly 
describing the conditions under which fees and gates might be imposed 
by providing that fees and gates could be imposed if ``the Fund's 
liquidity falls below required minimums because of market conditions or 
other factors.''
---------------------------------------------------------------------------

    \920\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
---------------------------------------------------------------------------

e. Disclosure Concerning Sponsor Support
    As proposed, the required disclosure statement would have included 
a bulleted statement providing: ``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.'' We are adopting identical content in the required 
disclosure statement. Several commenters opposed the inclusion of a 
reference to sponsor support in the required disclosure statement.\921\ 
Some commenters argued that the disclosure would raise sponsor support 
to an unwarranted level of prominence, noting that there have not been 
any studies to determine whether investors actually rely on the 
potential for sponsor support as a factor when determining whether to 
invest in a money market fund.\922\ Commenters also were concerned that 
investors will not understand the disclosure in fund advertisements, 
since advertisements will not afford space or opportunity to explain to 
investors who the fund's ``sponsor'' is and what ``financial support'' 
means.\923\
---------------------------------------------------------------------------

    \921\ See Dreyfus Comment Letter; NYC Bar Committee Comment 
Letter; ABA Business Law Section Comment Letter. But see CFA 
Institute Comment Letter; HSBC Comment Letter (both generally 
supporting the proposed disclosure statement, including the language 
discussing sponsor support).
    \922\ See, e.g., ABA Business Law Section Comment Letter; NYC 
Bar Committee Comment Letter.
    \923\ Id.
---------------------------------------------------------------------------

    We continue to believe that the disclosure statement should include 
a statement that the fund's sponsor has no obligation to provide 
financial support. In the Proposing Release, we recognized that 
particular instances of sponsor support were not particularly 
transparent to investors in past years because sponsor support 
generally was not immediately disclosed, and was not required to be 
disclosed by the Commission.\924\ But although investors might not have 
known of particular instances of sponsor support, we believe that many 
investors, particularly institutional investors, have historically 
understood that there was a possibility of financial support from the 
money market fund's sponsor and that this possibility has affected 
investors' perceptions about the level of risk in investing in money 
market funds.\925\ We therefore disagree with the commenter who 
suggested that investors were generally unaware of this practice 
preceding and during the financial crisis.\926\ For this reason, we 
believe that it is important to emphasize to investors that they should 
not expect a fund sponsor to provide financial support to the fund.
---------------------------------------------------------------------------

    \924\ Proposing Release, supra note 25, at section II.B.3.
    \925\ See, e.g., Roundtable Transcript, supra note 63 (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 
fund sponsors. So once they perceive that they are not able to get 
that additional assurance, I believe that was one probably cause of 
the run.'').
    \926\ See NYC Bar Committee Comment Letter (arguing that the 
Commission's discussion of the lack of transparency regarding 
instances of sponsor support shows that the proposed risk statement 
addresses a practice that investors were not aware of during the 
financial crisis).
---------------------------------------------------------------------------

    For similar reasons, we disagree with one commenter who argued that 
requiring this disclosure is at odds with the requirement that funds 
publicly disclose instances of sponsor support.\927\ As discussed 
below, we are requiring funds to disclose current and historical 
instances of sponsor support because we believe that such disclosure 
will help investors better understand the risks of investing in the 
funds.\928\ This reporting, which should help investors understand 
instances when the fund has come under stress, provides historical 
information about the fund. The required disclosure statement, on the 
other hand, is a forward-looking risk statement that reminds current 
and prospective investors that sponsors do not have an obligation to 
provide sponsor support and that investors should not expect that 
sponsors will provide support in the future.
---------------------------------------------------------------------------

    \927\ See Dreyfus Comment Letter.
    \928\ See infra notes 1007-1010, 1132 and accompanying text.

---------------------------------------------------------------------------

[[Page 47818]]

    Finally, we are not persuaded that the disclosure regarding sponsor 
support should not appear in advertisements because this disclosure 
will not be understood by investors. We recognize that upon reading the 
disclosure statement, investors might have questions regarding 
financial support from sponsors, as commenters indicated, including 
questions regarding who the fund's ``sponsor'' is, or what constitutes 
``financial support.'' \929\ We believe, however, that funds can 
address this issue through more complete disclosure elsewhere in the 
fund prospectus if they believe it is necessary.
---------------------------------------------------------------------------

    \929\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter.
---------------------------------------------------------------------------

f. Disclosure for Floating NAV Funds
    As proposed, the required disclosure statement for floating NAV 
funds would have included bulleted statements providing: ``You should 
not invest in the Fund if you require your investment to maintain a 
stable value'' and ``The value 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.'' 
Instead of including these bullet points in the required disclosure, we 
are adopting similar content in the required disclosure statement 
providing: ``Because the share price of the Fund will fluctuate, when 
you sell your shares they may be worth more or less than what you 
originally paid for them.'' While one commenter questioned whether the 
proposed disclosure was necessary for investors in institutional prime 
funds,\930\ we believe it is important to emphasize to investors the 
potential impact of a floating NAV.\931\ In response to suggestions by 
commenters,\932\ we have decided not to require that the disclosure 
statement include the proposed statement that investors that require a 
stable value not invest in the fund. We were persuaded by commenters 
that the term ``stable value'' is often used by financial advisers when 
referring to certain investment products, at least some of which do 
have a variable NAV.\933\ We are also not including in the disclosure 
requirements the proposed statements about the relationship between the 
fund share price and the value of the fund's underlying securities and 
the risk factors that can affect the value of the fund's underlying 
securities. We were persuaded by one commenter who noted that 
discussion of specific risk factors will be addressed in other areas of 
the prospectus, including the summary prospectus.\934\ We also believe 
that not including these statements addresses more general concerns 
expressed by commenters regarding the length and efficacy of the 
proposed disclosure statement.\935\
---------------------------------------------------------------------------

    \930\ See Dreyfus Comment Letter (``[W]e also question the 
Commission's concern that investors will fail to understand that the 
value of the [floating NAV] MMF will fluctuate. We question at what 
point investors will be given the benefit of the doubt for 
understanding the product in which they are invested and when such 
concerns will cease to drive additional regulatory action.'')
    \931\ Cf. ABA Business Law Section Comment Letter (suggesting 
that ``floating NAV money market funds include in their 
advertisements a statement that their principal value will fluctuate 
so that an investor's shares, when redeemed may be worth more or 
less than their original cost''); CFA Institute Comment Letter 
(stating that ``[d]isclosures are needed to alert investors to the 
potential for loss of principal and interest'').
    \932\ See NYC Bar Committee Comment Letter; ABA Business Law 
Section Comment Letter.
    \933\ See NYC Bar Committee Comment Letter (noting that ``stable 
value'' commonly refers to a ``retirement product that will use a 
combination of government bonds, guaranteed return insurance 
wrappers and potentially other synthetic instruments to deliver a 
minimum rate of return'').
    \934\ See Dreyfus Comment Letter.
    \935\ See ABA Business Law Section Comment Letter; NYC Bar 
Committee Comment Letter. The required disclosure statement that we 
are adopting today (see supra text accompanying note 909) is about 
30% shorter than the proposed bulleted disclosure statement. (We 
have modified the proposed bulleted disclosure statement to 
encompass the proposed language referencing fluctuating share price 
as well as the ability of a fund to impose fees or gates. The 
Proposing Release conceived of two separate reform approaches, each 
with its own disclosure statement, while this Release combines the 
approaches into a single reform package, and the disclosure 
statement we are adopting therefore references both reform elements, 
as appropriate.)
---------------------------------------------------------------------------

2. Disclosure of Tax Consequences and Effect on Fund Operations--
Floating NAV
    As discussed in the Proposing Release, the requirement that 
institutional prime money market funds transition to a floating NAV 
will entail certain additional tax- and operations-related disclosure, 
but these disclosure requirements do not necessitate rule and form 
amendments.\936\ As noted above, taxable investors in institutional 
prime money market funds, like taxable investors in other types of 
mutual funds, may now experience taxable gains and losses.\937\ 
Currently, funds are required to describe in their prospectuses the tax 
consequences to shareholders of buying, holding, exchanging, and 
selling the fund's shares.\938\ 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 changes resulting from the fund's use of a 
floating NAV.\939\ We also expect that a fund that intends to qualify 
as a retail money market fund would disclose in its prospectus that it 
limits investment to accounts beneficially owned by natural 
persons.\940\ The Proposing Release requested 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 shares of the fund, as well as the 
effects (if any) on fund operations resulting from the transition to a 
floating NAV. We received no comments directly discussing this 
disclosure.
---------------------------------------------------------------------------

    \936\ Prospectus disclosure regarding the tax consequences of 
these activities is currently required by Form N-1A. See Item 11(f) 
of Form N-1A.
    \937\ See supra section III.B.6.
    \938\ See Item 11(f) of Form N-1A.
    \939\ We expect that a floating NAV 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.
    \940\ See supra note 692 and accompanying text.
---------------------------------------------------------------------------

3. Disclosure of Transition to Floating NAV
    Currently, 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.\941\ As discussed in the Proposing Release, we would 
expect that, to meet this existing 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), it 
would update its registration statement to include relevant related 
disclosure, as discussed in sections III.E.1 and III.E.2 of this 
Release, by means of a post-effective amendment or a prospectus 
supplement. Two commenters explicitly supported that such disclosures 
be made when transitioning to a floating NAV.\942\ We continue to 
believe that a money market fund must update its registration statement 
by means of a post-effective amendment or ``sticker''

[[Page 47819]]

to reflect relevant disclosure related to a transition to a floating 
NAV.
---------------------------------------------------------------------------

    \941\ See 17 CFR 230.497.
    \942\ See HSBC Comment Letter; PWC Comment Letter.
---------------------------------------------------------------------------

4. Disclosure of the Effects of Fees and Gates on Redemptions
    As we discussed in the proposal, pursuant to the existing 
requirements in Form N-1A, funds must disclose any restrictions on fund 
redemptions in their registration statements.\943\ As discussed in more 
detail below, we expect that, to comply with these existing 
requirements, money market funds (other than government money market 
funds that are not subject to the fees and gates requirements pursuant 
to rule 2a-7(c)(2)(iii) and that have not chosen to rely on the ability 
to impose liquidity fees and suspend redemptions) will disclose in the 
registration statement the effects that the potential imposition of 
fees and/or gates, including a board's discretionary powers regarding 
the imposition of fees and gates, may have on a shareholder's ability 
to redeem shares of the fund. This disclosure should help investors 
evaluate the costs they could incur in redeeming fund shares--one of 
the goals of this rulemaking.
---------------------------------------------------------------------------

    \943\ See Items 11(c)(1) and 23 of Form N-1A.
---------------------------------------------------------------------------

    Commenters generally agreed that this disclosure would help 
investors understand the effects of fees and gates on redemptions.\944\ 
One commenter specifically agreed that Items 11(c)(1) and 23 of Form N-
1A would require money market funds to fully describe the circumstances 
under which liquidity fees could be charged or redemptions could be 
suspended or reinstated.\945\ In addition, two commenters noted that 
the prospectus should include disclosure of a board's discretionary 
powers regarding the imposition of fees and gates, which would serve to 
emphasize further the nature of money market funds as investments 
subject to risk.\946\ The Proposing Release requested comment on the 
utility of including additional disclosure about the operations and 
effects of fees and redemption gates, including (i) requiring 
information about the basic operations of fees and gates to be 
disclosed in the summary section of the statutory prospectus (and any 
summary prospectus, if used) and (ii) requiring details about the 
fund's liquidation process. One commenter argued against the utility of 
such additional disclosure in helping investors to understand the 
effects of fees and gates on redemptions.\947\ We agree and decided 
against making any changes to the rule text in this regard.
---------------------------------------------------------------------------

    \944\ See, e.g., UBS Comment Letter; Chamber II Comment Letter; 
Federated VIII Comment Letter.
    \945\ See Federated VIII Comment Letter (suggesting that Form N-
1A also would require money market funds to describe how 
shareholders would be notified thereof, as well as other 
implications for shareholders, such as the tax consequences 
associated with the money market fund's receipt of liquidity fees).
    \946\ See UBS Comment Letter; Chamber II Comment Letter.
    \947\ See Federated VIII Comment Letter (arguing that: (i) 
Requiring disclosure in the summary prospectus about ``an exigent 
circumstance (i.e., charging liquidity fees or suspending 
redemptions) which is highly unlike[ly] to ever occur '' would be 
``highly inconsistent with the Commission's goal of `providing 
prospectuses that are simpler, clearer, and more useful to 
investors' '' and (ii) no money market funds have relied on rule 
22e-3 to suspend the redemption of shares and liquidate the fund 
since the rule's adoption, and thus suggesting that disclosure about 
a fund's liquidation process would not be useful to investors).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we expect money market funds 
to explain in the prospectus the various situations in which the fund 
may impose a liquidity fee or gate.\948\ For example, money market 
funds would briefly explain in the prospectus that if the fund's weekly 
liquid assets fall below 30% of its total assets and the fund's board 
determines it is in the best interests of the fund, the fund board may 
impose a liquidity fee of no more than 2% and/or temporarily suspend 
redemptions for a limited period of time.\949\ We also expect money 
market funds to briefly explain in the prospectus that if the fund's 
weekly liquid assets fall below 10% of its total assets, the fund will 
impose a liquidity fee of 1% 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 
interests of the fund or determines that a lower or higher fee (not to 
exceed 2%) would be in the best interests of the fund.\950\
---------------------------------------------------------------------------

    \948\ Proposing Release, supra note 25, at section III.B.8.
    \949\ See Items 11(c)(1) and 23 of Form N-1A.
    \950\ See Items 11(c)(1) and 23 of Form N-1A.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we 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. Prospectus disclosure regarding any restrictions 
on redemptions is currently required by Item 11(c)(1) of Form N-1A. In 
addition to the disclosure required by Item 11(c)(1), 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 of Form N-1A (``Purchase, 
Redemption, and Pricing of Shares''). In determining whether and/or to 
what extent 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 ``would be 
most useful to typical or average investors in making an investment 
decision.'' \951\ 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.\952\
---------------------------------------------------------------------------

    \951\ 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.
    \952\ Id.
---------------------------------------------------------------------------

    Based on this principle, we anticipate that funds generally would 
consider the following disclosure to be appropriate for the prospectus, 
as disclosure regarding redemption restrictions provided in response to 
Item 11(c)(1) of Form N-1A: (i) Means of notifying shareholders about 
the imposition and lifting of fees and/or gates (e.g., press release, 
Web site announcement); (ii) timing of the imposition and lifting of 
fees and gates, including (a) an explanation that if a fund's weekly 
liquid assets fall below 10% of its total assets at the end of any 
business day, the next business day it must impose a 1% liquidity fee 
on shareholder redemptions unless the fund's board of directors 
determines that doing otherwise is in the best interests of the fund, 
(b) an explanation that if a fund's weekly liquid assets fall below 30% 
of its total assets, it may impose fees or gates as early as the same 
day, and (c) an explanation of the 10 business day limit for imposing 
gates; (iii) use of fee proceeds by the fund, including any possible 
return to shareholders in the form of a distribution; (iv) the tax 
consequences to the fund and its shareholders of the fund's receipt of 
liquidity fees; and (v) general description of the process of fund 
liquidation\953\ if the fund's weekly liquid assets fall below 10%, and 
the fund's board of directors determines that it would not be in the 
best interests of the fund to continue operating.\954\
---------------------------------------------------------------------------

    \953\ See supra section III.A.4.
    \954\ One commenter argued that it was unnecessary to describe 
the process of fund liquidation in either the prospectus or SAI. See 
Federated VIII Comment Letter. We note that we are not mandating 
particular disclosures, but rather providing examples of the types 
of disclosures we believe that money market funds could provide in 
the prospectus or SAI. We further note that it is important for 
funds to ensure that investors are fully aware of the ability of the 
fund to permanently suspend redemptions and liquidate.
---------------------------------------------------------------------------

    In addition, we expect that a government money market fund that is 
not subject to the fees and gates

[[Page 47820]]

requirements pursuant to rule 2a-7(c)(2)(iii), but that later decides 
to rely on the ability to impose liquidity fees and suspend 
redemptions, would update its registration statement to reflect the 
changes by means of a post-effective amendment or a prospectus 
supplement pursuant to rule 497 under the Securities Act. In addition, 
a government fund that later opts to rely on the ability to impose fees 
and gates provided in rule 2a-7(c)(2)(iii) should consider whether to 
provide any additional notice to its shareholders of that 
election.\955\
---------------------------------------------------------------------------

    \955\ We note that 60-day notice is required by our rules for 
other significant changes by funds, for example, when a fund changes 
its name. See rules 35d-1(a)(2)(ii) and (a)(3)(iii).
---------------------------------------------------------------------------

5. Historical Disclosure of Liquidity Fees and Gates
    We are amending Form N-1A, generally as proposed, but with certain 
modifications as discussed below, to require that money market funds 
provide disclosure in their SAIs about historical occasions in which 
the fund has considered or imposed liquidity fees or gates.\956\ As 
proposed, we would have required 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.\957\ As discussed below, we are adopting modified 
thresholds for imposing fees and gates from what was proposed; 
consequently, the amendments we are adopting to Form N-1A to require 
historical disclosure of liquidity fees and gates have been modified 
from the proposed amendments to conform to these amended threshold 
levels. In addition, in a change from the proposed historical 
disclosure requirements, the Form N-1A amendments we are adopting 
require a fund to disclose the size of any liquidity fee imposed during 
the specified look-back period. We have also determined not to adopt 
the proposed requirement to disclose ``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'' for the reasons detailed below.
---------------------------------------------------------------------------

    \956\ As we proposed, this historical disclosure would only 
apply to such events that occurred after the compliance date of the 
amendments. See Proposing Release, supra note 25, at n.983.
    \957\ See Proposing Release, supra note 25, at section 
III.B.8.d.
---------------------------------------------------------------------------

    Specifically, we are amending Form N-1A to require that money 
market funds (other than government money market funds that are not 
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii)) \958\ provide disclosure in their SAIs regarding any 
occasion during the last 10 years (but not for occasions that occurred 
before the compliance date of these amended rules) \959\ on which (i) 
the fund's weekly liquid assets have fallen below 10%, 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, or 
(ii) the fund's weekly liquid assets have fallen below 30% (but not 
less than 10%) and the fund's board of directors determined to impose a 
liquidity fee and/or suspend the fund's redemptions.\960\ With respect 
to each occasion, we are requiring funds to disclose: (i) The length of 
time for which the fund's weekly liquid assets remained below 10% (or 
30%, as applicable); (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) the size of any 
liquidity fee imposed.\961\
---------------------------------------------------------------------------

    \958\ Rule 2a-7(c)(2)(iii).
    \959\ See infra section III.N.
    \960\ See amended Item 16(g)(1) of Form N-1A. The disclosure 
required by Item 16(g)(1) should incorporate, as appropriate, any 
information that the fund is required to report to the Commission on 
Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR. See 
Instruction 2 to Item 16(g)(1). This represents a slight change from 
the proposal, in that the required disclosure is now the same as 
what would be disclosed in the initial filings of Form N-CR. We have 
made this change to reduce the burdens associated with such 
disclosure so that funds need only prepare this information once in 
a single manner. For the reasons discussed in section III.F of this 
Release, Form N-CR includes a new requirement that funds report 
their level of weekly liquid assets at the time of the imposition of 
fees or gates, and accordingly, we are also requiring similar 
disclosure here. See Form N-CR Items E.3 and F.1.
    \961\ See Instructions to amended Item 16(g)(1) of Form N-1A.
---------------------------------------------------------------------------

    We proposed to require a fund to provide disclosure in its SAI 
regarding any occasion during the last 10 years (but not before the 
compliance date) in which the fund's weekly liquid assets had 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.\962\ As discussed previously, the final 
amendments contain modified thresholds for imposing fees and gates from 
what was proposed,\963\ and we are therefore modifying the disclosure 
requirements to conform to these amended threshold levels.
---------------------------------------------------------------------------

    \962\ See Proposing Release, supra note 25, at section 
III.B.8.d.
    \963\ See supra section III.A.2.
---------------------------------------------------------------------------

    As proposed, the SAI disclosure requirements would not have 
directly required a fund to disclose the size of any liquidity fee 
imposed. We are modifying the SAI disclosure requirements to require a 
fund to disclose the size of any liquidity fee it has imposed during 
the specified look-back period. As discussed below in the context of 
the Form N-CR disclosure requirements we are adopting, because we are 
revising the default liquidity fee from the proposed 2% to 1%, and thus 
we expect that there may be instances where liquidity fees are above or 
below the default fee (rather than just lower as permitted under the 
proposal), we are requiring that funds disclose the size of the 
liquidity fee, if one is imposed.\964\
---------------------------------------------------------------------------

    \964\ See infra note 1316 and accompanying text.
---------------------------------------------------------------------------

    One commenter specifically supported the proposed 10-year ``look-
back'' period for the historical disclosure, noting that a 10-year 
period should capture a number of different market stresses delivering 
a meaningful sample.\965\ Another commenter suggested limiting SAI 
disclosure to a five-year period prior to the effective date of the 
registration statement incorporating the SAI disclosure, although this 
commenter did not provide specific reasons why this shortened look-back 
period would be appropriate.\966\ After further consideration, and 
given that commenters did not provide any specific reasons for 
implementing a shortened look-back period, we continue to believe that 
a 10-year look-back period provides shareholders and the Commission 
with a historical perspective that would be long enough to provide a 
useful understanding of past events. We believe that this period would 
provide a meaningful sample of stresses faced by individual funds and 
in the market as a whole, and to analyze patterns with respect to fees 
and gates, but would not be so long as to include circumstances that 
may no longer be a relevant reflection of the fund's management or 
operations.
---------------------------------------------------------------------------

    \965\ See HSBC Comment Letter.
    \966\ See Federated VIII Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we continue to believe that 
money market funds' current and prospective shareholders should be 
informed of historical occasions in which the fund's weekly liquid 
assets

[[Page 47821]]

have fallen below 10% and/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. The DERA Study analyzed the distribution of weekly 
liquid assets and found that 83 prime funds per year, corresponding to 
2.7% of the prime funds' weekly liquid asset observations, saw the 
percentage of their total assets that were invested in weekly liquid 
assets fall below 30%. The DERA Study further showed that less than one 
(0.6) fund per year, corresponding to 0.01% of the prime funds' weekly 
liquid asset observations, experienced a decline of total assets that 
were invested in weekly liquid assets to below 10%.\967\ We believe 
that funds will, in general, try to avoid the need to disclose 
decreasing percentages of weekly liquid assets and/or the imposition of 
a liquidity fee or gate, as required under the new amendments to Form 
N-1A,\968\ by keeping the percentage of their total assets invested in 
weekly liquid assets at or above 30%. Of those 83 funds that reported a 
percentage of total assets invested in weekly liquid assets below 30%, 
it is unclear how many, if any, would have attempted to keep the 
percentage of their total assets invested in weekly liquid assets at or 
above 30% to avoid having to report this information on their SAI 
(assuming they were to impose, at their board's discretion, a liquidity 
fee or gate).
---------------------------------------------------------------------------

    \967\ See DERA Study, supra note 24, at 27.
    \968\ See supra notes 960 and 961 and accompanying text.
---------------------------------------------------------------------------

    The required disclosure will permit current and prospective 
shareholders to assess, among other things, 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 declines in 
portfolio liquidity. This disclosure also provides 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 impose market discipline on portfolio managers to 
monitor and manage portfolio liquidity in a manner that lessens the 
likelihood that the fund would need to implement a liquidity fee or 
gate.\969\ One commenter explicitly supported the utility of these 
disclosure requirements in providing investors with useful information 
regarding the frequency of the money market fund's breaching of certain 
liquidity thresholds, whether a fee or gate was applied, and the level 
of fee imposed, stating that ``[t]his will allow investors to make 
informed decisions when determining whether to invest in [money market 
funds] and when comparing different [money market funds].'' \970\ No 
commenter argued that disclosure about the historical fact of 
occurrence of fees and gates would not be useful to investors. However, 
some commenters raised concerns about the potential redundancy of the 
proposed registration statement, Web site, and Form N-CR disclosure 
requirements.\971\
---------------------------------------------------------------------------

    \969\ See supra notes 157 and 162 and accompanying text.
    \970\ HSBC Comment Letter.
    \971\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we also have determined not to adopt the 
proposed requirement for a fund to disclose ``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'' in its SAI (or as discussed below, on its Web site).\972\ 
We note that Form N-CR, as proposed, also would have required a fund 
imposing a fee or gate to disclose a ``discussion of the board's 
analysis'' supporting its decision, and a number of commenters objected 
to this proposed requirement.\973\ In particular, commenters raised 
concerns that the disclosures proposed to be required in Form N-CR and 
Form N-1A would not be material to investors, would be burdensome to 
disclose, would chill deliberations among board members and hinder 
board confidentiality, and would encourage opportunistic 
litigation.\974\ Commenters also argued that disclosure of the board's 
analysis is not necessary to disclose patterns of stress in a fund and 
that this disclosure is not likely to be a meaningful indication of the 
board's analytical process going forward.\975\
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    \972\ However, as discussed below in section III.F.5, Form N-CR 
will require a fund to disclose the primary considerations or 
factors taken into account by the fund's board in its decision to 
impose a liquidity fee or gate.
    \973\ See infra section III.F.5.
    \974\ See infra notes 1289-1293 and accompanying text. Most 
commenters made these arguments in reference to the proposed Form N-
CR disclosure requirement; however, several commenters also 
specifically referenced the proposed identical Form N-1A disclosure 
requirement. See SIFMA Comment Letter; Stradley Ronon Comment 
Letter.
    \975\ See SIFMA Comment Letter; Stradley Ronon Comment Letter 
(both stating that requiring disclosure of the board's analysis is 
not necessary to disclose patterns of stress in a fund, and that 
patterns of stress will be apparent via the proposed disclosures of 
historical sponsor support and liquidity shortfalls). We note that 
the Proposing Release does not specifically state that disclosure of 
the board's analysis supporting its decision to impose a liquidity 
fee or temporarily suspend the fund's redemptions would permit 
shareholders to assess patterns of stress. Rather, the Proposing 
Release states that the proposed historical disclosure of liquidity 
fees and gates (which disclosure would include a discussion of the 
board's analysis supporting its decision to impose a liquidity fee 
or gate) generally would assist shareholders in assessing patterns 
of stress. See Proposing Release, supra note 25, at section 
III.B.8.d. We continue to believe that historical disclosure of fees 
and gates, which would include disclosures of historical liquidity 
shortfalls, would assist shareholders in understanding patterns of 
stress faced by the fund. See supra notes 969-970 and accompanying 
text. We believe that this historical disclosure complements the 
disclosure of historical instances of sponsor support in 
understanding patterns of stress.
---------------------------------------------------------------------------

    We discuss these commenters' concerns in detail in section III.F 
below and also provide our analysis supporting our attempt to balance 
these concerns with our interest in permitting the Commission and 
shareholders to understand why a board imposed (or did not impose) a 
liquidity fee or gate. As a result of these considerations and the 
analysis discussed in section III.F below, we have adopted a Form N-CR 
requirement to require disclosure of the primary considerations or 
factors taken into account by the fund's board in its decision to 
impose a liquidity fee or gate. However, in order to avoid unnecessary 
duplication in the disclosure that will appear in a fund's SAI and on 
Form N-CR, we have determined not to require parallel disclosure of 
these considerations or factors in the fund's SAI. Instead, a fund will 
only be required to present certain summary information about the 
imposition of fees and/or gates in its SAI (as well as on the fund's 
Web site \976\), and will be required to present more detailed 
discussion solely on Form N-CR.\977\ To inform investors about the 
inclusion of this more detailed information on Form N-CR, funds will be 
instructed to include the following statement as part of their SAI 
disclosure about the historical occasions in which the fund has 
considered or imposed liquidity fees or gates: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form

[[Page 47822]]

N-CR filing submitted by the Fund is available on the EDGAR Database on 
the Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \978\ In adopting these modified SAI disclosure 
requirements, we have attempted to balance concerns about potentially 
duplicative disclosure \979\ with our interest in presenting the 
primary information about the fund's historical imposition of fees or 
gates that we believe shareholders may find useful in assessing fund 
risks.
---------------------------------------------------------------------------

    \976\ See infra section III.E.9.f.
    \977\ See infra section III.F.5.
    \978\ See instructions to amended Item 16(g)(1) of Form N-1A.
    \979\ See supra note 971 and accompanying text. As discussed in 
more detail in section III.F.5 below, while similar information is 
required to be included on Form N-CR and on Form N-1A, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes. See infra notes 1308-1309 and accompanying 
text.
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6. Prospectus Fee Table
    As proposed, we are 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.\980\ Commenters on this aspect of our proposal agreed that the 
liquidity fee should not be included in the prospectus fee table.\981\ 
For example, one commenter stated that the fees and expenses table is 
intended to show a typical investor the range of anticipated costs that 
will be borne by the investor directly or indirectly as a shareholder, 
but is not an ideal presentation for the kind of highly contingent cost 
that would be represented by a liquidity fee.\982\
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    \980\ See Instruction 2(b) to amended Item 3 of Form N-1A.
    \981\ See, e.g., HSBC Comment Letter; NYC Bar Committee Comment 
Letter; Dreyfus Comment Letter.
    \982\ See NYC Bar Committee Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release and as adopted today, a 
liquidity fee will only be imposed when a fund experiences stress, and 
because we anticipate that a particular fund would impose this fee 
rarely, if at all,\983\ we continue to believe that the prospectus fee 
table, which is intended to help shareholders compare the costs of 
investing in different mutual funds, should not include the liquidity 
fee.\984\ We also note, as discussed above, that shareholders will be 
adequately informed about liquidity fees through other disclosures in 
funds' SAI and summary section of the statutory prospectus (and, 
accordingly, in any summary prospectus, if used).\985\ If a fund 
imposes a liquidity fee, shareholders will also be informed about the 
imposition of this fee on the fund's Web site \986\ and possibly by 
means of a prospectus supplement.\987\ A fund could also provide 
complementary shareholder communications, such as a press release or 
social media update.\988\ Accordingly, we are adopting the clarifying 
instruction to Item 3 as proposed.
---------------------------------------------------------------------------

    \983\ See supra note 247 and accompanying text.
    \984\ 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.
    \985\ See supra section III.E.4.
    \986\ See infra section III.E.9.f.
    \987\ See infra text accompanying notes 1126 and 1127.
    \988\ See infra text following note 1123.
---------------------------------------------------------------------------

7. Historical Disclosure of Affiliate Financial Support
    As discussed above in section II.B.4, voluntary support provided by 
money market fund sponsors and affiliates has played a role in helping 
some money market funds maintain a stable share price, and, as a 
result, may have lessened investors' perception of the level of risk in 
money market funds. Such discretionary sponsor support was, in fact, 
not unusual during the financial crisis.\989\ Today we are adopting, 
with certain modifications from the proposal to address commenter 
concerns, amendments that require that money market funds disclose 
current and historical instances of affiliate ``financial support.'' 
The final amendments define ``financial support'' in the same way it is 
defined in Form N-CR,\990\ and specify that funds should incorporate 
certain information that the fund is required to report on Form N-CR in 
their SAI disclosure.\991\ We discuss this definition in detail, 
including the modifications we have made to address commenter concerns, 
in section III.F.\992\ This represents a slight change from the 
proposal, in that the required disclosure is now identical to what 
would be disclosed in the initial filings of Form N-CR. We have made 
this change to reduce the burdens associated with such disclosure so 
that funds need only prepare this information once in a single 
manner.\993\
---------------------------------------------------------------------------

    \989\ See, e.g., DERA Study, supra note 24, at nn.23-24 and 
accompanying text.
    \990\ See Instruction 1 to Item 16(g)(2) of Form N-1A; Form N-CR 
Part C (defining financial support as ``including any (i) capital 
contribution, (ii) purchase of a security from the Fund in reliance 
on Sec.  270.17a-9, (iii) purchase of any defaulted or devalued 
security at par, (iv) execution of letter of credit or letter of 
indemnity, (v) capital support agreement (whether or not the Fund 
ultimately received support), (vi) performance guarantee, or (vii) 
any other similar action reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio; excluding, 
however, any (i) routine waiver of fees or reimbursement of Fund 
expenses, (ii) routine inter-fund lending (iii) routine inter-fund 
purchases of Fund shares, or (iv) any action that would qualify as 
financial support as defined above, that the board of directors has 
otherwise determined not to be reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio.'').
    \991\ See Instruction 3 to Item 16(g)(2) of Form N-1A.
    \992\ See infra section III.F.3.
    \993\ See Item 16(g)(2) of Form N-1A. The disclosure required by 
Item 16(g)(2) should incorporate, as appropriate, any information 
that the fund is required to report to the Commission on Items C.1, 
C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR. See Instruction 2 to 
Item 16(g)(2).
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on amending rule 
17a-9 (which allows for the discretionary support of money market funds 
by their sponsors and other affiliates) to potentially restrict the 
practice of sponsor support, but did not propose any specific changes 
to the rule. While a few commenters suggested, in response to this 
request for comment, that we prohibit affiliates from providing 
discretionary support to maintain a money market fund's share 
value,\994\ other commenters opposed making any changes to rule 17a-9, 
arguing that transactions facilitated by the rule are in the best 
interests of shareholders.\995\ We continue to believe, as discussed in 
the Proposing Release, that permitting financial support (with adequate 
disclosure) will provide fund affiliates with the flexibility to 
protect shareholder interests, and we are not amending rule 17a-9 at 
this time.\996\ Many commenters supported the various financial support 
disclosures we are adopting today.\997\ We believe that these 
disclosure requirements will provide transparency to shareholders and 
the Commission about the frequency, nature, and amount of affiliate 
financial support.
---------------------------------------------------------------------------

    \994\ See, e.g., Systemic Risk Council Comment Letter; Capital 
Advisors Comment Letter; see also HSBC Comment Letter (supporting 
amending rule 17a-9, arguing that transactions facilitated by the 
rule can result in shareholders having unjustified expectations of 
future support being provided by sponsors).
    \995\ See ICI Comment Letter; Dreyfus Comment Letter; ABA 
Business Law Comment Letter.
    \996\ See Proposing Release, supra note 25, at text accompanying 
n.607.
    \997\ See, e.g., Oppenheimer Comment Letter (``We support the 
SEC's proposal to require money market funds to disclose current and 
historical instances of sponsor support for stable NAV funds [. . 
.].''). See also, e.g., Angel Comment Letter; American Bankers Ass'n 
Comment Letter; Federated VIII Comment Letter; Comment Letter of 
Occupy the SEC (Sept. 16, 2013) (``Occupy the SEC Comment Letter''); 
Thrivent Comment Letter.
---------------------------------------------------------------------------

a. General Requirements
    We are adopting, with some changes from the proposal, amendments to 
Form N-1A to require a money market fund

[[Page 47823]]

to disclose in its SAI historical instances in which the fund has 
received financial support from a sponsor or fund affiliate.\998\ 
Specifically, each money market fund will be required to disclose any 
occasion during the last 10 years (but not for occasions that occurred 
before the compliance date of these amended rules) on which an 
affiliated person, promoter, or principal underwriter of the fund, or 
an affiliated person of such person,\999\ provided any form of 
financial support to the fund. For the reasons discussed in the 
Proposing Release, we believe that the disclosure of historical 
instances of sponsor support will allow investors, regulators, 
academics, market observers and market participants, and other 
interested members of the public to understand better whether a 
particular fund has required financial support in the past and the 
extent of sponsor support across the fund industry.\1000\ As proposed, 
with respect to each such occasion, funds would have been required to 
describe the nature of support, the person providing support, the 
relationship between the person providing support and the fund, the 
date the support provided, the amount of support,\1001\ the security 
supported and its value on the date support was initiated (if 
applicable), the reason for support, the term of support, and any 
contractual restrictions relating to support.\1002\ We are adopting the 
proposed disclosure requirements, with the exception of the 
requirements for a fund to describe the reason for support, the term of 
support, and any contractual restrictions relating to support.
---------------------------------------------------------------------------

    \998\ See Item 16(g)(2) of Form N-1A.
    \999\ Rule 2a-7 currently requires a money market fund to notify 
the Commission by electronic mail, directed to the Director of 
Investment Management or the Director's designee, of any purchase of 
money market fund portfolio securities by an affiliated person, 
promoter, or principal underwriter of the fund, or an affiliated 
person of such person, pursuant to rule 17a-9. See current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement 
today, as it would be duplicative with the proposed Form N-CR 
reporting requirements discussed below. See rule 2a-7(f)(3); see 
also infra note 1254. However, because the definition of ``financial 
support'' as adopted today includes the purchase of a security 
pursuant to rule 17a-9 (as well as similar actions), we believe that 
the scope of the persons covered by the definition should reflect 
the scope of persons covered by current rule 2a-7(c)(7)(iii)(B). The 
term ``affiliated person'' is defined in section 2(a)(3) and, in the 
context of an investment company, includes, among other persons, the 
investment adviser of the investment company.
    \1000\ See Proposing Release, supra note 25, at text following 
n.607.
    \1001\ See infra section III.F.3 for Commission guidance on the 
amount of support to be disclosed.
    \1002\ See proposed Item 16(g)(2) of Form N-1A. See infra notes 
1226-1243 and accompanying text for a discussion of actions that 
would be deemed to constitute ``financial support'' and additional 
discussion of what is required to be reported.
---------------------------------------------------------------------------

    While multiple commenters supported the proposed requirement for 
money market funds to disclose historical instances of financial 
support in the fund's SAI,\1003\ other commenters expressed a number of 
concerns about this proposed requirement.\1004\ For example, one 
commenter opposed this disclosure, stating that ``many investors would 
extrapolate such disclosure as an implied guarantee of future support 
by the sponsor of the fund.'' \1005\ Another commenter rejected the 
notion that past sponsor support is indicative of a sponsor's 
management style and further observed that disclosure of historical 
support contradicts the proposed disclosure that a fund's sponsor has 
no legal obligation to provide support.\1006\ While we acknowledge 
these concerns, we believe it is important for investors to understand 
the nature and extent that a fund's sponsor has discretionarily 
supported the fund in order to allow them to fully appreciate the risks 
of investing in the fund.\1007\ Although we recognize that historical 
occurrences are not necessarily indicative of future events and that 
support does not equate to poor fund management, we continue to expect 
that these disclosures will permit investors to assess the sponsor's 
past ability and willingness to provide financial support to the fund. 
This disclosure also should help investors gain a better context for, 
and understanding of, the fund's risks, historical performance, and 
principal volatility.
---------------------------------------------------------------------------

    \1003\ See supra note 997.
    \1004\ See, e.g., U.S. Bancorp Comment Letter; Dreyfus Comment 
Letter.
    \1005\ See U.S. Bancorp Comment Letter.
    \1006\ See Dreyfus Comment Letter.
    \1007\ See supra notes 51-55 and accompanying discussion; see 
also, e.g., Proposing Release, supra note 25, at n.607 and 
accompanying text.
---------------------------------------------------------------------------

    A number of commenters stated that any disclosure of financial 
support, including the historical disclosures, should only apply to 
stable NAV funds.\1008\ We disagree. Transparency of financial support 
is important for stable NAV funds, given the potential for a ``breaking 
the buck'' event absent the receipt of affiliate financial support. It 
is equally important, for both floating and stable NAV money market 
funds, that investors have transparency about the extent to which the 
fund's principal stability or liquidity profile is achieved through 
financial support as opposed to portfolio management. This is 
particularly the case when financial support for a floating NAV fund 
could obviate the need for it to impose a liquidity fee or redemption 
gate.\1009\ We therefore believe that transparency of such support will 
help investors better evaluate the risks with respect to both stable 
and floating NAV funds.\1010\
---------------------------------------------------------------------------

    \1008\ See, e.g., ICI Comment Letter; IDC Comment Letter; 
Oppenheimer Comment Letter; Comment Letter of State Street Global 
Advisors (Sept. 17, 2013) (``SSGA Comment Letter'').
    \1009\ See generally, ABA Business Law Section (with respect to 
retaining rule 17a-9, stating that ``the possibility of economic 
support from an affiliated person would remain important to money 
market funds that have a floating NAV because [. . .] liquidity 
concerns [remain] significant to money market funds (and other funds 
holding the same investments). [. . . .] In addition, retaining 
[rule 17a-9] would not undercut the Commission's goal of providing 
transparency of money market fund risks, particularly in light of 
the Commission's companion proposals calling for disclosure of 
historical instances of economic support from sponsors of money 
market funds.'').
    \1010\ See Proposing Release, supra note 25, at section 
III.F.1.a (discussing reasons why funds should disclose historical 
sponsor support).
---------------------------------------------------------------------------

    Some commenters also suggested we shorten the look-back period. For 
example, one commenter proposed a look-back period of 3 to 5 years 
(rather than 10 years, as proposed).\1011\ We believe, however, that a 
look-back period of less than 10 years would be too short to achieve 
our goals. As we noted in the Proposing Release,\1012\ the 10-year 
look-back period will provide shareholders and the Commission with a 
historical perspective that is long enough to provide a useful 
understanding of past events, and to analyze patterns with respect to 
financial support received by the fund, but not so long as to include 
circumstances that may no longer be a relevant reflection of the fund's 
management or operations. We also note that, historically, episodes of 
financial support have occurred on average every 5 to 10 years.\1013\ 
Accordingly, a shorter look-back period would result in disclosure that 
not does reflect the typical historical frequency of instances of 
financial support.
---------------------------------------------------------------------------

    \1011\ See, e.g., Dreyfus Comment Letter (stating that 
``[s]imilar kinds of information (e.g., management fees and 12b-1 
fees paid, officers and directors biographies, financial highlights) 
generally [are] required in the registration statement only for a 3-
5 year period.''); Federated VIII Comment Letter (recommending five 
years). But see Occupy the SEC Comment Letter (explicitly supporting 
the proposed 10-year look-back period for disclosing events of 
financial support).
    \1012\ See Proposing Release, supra note 25, at discussion 
following n.614.
    \1013\ See Proposing Release, supra note 25, at section II.B, 
Table 1.
---------------------------------------------------------------------------

    We proposed to limit historical disclosure of events of affiliate 
financial support to instances that occur after the compliance date of 
the amendments to Form N-1A.\1014\ Several commenters

[[Page 47824]]

generally supported this approach, suggesting that this disclosure 
requirement should only apply to events that occur after the compliance 
date of the disclosure reforms.\1015\ We continue to believe that these 
disclosures should only apply to affiliate financial support events 
that occur after the compliance date of the disclosure reforms, in 
large part because to do otherwise would require funds and their 
affiliates to incur significant costs as they reexamine a variety of 
past transactions to determine whether such events fit our new 
definition of affiliate financial support.
---------------------------------------------------------------------------

    \1014\ As we proposed, this historical disclosure would only 
apply to such events that occurred after the compliance date of the 
amendments. See Proposing Release, supra note 25, at text 
accompanying n.983.
    \1015\ See Federated VII Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    Finally, a few commenters suggested disclosing historical financial 
support in Form N-MFP, N-CR, or N-CSR, rather than in the SAI (as 
proposed).\1016\ One commenter noted that to the extent this disclosure 
will serve as a reporting function for analysis by regulators, other 
forms such as Form N-MFP have been developed for that particular 
purpose.\1017\ Commenters also raised concerns about the potential 
redundancy of the proposed registration statement, Web site, and Form 
N-CR disclosure requirements.\1018\ Because these historical sponsor 
support disclosures are intended to benefit investors, as well as 
regulators, we believe that the SAI is the most accessible and 
efficient format for such disclosure. As discussed in section III.F.3, 
we note that the contemplated SAI disclosure would consolidate 
historical instances of sponsor support that have occurred in the past 
10 years, which would permit investors to view this information in a 
user-friendly manner, without the need to review prior form filings to 
piece together a fund's history of sponsor support. We also believe 
that, to the extent investors may not be familiar with researching 
filings on EDGAR, including this disclosure in a fund's SAI, which 
investors may receive in hard copy through the U.S. Postal Service or 
may access on a fund's Web site, as well as on EDGAR, may make this 
information more readily available to these investors than disclosure 
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------

    \1016\ See, e.g., Dreyfus Comment Letter; U.S. Bancorp Comment 
Letter.
    \1017\ See Dreyfus Comment Letter.
    \1018\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    As discussed above, we are not adopting the proposed requirements 
that a fund include the reason for support, the term of support, and 
any contractual restrictions relating to support in its required SAI 
disclosure.\1019\ Instead, a fund will only be required to present 
certain summary information about the receipt of financial support in 
its SAI (as well as on the fund's Web site \1020\), and will be 
required to present more detailed discussion solely on Form N-CR.\1021\ 
To inform investors about the inclusion of this more detailed 
information on Form N-CR, funds will be instructed to include the 
following statement as part of the historical disclosure of affiliate 
financial support appearing in the fund's SAI: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form N-CR filing submitted by 
the Fund is available on the EDGAR Database on the Securities and 
Exchange Commission's Internet site at http://www.sec.gov.'' \1022\ In 
adopting these modified SAI disclosure requirements, we have attempted 
to appropriately consider concerns about potentially duplicative 
disclosure \1023\ as well as our belief, as discussed above, that the 
SAI is the most accessible and efficient format for investors to 
receive historical disclosures about affiliate financial support, and 
our interest in presenting the primary information about such financial 
support that we believe shareholders may find useful in assessing fund 
risks.
---------------------------------------------------------------------------

    \1019\ See supra note 1002 and accompanying text.
    \1020\ See infra section III.E.9.g.
    \1021\ See infra section III.F.3.
    \1022\ See Instructions to amended Item 16(g)(2) of Form N-1A.
    \1023\ See supra note 1018 and accompanying text. As discussed 
in more detail in section III.F.3 below, while similar information 
is required to be included on Form N-CR and Form N-1A, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes. See discussion following infra notes 1248 
and 1249 and accompanying text.
---------------------------------------------------------------------------

b. Historical Support of Predecessor Funds
    We also are amending, generally as we proposed, the instructions to 
Form N-1A to clarify that funds must disclose any financial support 
provided to a predecessor fund (in the case of a merger or other 
reorganization) within the 10-year look-back period. As discussed in 
the Proposing Release, this amendment will provide additional 
transparency by providing investors the full extent of historical 
support provided to a fund or its predecessor. Specifically, except as 
noted below, the amended instructions state that if the fund has 
participated in a merger or other reorganization with another 
investment company during the last 10 years, the fund must additionally 
provide the required disclosure with respect to the other investment 
company.\1024\
---------------------------------------------------------------------------

    \1024\ See Instruction 2 to Item 16(g)(2). Additionally, if a 
fund's name has changed (but the corporate or trust entity remains 
the same), the fund may want to consider providing the required 
disclosure with respect to the entity or entities identified by the 
fund's former name. See Proposing Release, supra note 25, at n.619.
---------------------------------------------------------------------------

    Rather than require that funds disclose financial support provided 
to a predecessor fund in all cases (as proposed), we are revising the 
instruction to permit a fund to exclude such disclosure where the 
person or entity that previously provided financial support to the 
predecessor fund is not currently an affiliated person (including the 
adviser), promoter, or principal underwriter of the disclosing 
fund.\1025\ A few commenters expressed concern about historical 
disclosures with respect to third-party reorganizations, asserting that 
past financial support would be irrelevant to shareholders where the 
surviving fund had a new manager unaffiliated with the prior 
manager.\1026\ These commenters noted that this disclosure requirement 
could adversely affect potential merger transactions with funds that 
have received sponsor support.\1027\
---------------------------------------------------------------------------

    \1025\ Id. In the Proposing Release we had proposed to require 
disclosure of financial support provided to a predecessor fund in 
all cases. See Proposing Release, supra note 25, at n.618 and 
accompanying discussion.
    \1026\ See, e.g., Federated VIII Comment Letter; SIFMA Comment 
Letter.
    \1027\ See id.
---------------------------------------------------------------------------

    We agree with these commenters that historical sponsor support 
information about a predecessor fund may be less relevant when the fund 
is not advised by, or otherwise affiliated with, the entity that had 
previously provided financial support to the predecessor fund. 
Accordingly, we are adopting an exclusion to this disclosure 
requirement based on whether the current fund continues to have any 
affiliation with the predecessor fund's affiliated persons (including 
the predecessor fund's adviser), promoter, or principal 
underwriter.\1028\ We expect this approach should mitigate commenter 
concerns of adverse effects on fund mergers.
---------------------------------------------------------------------------

    \1028\ See Instruction 2 to Item 16(g)(2).
---------------------------------------------------------------------------

8. Economic Analysis
    As discussed above, we are adopting a number of amendments to 
requirements for disclosure documents that are related to both our fees 
and

[[Page 47825]]

gates and floating NAV requirements, as well as other disclosure 
enhancements discussed in the proposal. We believe that these 
amendments improve transparency and will better inform shareholders 
about the risks of investing in money market funds, which should result 
in shareholders making investment decisions that better match their 
investment preferences. We believe that many of these amendments will 
have effects on efficiency, competition, and capital formation that are 
similar to those that are outlined in the Macroeconomic Consequences 
section below,\1029\ but some of the amendments introduce additional 
effects.
---------------------------------------------------------------------------

    \1029\ See infra section III.K.
---------------------------------------------------------------------------

    Many of the new disclosure requirements are designed to make 
investors aware of the more substantive amendments discussed earlier in 
the Release, i.e., the ability of certain funds to impose redemption 
fees and gates and the requirement that certain funds float their NAV. 
Increasing investor awareness via enhanced disclosure may lead to more 
efficient capital allocations because investors will possess greater 
knowledge of risks and thus will be able to make better informed 
investment decisions when deciding how to allocate their assets. 
Increased investor awareness also may promote capital formation if 
investors find a floating NAV and/or redemption fees and gates 
attractive and are more willing to invest in this market. For instance, 
investors may find fees and gates attractive insofar as imposing fees 
and gates during a time of market stress could help protect the 
interests of shareholders, or could permit a fund manager to invest the 
proceeds of maturing assets in short-term securities while the gate is 
down, thereby helping to protect the short-term financing 
markets.\1030\ Moreover, enhanced investor awareness of fund risks may 
incentivize fund managers to hold less risky portfolio securities, 
which could also increase capital formation. Capital formation could be 
negatively impacted if investors find a floating NAV and/or redemption 
fees and gates unattractive or too complicated to understand. For 
instance, an investor could find it unattractive that imposing a fee or 
gate would prevent them from moving their investment into other 
investment alternatives or using their assets to satisfy liquidity 
needs.\1031\ Additionally, disclosing a general risk of investment loss 
may negatively impact capital formation if this disclosure leads 
investors to decide that money market funds pose too great of an 
investment risk, and investors consequently decide not to invest in 
money market funds or to move their invested assets from money market 
funds. As such, capital formation could be negatively impacted if 
investors move their money from these types of funds to a different 
style of fund, for example, from an institutional prime fund to a 
government fund and thus affecting the short-term funding market. 
However, if investors move from a money market fund to a money market 
fund alternative that invests in similar types of assets, then there 
should not be an impact on capital formation with respect to the 
overall economy, but only within the money market fund industry.
---------------------------------------------------------------------------

    \1030\ See supra section III.A.1.b.ii.
    \1031\ See supra section III.A.1.c.iii.
---------------------------------------------------------------------------

    To the extent that the disclosure amendments increase investor 
awareness of the more substantive reforms, there may be an effect on 
competition because some of the disclosure requirements are specific to 
the structure of the funds. As such, these funds will be competing with 
each other based on, among other things, what is stated in their 
advertisements, sales materials, and the summary section of their 
statutory prospectus. Disclosure providing that funds with a stable NAV 
seek to preserve the value of their investment at $1.00 per share, that 
share prices of floating NAV funds will fluctuate, that taxable 
investors in institutional prime money market funds may experience 
taxable gains or losses, or that non-government funds may impose a fee 
or gate may make investors more aware of different investment options, 
which could increase competition between funds.
    The amendments that require money market funds to disclose current 
and historical information about affiliate financial support and 
historical information about the implementation of redemption fees and 
gates may also affect efficiency, competition, and capital formation. 
As discussed in the Proposing Release, these amendments may increase 
informational efficiency by providing additional information to 
investors and the Commission about the frequency, nature, and amount of 
financial support provided by money market fund sponsors,\1032\ as well 
as the frequency and duration of redemption fees and gates. This in 
turn could assist investors in analyzing the risks associated with 
particular funds, which could increase allocative efficiency and could 
positively affect competition by permitting investors to choose whether 
to invest in certain funds based on this information. However, the 
disclosure of sponsor support could advantage larger funds and fund 
groups, if a fund sponsor's ability to provide financial support to a 
fund is perceived to be a competitive benefit. The disclosure of fees 
and gates also could advantage larger funds and fund groups if the 
ability to provide financial support reduces or eliminates the need to 
impose fees and/or gates (the imposition of which presumably would be 
perceived to be a competitive detriment). Additionally, if investors 
move their assets among money market funds or decide to invest in 
investment products other than money market funds as a result of the 
proposed disclosure requirements, the competitive stance of certain 
money market funds, or the money market fund industry generally, could 
be adversely affected.
---------------------------------------------------------------------------

    \1032\ See Proposing Release, supra note 25, at text following 
n.629.
---------------------------------------------------------------------------

    The disclosure of affiliate financial support could have additional 
effects on capital formation, depending on whether investors interpret 
financial support as a sign of money market fund strength or weakness. 
If sponsor support (or the lack of need for sponsor support) were 
understood to be a sign of fund strength, the requirements could 
enhance capital formation by promoting stability within the money 
market fund industry. On the other hand, the disclosure requirements 
could detract from capital formation if sponsor support were understood 
to indicate fund weakness and make money market funds more susceptible 
to heavy redemptions during times of stress, or if money market fund 
investors decide to move their money out of money market funds entirely 
and not put it into an alternative with similar types of assets as a 
result. We did not receive comments on this aspect of our economic 
analysis. Similarly, the requirement to disclose historical redemption 
fees and gates could either promote or hinder capital formation. 
Disclosing the prior imposition of fees or gates may negatively impact 
capital formation if investors view the imposition of fees and gates 
unfavorably. Conversely, the requirement to disclose will allow 
investors to differentiate funds based on the extent to which funds 
have imposed fees and gates in the past, which could increase capital 
formation if investors perceive the absence of past fees and gates as a 
sign of greater stability within the money market fund industry. 
Furthermore, these required disclosures could assist the Commission in 
overseeing money market funds and

[[Page 47826]]

developing regulatory policy affecting the money market fund industry, 
which might affect capital formation positively if the resulting more 
efficient or more effective regulatory framework encouraged investors 
to invest in money market funds. The Commission cannot estimate the 
quantitative benefits of the amendments to the disclosure forms because 
of uncertainty about how increased transparency may affect different 
investors' or groups of investors' understanding of the risks 
associated with money market funds. Uncertainty regarding how the 
proposed disclosure may affect different investors' behavior likewise 
makes it difficult for the Commission to measure the quantitative 
benefits of the proposed requirements.
    As a possible alternative, we could have chosen to require 
disclosure, as suggested by commenters, of the historical information 
on Form N-MFP, Form N-CR, or Form N-CSR instead of through the SAI. 
Because the historical disclosures are intended to benefit both 
investors and regulators, we believe that the SAI is the most suitable 
format for such disclosure. As discussed above, we believe that 
including historical information about affiliate financial support and 
the imposition of fees and gates in the fund's SAI may make this 
information more readily available to investors than disclosure on 
other SEC forms that are solely accessible on EDGAR. We therefore 
believe that requiring this disclosure to appear in a fund's SAI could 
increase informational efficiency by facilitating the provision of this 
information to investors.
    We believe that all money market funds will incur one-time and 
ongoing annual costs to update their registration statements, as well 
as their advertising and sales materials. The proposal estimated the 
costs that would be incurred under the fees and gates alterative 
separately from those that would be incurred under the floating NAV 
alternative. Under the fees and gates alternative, the proposal 
estimated that the average one-time costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its 
registration statement and to update its advertising and sales 
materials would be $3,092,\1033\ and the average one-time costs for a 
government fund that is not subject to the fees and gates requirements 
pursuant to rule 2a-7(c)(2)(iii) would be $2,204.\1034\ The proposal 
also estimated that the average annual costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) to amend its 
registration statement would be $296,\1035\ and the average annual 
costs for a government fund that is not subject to the fees and gates 
requirements pursuant to rule 2a-7(c)(2)(iii) would be $148.\1036\
---------------------------------------------------------------------------

    \1033\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the fees and gates proposal, as well as the Form N-1A requirements 
relating to the fees and gates proposal that would not necessitate 
form amendments ($1,480) + the costs estimated for each fund to 
comply with the proposed Form N-1A sponsor support disclosure 
requirements ($148) = $1,628. The estimated costs included in 
section III.B.8 of the Proposing Release inadvertently omitted the 
costs estimated for each fund to update the fund's advertising and 
sales materials to include the required risk disclosure statement; 
however, these costs ($1,464) were discussed in the Paperwork 
Reduction Act Analysis section of the Proposing Release. Adding 
these costs ($1,464) to the costs of complying with the new 
requirements of Form N-1A ($1,628) results in total estimated costs 
of $3,092. See Proposing Release, supra note 25, at nn.461, 628, 
1214 and accompanying text.
    \1034\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the fees and gates proposal, as well as the Form N-1A requirements 
relating to the fees and gates proposal that would not necessitate 
form amendments ($592) + the costs estimated for each fund to comply 
with the proposed Form N-1A sponsor support disclosure requirements 
($148) = $740. The estimated costs included in section III.B.8 of 
the Proposing Release inadvertently omitted the costs estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement; however, these costs 
($1,464) were discussed in the Paperwork Reduction Act Analysis 
section of the Proposing Release. Adding these costs ($1,464) to the 
costs of complying with the proposed amendments to Form N-1A ($740) 
results in total estimated costs of $2,204. See Proposing Release, 
supra note 25, at nn.461, 628, 1214 and accompanying text.
    \1035\ This figure incorporates the costs estimated for a fund 
to: (i) Review and update the disclosure in its registration 
statement regarding historical occasions on which the fund has 
considered or imposed liquidity fees or gates, and to inform 
investors of any fees or gates currently in place by means of a 
prospectus supplement ($148); and (ii) to review and update the 
disclosure in its registration statement regarding historical 
instances in which the fund has received financial support from a 
sponsor or fund affiliate ($148). See Proposing Release, supra note 
25, at nn.463, 628 and accompanying text.
    \1036\ This figure reflects the costs estimated for a fund to 
review and update the disclosure in its registration statement 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate ($148). See 
Proposing Release, supra note 25, at n.628 and accompanying text.
---------------------------------------------------------------------------

    Under the floating NAV alternative, the proposal estimated that the 
average one-time costs that would be incurred for a floating NAV money 
market fund to amend its registration statement and update its 
advertising and sales materials would be $3,092,\1037\ and the average 
one-time costs for a government or retail money market fund would be 
$2,204.\1038\ The proposal also estimated that the average annual costs 
for a money market fund to amend its registration statement would be 
$148.\1039\
---------------------------------------------------------------------------

    \1037\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the floating NAV proposal, as well as the Form N-1A requirements 
relating to the floating NAV proposal that would not necessitate 
form amendments ($1,480) + the costs estimated for each fund to 
comply with the proposed Form N-1A sponsor support disclosure 
requirements ($148) = $1,628. The estimated costs included in 
section III.A.8 of the Proposing Release inadvertently omitted the 
costs estimated for each fund to update the fund's advertising and 
sales materials to include the required risk disclosure statement; 
however, these costs ($1,464) were discussed in the Paperwork 
Reduction Act Analysis section of the Proposing Release. Adding 
these costs ($1,464) to the costs of complying with the proposed 
amendments to Form N-1A ($1,628) results in total estimated costs of 
$3,092. See Proposing Release, supra note 25, at nn.330, 628, 1121-
1125 and accompanying text.
    \1038\ This figure incorporates the costs estimated for each 
fund to comply with the proposed amendments to Form N-1A relating to 
the floating NAV proposal, as well as the Form N-1A requirements 
relating to the floating NAV proposal that would not necessitate 
form amendments ($592) + the costs estimated for each fund to comply 
with the proposed Form N-1A sponsor support disclosure requirements 
($148) = $740. The estimated costs included in section III.A.8 of 
the Proposing Release inadvertently omitted the costs estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement; however, these costs 
($1,464) were discussed in the Paperwork Reduction Act Analysis 
section of the Proposing Release. Adding these costs ($1,464) to the 
costs of complying with the proposed amendments to Form N-1A 
($1,628) results in total estimated costs of $2,204. See Proposing 
Release, supra note 25, at nn.330, 628, 1121-1125 and accompanying 
text.
    \1039\ This figure reflects the costs estimated for a fund to 
review and update the disclosure in its registration statement 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate ($148). See 
Proposing Release, supra note 25, at n.628 and accompanying text.
---------------------------------------------------------------------------

    We requested comment on the estimates of the operational costs 
associated with the amended disclosure requirements. Certain commenters 
generally noted that complying with all of the new disclosure 
requirements, including the disclosure requirements involving the 
fund's advertisements and sales materials and its registration 
statement, would involve some additional costs.\1040\ Several 
commenters provided dollar estimates

[[Page 47827]]

of the initial costs to implement a fees and gates or floating NAV 
regime and noted that these estimates would include the costs of 
related disclosure, but these commenters did not specifically break out 
the disclosure-related costs in their estimates.\1041\ One commenter 
stated that the costs to update a fund's registration statement to 
reflect the new fees and gates and floating NAV requirements would be 
``minimal when compared to other costs.'' \1042\ Another commenter 
stated that it did not consider the disclosure requirements burdensome 
and noted that it did not believe the disclosure requirements would 
impose unnecessary costs.\1043\ We have considered the comments we 
received on the new disclosure requirements, and we have determined not 
to change the assumptions we used in our cost estimates in response to 
these comments, as the comments provided no specific suggestions or 
critiques regarding our methods for estimating these costs. However, 
our current estimates reflect the fact that the amendments we are 
adopting today combine the floating NAV and fees and gates proposal 
alternatives into one unified approach, and also incorporate updated 
industry data.
---------------------------------------------------------------------------

    \1040\ See, e.g., Fin. Svcs. Roundtable Comment Letter (noting 
that the proposed disclosure requirements generally would produce 
``significant cost to the fund and ultimately to the fund's 
investors''); SSGA Comment Letter (urging the Commission to consider 
the ``substantial administrative, operational, and expense burdens'' 
of the proposed disclosure-related amendments); Chapin Davis Comment 
Letter (noting that the disclosure- and reporting-related amendments 
will result in increased costs in the form of fund staff salaries, 
or consultant, accountant, and lawyer hourly rates, that will 
ultimately be borne in large part by investors and portfolio 
issuers).
    \1041\ See, e.g., Chamber I Comment Letter; Fidelity Comment 
Letter.
    \1042\ See State Street Comment Letter, at Appendix A.
    \1043\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We anticipate that money market funds will incur costs to (i) amend 
the fund's advertising and sales materials (including the fund's Web 
site) to include the required risk disclosure statement; (ii) amend the 
fund's registration statement to include the required risk disclosure 
statement, disclosure of the tax consequences and effects on fund 
operations of a floating NAV (as applicable), and the effects of fees 
and gates on redemptions (as applicable); (iii) amend the fund's 
registration statement to disclose post-compliance-period historical 
occasions on which the fund has considered or imposed liquidity fees or 
gates; and (iv) amend the fund's registration statement to disclose 
post-compliance-period historical instances in which the fund has 
received financial support from a sponsor or fund affiliate. These 
costs will include initial, one-time costs, as well as ongoing costs. 
Each money market fund in a fund complex might not incur these costs 
individually.
    We estimate that the average one-time costs for a money market fund 
(except government money market funds that are not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii), and floating 
NAV money market funds) to comply with these disclosure requirements 
would be $3,059 (plus printing costs).\1044\ We estimate that the 
average one-time costs for a government money market fund that is not 
subject to the fees and gates requirements pursuant to rule 2a-
7(c)(2)(iii) to comply with these disclosure requirements would be 
$2,102 (plus printing costs).\1045\ Finally, we estimate that the 
average one-time costs for floating NAV money market funds to comply 
with these disclosure requirements would be $4,016 (plus printing 
costs).\1046\
---------------------------------------------------------------------------

    \1044\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement, the required disclosure about the effects that 
fees and gates may have on shareholder redemptions, disclosure about 
historical occasions on which the fund has considered or imposed 
liquidity fees or gates, and disclosure about financial support 
received by the fund ($1,595) + the costs we estimated for each fund 
to update the fund's advertising and sales materials to include the 
required risk disclosure statement ($1,464) = $3,059. The costs 
associated with these activities are all paperwork-related costs and 
are discussed in more detail infra at sections IV.F and IV.G.
    \1045\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement and disclosure about financial support received 
by the fund ($638) + the costs we estimated for each fund to update 
the fund's advertising and sales materials to include the required 
risk disclosure statement ($1,464) = $2,102. The costs associated 
with these activities are all paperwork-related costs and are 
discussed in more detail infra at sections IV.F and IV.G.
    \1046\ This figure incorporates the costs we estimated for each 
fund to update its registration statement to include the required 
disclosure statement, the required disclosure about the effects that 
fees and gates may have on shareholder redemptions, disclosure about 
historical occasions on which the fund has considered or imposed 
liquidity fees or gates, the required tax- and operations-related 
disclosure about a floating NAV, and disclosure about financial 
support received by the fund ($2,552) + the costs we estimated for 
each fund to update the fund's advertising and sales materials to 
include the required risk disclosure statement ($1,464) = $4,016. 
The costs associated with these activities are all paperwork-related 
costs and are discussed in more detail infra at sections IV.F and 
IV.G.
---------------------------------------------------------------------------

    Ongoing compliance costs include the costs for money market funds 
periodically to: (i) Review and update the fund's registration 
statement disclosure regarding historical occasions on which the fund 
has considered or imposed liquidity fees or gates (as applicable); (ii) 
review and update the fund's registration statement disclosure 
regarding historical instances in which the fund has received financial 
support from a sponsor or fund affiliate; and (iii) inform investors of 
any fees or gates currently in place (as applicable) or the transition 
to a floating NAV (as applicable) by means of a prospectus supplement. 
Because the required registration statement disclosure overlaps with 
the information that a fund must disclose on Parts C, E, F, and G of 
Form N-CR, 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.F. We estimate that a fund 
(besides a government money market fund that is not subject to the fees 
and gates requirements pursuant to rule 2a-7(c)(2)(iii)) will incur 
average annual costs of $319 to comply with these disclosure 
requirements.\1047\ We also estimate that a government money market 
fund that is not subject to the fees and gates requirements pursuant to 
rule 2a-7(c)(2)(iii) will incur average annual costs of $160 to comply 
with these disclosure requirements.\1048\
---------------------------------------------------------------------------

    \1047\ This figure incorporates the costs we estimated for each 
fund to review and update its registration statement disclosure 
regarding historical occasions on which the fund has considered or 
imposed liquidity fees or gates, and to inform investors of any fees 
or gates currently in place (as appropriate) or the transition to a 
floating NAV (as appropriate) by means of a prospectus supplement 
($159.5) + the costs we estimated for each fund to review and update 
its registration statement disclosure regarding historical instances 
in which the fund has received financial support from a sponsor or 
fund affiliate ($159.5) = $319. The costs associated with these 
activities are all paperwork-related costs and are discussed in more 
detail infra at section IV.G.
    \1048\ This figure incorporates the costs we estimated for each 
fund to review and update its registration statement disclosure 
regarding historical instances in which the fund has received 
financial support from a sponsor or fund affiliate (approximately 
$160). The costs associated with these activities are all paperwork-
related costs and are discussed in more detail infra at section 
IV.G.
---------------------------------------------------------------------------

9. Web site Disclosure
a. Daily Disclosure of Daily and Weekly Liquid Assets
    We are adopting, as proposed, amendments to rule 2a-7 that require 
money market funds to disclose prominently on their Web sites the 
percentage of the fund's total assets that are invested in daily and 
weekly liquid assets, as of the end of each business day during the 
preceding six months.\1049\ The amendments we are adopting would 
require, as proposed, a fund to maintain a schedule, chart, graph, or 
other depiction on its Web site showing historical information about 
its investments in daily liquid assets and weekly liquid assets for the 
previous six

[[Page 47828]]

months,\1050\ and would require the fund to update this historical 
information each business day, as of the end of the preceding business 
day. Several commenters supported the disclosure on a fund's Web site 
of the fund's daily liquid assets and weekly liquid assets.\1051\ 
Commenters supporting such disclosure noted that daily disclosure of 
this information would promote transparency and help investors better 
understand money market fund risks.\1052\ A few commenters stated that 
providing this information could help investors evaluate whether a fund 
is positioned to meet redemptions or could approach a threshold where a 
fee or gate could be imposed.\1053\ A number of commenters suggested 
that daily disclosure likely would impose external market discipline on 
portfolio managers and encourage careful management of daily and weekly 
assets.\1054\ Finally, several commenters indicated that many money 
market funds are already disclosing such information on either a daily 
or a weekly basis, a fact we noted in the Proposing Release.\1055\
---------------------------------------------------------------------------

    \1049\ See rule 2a-7(a)(4). As proposed, 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.
    \1050\ For purposes of the required Web site disclosure of daily 
and weekly liquid assets, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. Accordingly, if a fund were to update its Web site 
on the compliance date to include the required schedule, chart, 
graph, or other depiction showing historical data for the previous 
six months, the depiction would show data from six months prior to 
the compliance date. See infra note 2201.
    \1051\ See, e.g., Boston Federal Reserve Comment Letter; 
Oppenheimer Comment Letter; Fidelity Comment Letter.
    \1052\ See, e.g., Oppenheimer Comment Letter; Blackrock II 
Comment Letter; Fidelity Comment Letter.
    \1053\ See, e.g., U.S. Bancorp Comment Letter; Goldman Sachs 
Comment Letter.
    \1054\ See, e.g., ICI Comment Letter; Dreyfus Comment Letter; 
American Bankers Ass'n Comment Letter.
    \1055\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II 
Comment Letter; J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    Other commenters, however, opposed certain aspects of the proposed 
amendment. Two commenters opposed daily disclosure of this information 
and thought the information could be provided on a weekly basis.\1056\ 
We disagree. In times of market stress, money market funds may face 
rapid, heavy redemptions, which could quickly affect their 
liquidity.\1057\ Having daily information in times of market stress can 
reduce uncertainty, providing investors assurance that a money market 
fund has sufficient liquidity to withstand the potential for heavy 
redemptions. One commenter opposed the six-month look-back because it 
would require a restructuring of fund Web sites that are already 
disclosing this data.\1058\ We recognize, as discussed below, that the 
amendments will impose costs on funds. We believe, however, that it is 
important for funds to provide historical information for the prior six 
months, and updating such information daily will help investors place 
current information in context and thus have a more complete picture of 
current events.
---------------------------------------------------------------------------

    \1056\ See Schwab Comment Letter; Federated VIII Comment Letter.
    \1057\ See generally DERA Study, supra note 24, at section 3.
    \1058\ See UBS Comment Letter.
---------------------------------------------------------------------------

    One commenter argued that daily disclosure of this information 
would not be meaningful to investors,\1059\ while another commenter 
expressed concern that daily disclosure, in combination with 
discretionary fees and gates, could cause reactionary 
redemptions.\1060\ We recognize and have considered the risk that daily 
disclosure of weekly liquid assets and daily liquid assets could 
trigger heavy redemptions in some situations, particularly the risk of 
pre-emptive redemptions in anticipation of a potential fee or gate. 
However, as discussed in detail above, the board's discretion to impose 
a fee or a gate, among other things, mitigates the concern that 
investors will be able to accurately predict such an event which in 
turn would lead them to pre-emptively withdraw their assets from the 
fund.\1061\ In addition, as discussed above, other aspects of today's 
amendments further mitigate the risks of pre-emptive runs. We believe 
that daily disclosure of weekly liquid assets and daily liquid assets 
ultimately benefits investors and could both increase stability and 
decrease risk in the financial markets.\1062\ As mentioned above, while 
there is a potential for heavy redemptions in response to a decrease in 
liquidity, the increased transparency could reduce run risk in cases 
where it shows investors that a fund has sufficient liquidity to 
withstand market stress events. We also agree with commenters and 
believe that daily disclosure will increase market discipline, which 
could ultimately deter situations that could lead to heavy 
redemptions.\1063\ Also, as noted elsewhere in this Release, we believe 
that the reforms we are adopting concerning fees and gates are a tool 
for handling heavy redemptions once they occur. Finally, we note that 
several funds have already voluntarily begun disclosing liquidity 
information on their Web sites.\1064\
---------------------------------------------------------------------------

    \1059\ See Schwab Comment Letter.
    \1060\ See Federated VIII Comment Letter; see also supra section 
III.A.1.c.i.
    \1061\ See supra note 171 and accompanying text.
    \1062\ Although not a principal basis for our decision, we note 
that certain literature suggests that suspensions of withdrawals can 
prevent bank runs. See, e.g., Diamond, Douglas W., Spring 2007, 
``Banks and Liquidity Creation: A Simple Exposition of the Diamond-
Dybvig Model,'' Economic Quarterly, Volume 93, Number 2, 189-200.
    \1063\ See supra note 1054.
    \1064\ See, e.g., BlackRock II Comment Letter; Boston Federal 
Reserve Comment Letter.
---------------------------------------------------------------------------

    A few commenters also believed that the proposed disclosures should 
apply only to stable NAV funds.\1065\ We disagree with these 
commenters. We believe that the benefits we discuss throughout this 
section regarding disclosure apply regardless of whether a fund has a 
stable or floating NAV. As we have noted in several instances, a 
floating NAV may reduce but does not eliminate the risk of heavy 
redemptions if the fund comes under stress. Liquidity information can 
help investors understand a fund's ability to withstand heavy 
redemptions. Additionally, this information is relevant to investors to 
understand the potential for either a floating NAV fund or a stable NAV 
fund to impose a fee or a gate. We also believe that it is important 
for all money market funds, both floating NAV funds and stable NAV 
funds, to disclose liquidity information so that investors will easily 
be able to compare this data point, which could be seen as a risk 
metric, across funds when making investment decisions among types of 
money market funds (e.g., comparing an institutional prime money market 
fund to a government money market fund), as well as between money 
market funds of the same type (e.g., comparing two government money 
market funds).
---------------------------------------------------------------------------

    \1065\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that daily Web site disclosure of a fund's 
daily liquid assets and weekly liquid assets will increase transparency 
and enhance investors' understanding of money market fund risks. This 
disclosure will help investors understand how funds are managed, as 
well as help them monitor, in near real-time, a fund's ability to 
satisfy redemptions in various market conditions, including episodes of 
market turbulence. We also agree with commenters and believe that this 
disclosure will encourage market discipline on fund managers.\1066\ In 
particular, we believe that this disclosure will encourage fund 
managers to manage the fund's liquidity in a manner that makes it less 
likely that the fund crosses a threshold where a fee or gate could be 
imposed, and also discourage month-end ``window dressing'' (in this 
context, the practice

[[Page 47829]]

of periodically increasing the daily liquid assets and/or weekly liquid 
assets in a fund's portfolio, such that the fund's month-end reporting 
will reflect certain liquidity levels, and then decreasing the fund's 
investment in such assets shortly after the fund's month-end reporting 
calculations have been made).
---------------------------------------------------------------------------

    \1066\ See supra note 1054.
---------------------------------------------------------------------------

b. Daily Disclosure of Net Shareholder Flows
    We are also adopting, as proposed, amendments to rule 2a-7 that 
require money market funds to disclose prominently on their Web sites 
the fund's daily net inflows or outflows, as of the end of the previous 
business day, during the preceding six months.\1067\ As proposed, the 
amendments we are adopting would require a fund to maintain a schedule, 
chart, graph, or other depiction on its Web site showing historical 
information about its net inflows or outflows for the previous six 
months,\1068\ and would require the fund to update this historical 
information each business day, as of the end of the preceding business 
day. One commenter expressed support for daily disclosure of a fund's 
net inflows and outflows, though it opposed the requirement to report 
and continually update historical information.\1069\ Several commenters 
objected to Web site disclosure of net shareholder flows, noting that 
money market funds often have large inflows and outflows as a normal 
course of business, and these flows are often anticipated.\1070\ A 
number of commenters suggested that shareholders could misinterpret 
large inflows and outflows as a sign of stress even if the flows are 
anticipated and the fund's liquidity is adequate to handle them.\1071\ 
Two commenters also expressed concern that a large net inflow or 
outflow could signal to the market that the money market fund would 
need to buy or sell securities in the market, potentially facilitating 
front running.\1072\
---------------------------------------------------------------------------

    \1067\ See rule 2a-7(h)(10)(ii); see also supra note 1049.
    \1068\ For purposes of the required Web site disclosure of net 
fund inflows or outflows, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. See supra note 1050.
    \1069\ See UBS Comment Letter.
    \1070\ See Federated VIII Comment Letter; Vanguard Comment 
Letter; U.S. Bancorp Comment Letter; Legg Mason & Western Asset 
Comment Letter; IDC Comment Letter.
    \1071\ See U.S. Bancorp Comment Letter; Blackrock II Comment 
Letter; Dreyfus Comment Letter.
    \1072\ See ICI Comment Letter; Legg Mason & Western Asset 
Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that daily disclosure of net inflows or 
outflows will provide beneficial information to shareholders, and thus 
we are adopting this requirement as proposed. In our view, information 
on shareholder redemptions can help provide important context to data 
regarding the funds' liquidity, as a fund that is experiencing 
increased outflow volatility will require greater liquidity. We 
understand, as commenters pointed out, that many funds can experience 
periodic and expected large net inflows or outflows on a regular basis. 
We believe that disclosure of this information over a rolling six-month 
period, however, will mitigate the risk that investors will 
misinterpret this information. Information about the historical context 
of fund inflows and outflows, which funds can include on their Web 
sites, should help investors distinguish between periodic large 
outflows that can occur in the normal course from periods of increased 
volatility in shareholder flow. Finally, we are not persuaded by 
commenters who suggested that information regarding net shareholder 
flows will promote front-running because we believe that front-running 
concerns are not especially significant for money market funds on 
account of the specific characteristics of these funds and their 
holdings.\1073\
---------------------------------------------------------------------------

    \1073\ See, e.g., Investment Company Institute, Report of the 
Money Market Working Group, at 93 (Mar. 17, 2009), available 
athttp://www.ici.org/pdf/ppr_09_mmwg.pdf (``Because of the 
specific characteristics of money market funds and their holdings . 
. . the frontrunning concerns are far less significant for this type 
of fund. For example, money market funds' holdings are by definition 
very short-term in nature and therefore would not lend themselves to 
frontrunning by those who may want to profit by trading in a money 
market fund's particular holdings. Rule 2a-7 also restricts the 
universe of Eligible Securities to such an extent that front 
running, to the extent it exists at all, tends to be immaterial to 
money market fund performance.'').
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c. Daily Disclosure of Current NAV
    We are adopting, as proposed, amendments to rule 2a-7 that would 
require each money market fund to disclose daily, prominently on its 
Web site, the fund's current NAV per share (calculated based on current 
market factors), rounded to the fourth decimal place in the case of a 
fund with a $1.0000 share price or an equivalent level of accuracy for 
funds with a different share price \1074\ (the fund's ``current NAV'') 
as of the end of the previous business day during the preceding six 
months.\1075\ The amendments require a fund to maintain a schedule, 
chart, graph, or other depiction on its Web site showing historical 
information about its daily current NAV per share for the previous six 
months,\1076\ and would require the fund to update this historical 
information each business day as of the end of the preceding business 
day.\1077\ These amendments complement the current requirement for a 
money market fund to disclose its shadow price monthly on Form N-MFP 
(broken out weekly).\1078\ Disclosing the NAV per share to the fourth 
decimal would conform to the precision of NAV reporting that funds will 
be required to report on Form N-MFP and to what many funds are 
currently voluntarily disclosing.\1079\
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    \1074\ E.g., $10,000 or $100.00 per share.
    \1075\ See rule 2a-7(h)(10)(iii).
    \1076\ For purposes of the required Web site disclosure of the 
fund's current NAV per share, the six-month look-back period for 
disclosure would encompass fund data that occurs prior to the 
compliance date. See supra note 1050.
    \1077\ See supra note 1049.
    \1078\ See infra section III.G.1.b.
    \1079\ See infra note 1087 and accompanying text.
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    Several commenters supported the proposed disclosure requirement of 
funds' current NAV per share. These commenters suggested that daily 
disclosure of the current NAV per share would increase transparency and 
investor understanding of money market funds.\1080\ One commenter noted 
that the disclosure could impose discipline on portfolio managers, 
preventing, for example, month-end ``window dressing.'' \1081\ Finally, 
as we noted in the Proposing Release, several commenters indicated that 
many money market funds are already disclosing such information on 
either a daily or a weekly basis.\1082\
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    \1080\ See, e.g., MFDF Comment Letter; Blackrock II Comment 
Letter.
    \1081\ See J.P. Morgan Comment Letter.
    \1082\ See, e.g., U.S. Bancorp Comment Letter; Blackrock II 
Comment Letter; J.P. Morgan Comment Letter. But see Federated VIII 
Comment Letter (noting that it has not received many ``hits'' on its 
Web site after it began voluntarily posting information about the 
current market-based NAV per share of its funds, suggesting that 
allowing market forces to determine when such disclosure is valuable 
to investors is preferable to a ``one size fits all'' regulation).
---------------------------------------------------------------------------

    Some commenters opposed certain aspects or questioned the 
usefulness of the proposed disclosure requirement. One commenter 
believed that frequent publication of a fund's current NAV per share 
would increase the risk of heavy redemptions for stable NAV funds 
during a period of market stress, noting the incentive for investors to 
redeem if they see the shadow price fall.\1083\ We recognize and have 
considered the risk that daily disclosure of the current NAV per share 
could encourage heavy redemptions when it declines. We believe, 
however, that daily disclosure will not lead to significant redemptions 
and could, as we describe below, both

[[Page 47830]]

increase stability and decrease risk in the financial markets.\1084\ In 
particular, we believe that greater transparency regarding the current 
and historical NAV per share could help investors better assess the 
effects of market events on a fund's NAV and understand the context of 
a fund's principal stability during particular market stresses. For 
example, if an investor believes the values of one or more securities 
held by a fund are impaired, but does not see that impairment reflected 
in the NAV because it is only required to be disclosed once a month, 
they may sell their shares in the funds even though there is no actual 
impairment. Lack of transparency was one of the reasons cited in the 
DERA Study as a possible explanation for the large redemption activity 
during the financial crisis.\1085\ As one commenter noted, such 
disclosure could allay concerns about how a money market fund might be 
affected by the occurrence of negative market events.\1086\ We also 
believe that daily disclosure will increase market discipline, which 
could ultimately deter heavy redemptions. Also, as noted elsewhere in 
this Release, we believe that the reforms we are adopting concerning 
fees and gates are a tool for handling heavy redemptions when they 
occur. Finally, we note that many funds have voluntarily begun 
disclosing information about their current market-based NAV per share 
on their Web sites, and such disclosures have not led to significant 
redemptions.\1087\
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    \1083\ See HSBC Comment Letter.
    \1084\ For a discussion of how disclosure of a fund's daily 
liquid assets and weekly liquid assets could similarly increase 
stability and decrease risk in the financial markets, see supra 
notes 1062-1064 and accompanying text.
    \1085\ See DERA Study, supra note 24.
    \1086\ See Goldman Sachs Comment Letter.
    \1087\ A number of large fund complexes have begun (or plan) to 
disclose daily money market fund market valuations (i.e., shadow 
prices), including BlackRock, Charles Schwab, Federated Investors, 
Fidelity Investments, Goldman Sachs, J.P. Morgan, Reich & Tang, and 
State Street Global Advisors. See, e.g., Money Funds' New Openness 
Unlikely to Stop Regulation, WALL ST. J. (Jan. 30, 2013).
---------------------------------------------------------------------------

    As with the proposed requirement regarding daily disclosure of 
liquidity levels, several commenters supported daily disclosure of a 
fund's current NAV per share only for stable NAV funds.\1088\ We 
disagree with commenters who suggested that daily Web site disclosure 
of the current NAV per share would only be useful for shareholders of 
stable NAV funds. We believe that the benefits we discuss above 
regarding disclosure apply regardless of whether a fund has a stable or 
floating NAV. For example, we believe that it is important for all 
money market funds, both floating NAV funds and stable NAV funds, to 
disclose NAV information so that investors will easily be able to 
compare this data point, which could be seen as a risk metric, across 
funds when making investment decisions among types of money market 
funds (e.g., comparing an institutional prime money market fund to a 
government money market fund), as well as between money market funds of 
the same type (e.g., comparing two institutional prime money market 
funds). The disclosure of the current NAV per share will enhance 
investors' understanding of money market funds and their inherent risks 
and allow investors to invest according to their risk preferences. This 
information will make changes in a money market fund's market-based NAV 
a regularly observable occurrence, which could promote investor 
confidence and generally provide investors with a greater understanding 
of the money market funds in which they invest.\1089\ We note that this 
disclosure could make floating NAV money market funds appear to be 
volatile compared to alternatives like ultra-short bond funds, which 
are registered mutual funds that transact at three decimal places (and 
disclosure of these alternative funds' NAV per share, consequently, 
would likewise show three and not four decimal places).\1090\ It is 
possible that investors might be incentivized to move their money to 
these alternatives because they appear more stable than money market 
funds.\1091\
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    \1088\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
    \1089\ See J.P. Morgan Comment Letter; BlackRock II Comment 
Letter.
    \1090\ But see supra note 521 and accompanying text (discussing 
staff analysis showing that, historically, over a twelve-month 
period, 100% of ultra-short bond funds have fluctuated in price 
(using 10 basis point rounding), compared with 53% of money market 
funds that have fluctuated in price (using basis point rounding)).
    \1091\ See infra section III.K, for an in-depth discussion about 
the macroeconomic consequences of the amendments, including the 
extent to which the requirements for institutional prime funds to 
transact at prices rounded to the fourth decimal place (and also, 
like all money market funds, disclose their current NAV to the 
fourth decimal place each day) could cause investors to reallocate 
their investments to alternatives outside the money market fund 
industry.
---------------------------------------------------------------------------

    The Commission continues to believe that requiring each fund to 
disclose daily its current NAV per share and also to provide six months 
of historical information about its current NAV per share will increase 
money market funds' transparency and permit investors to better 
understand money market funds' risks. This information will permit 
shareholders to reference funds' current NAV per share in near real 
time to assess the effect of market events on funds' portfolios, and 
will also provide investors the ability to discern trends through the 
provision of the six months of historical data.\1092\ While some 
historical data regarding the current NAV per share will be available 
through monthly N-MFP filings,\1093\ we believe that requiring funds to 
place this data on the fund's Web site will allow investors to consider 
this information in a more convenient and accessible format. In 
addition to increasing investors' understanding of money market funds' 
risks, we believe that this disclosure will encourage market discipline 
on fund managers, and particularly discourage month-end ``window 
dressing.''
---------------------------------------------------------------------------

    \1092\ One commenter opposed the disclosure of six months of 
historical information about a fund's current NAV per share because 
it would require a restructuring of fund Web sites that are already 
disclosing data. See UBS Comment Letter. We estimate the costs of 
modifications to fund Web sites in the Economic Analysis section 
infra.
    \1093\ See infra note 1179 and accompanying text (discussing our 
expectation that money market funds will be able generally to use 
the same software or service providers to calculate the fund's 
current NAV per share daily that they presently use to prepare and 
file Form N-MFP).
---------------------------------------------------------------------------

d. Daily Calculation of Current NAV per Share for Stable Value Money 
Market Funds
    We are adopting, generally as proposed, amendments to rule 2a-7 
that would require stable value money market funds to calculate the 
fund's current NAV per share (which the fund must calculate based on 
current market factors before applying the amortized cost or penny-
rounding method, if used), rounded to the fourth decimal place in the 
case of funds with a $1.0000 share price or an equivalent level of 
accuracy for funds with a different share price (e.g., $10.000 per 
share) as of the end of each business day.\1094\ Rule 2a-7 currently 
requires

[[Page 47831]]

money market funds to calculate the fund's NAV per share, using 
available market quotations (or an appropriate substitute that reflects 
current market conditions), at such intervals as the board of directors 
determines appropriate and reasonable in light of current market 
conditions.\1095\ We believe that daily disclosure of money market 
funds' current NAV per share would increase money market funds' 
transparency and permit investors to better understand money market 
funds' risks, and thus we are adopting amendments to rule 2a-7 that 
would require this disclosure.\1096\ Because we are requiring money 
market funds to disclose their current NAV daily on the fund Web site, 
we correspondingly are amending rule 2a-7 to require funds to make this 
calculation as of the end of each business day, rather than at the 
board's discretion. We received no comments on this calculation 
requirement separate from comments on the related current NAV 
disclosure requirement. As discussed above, many money market funds 
already calculate and disclose their current NAV on a daily basis, and 
thus we do not expect that requiring all money market funds to perform 
a daily calculation should entail significant additional costs.\1097\
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    \1094\ See rule 2a-7(h)(10)(iii); see also text accompanying 
supra note 1074 for definition of ``current NAV.'' Under rule 2a-7 
as amended, a floating NAV money market fund is required, like any 
mutual fund not regulated under rule 2a-7, to price its securities 
at the current NAV by valuing its 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 rule 2a-7(c)(1); section 2(a)(41)(B); rules 2a-4 and 22c-1; see 
also supra note 5 and accompanying text. In addition, under rule 2a-
7 as amended, a floating NAV money market fund is required to 
compute its price per share for purposes of distribution, 
redemption, and repurchase by rounding the fund's current NAV per 
share to a minimum of the fourth decimal place in the case of a fund 
with a $1.0000 share price or an equivalent or more precise level of 
accuracy for money market funds with a different share price (e.g., 
$10.000 per share, or $100.00 per share). See rule 2a-7(c)(1)(ii). 
Therefore, we did not propose amendments to rule 2a-7 that would 
specifically require floating NAV money market funds to calculate 
their current NAV per share daily, because these funds already would 
be required to calculate their current NAV in order to price and 
sell their securities each day. As proposed, rule 2a-7 as amended 
would have permitted stable value funds to compute their current 
price per share, for purposes of distribution, redemption, and 
repurchase, by use of the penny-rounding method but not the 
amortized cost method. See Proposing Release, supra note 25, at 
n.170. Therefore, the proposed daily current NAV calculation 
requirement would have specified that stable value funds calculate 
their current NAV per share based on current market factors before 
applying the penny rounding method. As adopted, rule 2a-7 permits 
stable value funds to compute their current price per share, for 
purposes of distribution, redemption, and repurchase, by use of the 
amortized cost method and/or the penny rounding method. See rule 2a-
7(c)(1)(i). Therefore, the daily calculation requirement we are 
adopting, as discussed in this section III.E.9.d, specifies that 
stable value funds calculate their current NAV per share based on 
current market factors before applying the amortized cost or penny-
rounding method. See rule 2a-7(c)(1)(i).
    \1095\ Current rule 2a-7(c)(1). As adopted today, Items A.20 and 
B.5 of Form N-MFP will require money market funds to provide NAV 
data as of the close of business on each Friday during the month 
reported.
    \1096\ See supra section III.E.9.c.
    \1097\ See supra note 1082 and accompanying text. The costs for 
those funds that do not already calculate and disclose their market-
based NAV on a daily basis are discussed in detail below. See infra 
note 1179 and accompanying text.
---------------------------------------------------------------------------

e. Harmonization of Rule 2a-7 and Form N-MFP Portfolio Holdings 
Disclosure Requirements
    Money market funds are currently required to file information about 
the fund's portfolio holdings on Form N-MFP within five business days 
after the end of each month, and to disclose much of the portfolio 
holdings information that Form N-MFP requires on the fund's Web site 
each month with 60-day delay. We are adopting amendments to rule 2a-7 
in order to harmonize the specific portfolio holdings information that 
rule 2a-7 currently requires funds to disclose on the fund's Web site 
with the corresponding portfolio holdings information required to be 
reported on Form N-MFP pursuant to amendments to Form N-MFP, with 
changes to conform to modifications we are making to Form N-MFP from 
the proposal. We believe that these amendments will benefit money 
market fund investors by providing additional, and more precise, 
information about portfolio holdings, which should allow investors to 
better evaluate the current risks of the fund's portfolio investments.
    Specifically, in a change from the proposal, we are adopting 
amendments to the categories of portfolio investments reported on Form 
N-MFP, and are therefore also adopting conforming amendments to the 
categories of portfolio investments currently required to be reported 
on a money market fund's Web site.\1098\ We are adopting, as proposed, 
an amendment to Form N-MFP that would require funds to report the 
maturity date for each portfolio security using the maturity date used 
to calculate the dollar-weighted average life maturity, and therefore 
we are also adopting, as proposed, conforming amendments to the current 
Web site disclosure requirements regarding portfolio securities' 
maturity dates.\1099\ Currently, we do not require funds to disclose 
the market-based value of portfolio securities on the fund's Web site, 
because doing so would disclose this information prior to the time the 
information becomes public on Form N-MFP (because of the current 60-day 
delay before Form N-MFP information becomes publicly available). 
Because we are removing this 60-day delay, we are also requiring funds 
to make the market-based value of their portfolio securities available 
on the fund Web site at the same time that this information becomes 
public on Form N-MFP.\1100\ One commenter supported the proposed 
amendments to harmonize portfolio information on Form N-MFP and 
information that funds disclose on their Web sites.\1101\
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    \1098\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.6.
    \1099\ See rule 2a-7(h)(10)(i)(B); Form N-MFP, Item C.12.
    \1100\ See rule 2a-7(h)(10)(i)(B).
    \1101\ See ICI Comment Letter.
---------------------------------------------------------------------------

    The information that money market funds currently are required to 
disclose about the fund's portfolio holdings on the fund's Web site 
includes, with respect to each security held by the money market fund, 
the security's amortized cost value.\1102\ As part of the reforms to 
rule 2a-7, we proposed to eliminate the use of the amortized cost 
valuation method for stable value money market funds, and to correspond 
with that elimination, we also proposed to remove references to 
amortized cost from Form N-MFP.\1103\ To harmonize the Web site 
disclosure of funds' portfolio holdings with these changes to Form N-
MFP, we additionally proposed amendments to the current requirement for 
funds to disclose the amortized cost value of each portfolio security; 
instead, funds would be required to disclose the ``value'' of each 
portfolio security.\1104\ As discussed previously in section III.B.5, 
the final amendments will permit the continued use of the amortized 
cost valuation method for stable value money market funds, and 
therefore to conform the changes to Form N-MFP to the final amendments 
to rule 2a-7, we are not adopting certain proposed Form N-MFP 
amendments that would have removed references to the amortized cost of 
securities in certain existing items.\1105\ However, as proposed, we 
are amending Items 13 and 41 of Form N-MFP by replacing amortized cost 
with ``value'' as defined in section 2(a)(41) of the Act (generally the 
market-based value but can also be the amortized cost value, as 
appropriate),\1106\ and therefore we are also adopting, as proposed, 
the requirement for funds to disclose the ``value'' (and not 
specifically the amortized cost value) of each portfolio security on 
the fund's Web site. Because the new information that a fund will be 
required to present on its Web site overlaps with the information that 
a fund will be required to disclose on Form N-MFP, we anticipate that 
the costs a fund will incur to draft and finalize the disclosure that 
will appear on its Web site will largely be incurred

[[Page 47832]]

when the fund files Form N-MFP, as discussed below in section 
III.G.\1107\
---------------------------------------------------------------------------

    \1102\ See current rule 2a-7(c)(12)(ii)(H).
    \1103\ See Proposing Release, supra note 25, at section III.H.
    \1104\ See id.
    \1105\ See infra section III.G.1.a.
    \1106\ See infra note 1446 and accompanying text.
    \1107\ This disclosure may largely duplicate the Form N-MFP 
filing, but merely providing a link to the EDGAR N-MFP filing of 
this data would not suffice to meet this requirement. We understand 
that investors have, in past years, become accustomed to obtaining 
money market fund information on funds' Web sites (see infra note 
1123 and accompanying text), and providing the disclosure directly 
on a fund's Web site would permit these investors to view this 
information in conjunction with other required Web site disclosure 
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and 
consolidate the information provided by this disclosure.
---------------------------------------------------------------------------

f. Disclosure of the Imposition of Liquidity Fees and Gates
    We are adopting, largely as proposed, an amendment to rule 2a-7 
that requires a fund to post prominently on its Web site certain 
information that the fund is required to report to the Commission on 
Form N-CR \1108\ regarding the imposition of liquidity fees, temporary 
suspension of fund redemptions, and the removal of liquidity fees and/
or resumption of fund redemptions.\1109\ The amendment requires 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,\1110\ 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.\1111\ This amendment 
requires a fund only to present certain summary information about the 
imposition of fees and gates on its Web site,\1112\ whereas the fund 
will be required to present more detailed discussion solely on Form N-
CR.\1113\ The Web site disclosure requirements we are adopting 
regarding the imposition of fees and gates are similar to the proposed 
requirements in that they, like the proposed requirements, require a 
fund to post on its Web site only that information about the imposition 
of fees and gates that the fund is required to disclose in an initial 
report on Form N-CR.\1114\ In addition, the amendments to rule 2a-7 
that we are adopting also require a fund to include the following 
statement as part of its Web site disclosure: ``The Fund was required 
to disclose additional information about this event [or ``these 
events,'' as appropriate] on Form N-CR and to file this form with the 
Securities and Exchange Commission. Any Form N-CR filing submitted by 
the Fund is available on the EDGAR Database on the Securities and 
Exchange Commission's Internet site at http://www.sec.gov.'' \1115\
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    \1108\ See infra section III.F.
    \1109\ See rule 2a-7(h)(10)(v); Form N-CR Parts E, F, and G; see 
also infra section III.F (discussing 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 is 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 Form N-CR Parts E and F. A link to the EDGAR N-CR filing would 
not suffice to meet this requirement. We understand that investors 
have, in past years, become accustomed to obtaining money market 
fund information on funds' Web sites (see infra note 1123 and 
accompanying text), and providing the disclosure directly on a 
fund's Web site would permit these investors to view this 
information in conjunction with other required Web site disclosure 
about the fund's liquidity and current net asset value (see rule 2a-
7(h)(10)(ii) and (iii)) without the need to independently locate and 
consolidate the information provided by this disclosure.
    \1110\ A fund must file an initial report on Form N-CR in 
response to any of the events specified in Parts E, F, or G 
(generally, the imposition or lifting of liquidity fees or gates) 
within one business day after the occurrence of any such event. A 
fund need not post on its Web site the additional information 
required in the follow-up Form N-CR filing 4 business days after the 
event, if such a filing is required. For additional discussion of 
the filing requirements provided in Parts E, F, and G of Form N-CR, 
see infra section III.F.5.
    \1111\ See rule 2a-7(h)(10)(v).
    \1112\ A fund also will be required to present summary 
information about the historical imposition of fees and/or gates in 
the fund's SAI. See supra section III.E.5.
    \1113\ See infra section III.F.5.
    \1114\ As discussed below, we have made changes to the proposed 
requirements of Form N-CR, and the information that a fund will be 
required to file on Parts E, F, and G of Form N-CR is therefore 
different than that which was proposed. See infra section III.F.5. 
The information a fund is required to post on its Web site mirrors 
certain of the information that the fund is required to disclose on 
Form N-CR. To the extent Form N-CR disclosure requirements that we 
are adopting have been modified from the proposed requirements, the 
Web site disclosure requirements have also been modified.
    \1115\ See rule 2a-7(h)(10)(v).
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    One commenter stated that it supported the proposed requirement 
that money market funds should post on their Web sites certain of the 
information required by Form N-CR, noting that although Form N-CR is 
publicly available upon filing with the SEC, investors will more 
readily find and make use of this information if posted on a particular 
funds' Web site.\1116\ Another commenter, however, argued that the 
proposed Web site disclosure (and proposed Form N-CR) filings are 
redundant and that it would be challenging to comply with a one-day 
time frame, and also argued that the registration statement and Web 
site disclosure to investors should take priority over the Form N-CR 
filing.\1117\ One commenter also supported a requirement for a money 
market fund to notify shareholders individually in order to allow a 
money market fund to apply a fee or gate.\1118\
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    \1116\ See CFA Institute Comment Letter.
    \1117\ See Dreyfus Comment Letter; see also infra notes 1308 and 
1309 and accompanying text.
    \1118\ See HSBC Comment Letter. We are not imposing such an 
individual shareholder notification requirement because we believe 
the costs of such notification may be extremely high, the 
notification process might take significant time, and shareholders 
should be able to get effective notice on a fund's Web site.
---------------------------------------------------------------------------

    As discussed below, we continue to believe that certain information 
required to be disclosed on Form N-CR must be filed with the Commission 
within one business day and that this information should also be posted 
on the fund's Web site within the same time-frame to help ensure that 
the Commission, investors generally, shareholders in each particular 
fund, and other market observers are all provided with these critical 
alerts as quickly as possible.\1119\ Because we believe that these 
different parties all have a significant interest in receiving this 
information very quickly, we do not agree with the commenter who argued 
that Web site and registration disclosure should take priority over the 
Form N-CR filing.\1120\ We believe that it is important for a money 
market fund that may impose fees and gates to inform existing and 
prospective shareholders on its Web site when: (i) The fund's weekly 
liquid assets fall below 10% of its total assets; (ii) the fund's 
weekly liquid assets fall below 30% of its total assets and the board 
of directors imposes a liquidity fee pursuant to rule 2a-7; (iii) the 
fund's board of directors temporarily suspends the fund's redemptions 
pursuant to rule 2a-7; or (iv) a liquidity fee has been removed or fund 
redemptions have been resumed. This information is particularly 
meaningful 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. 
We also note, as discussed in more detail in the Paperwork Reduction 
Act analysis section below,\1121\ that we believe the burdens a fund 
would incur to draft and finalize the disclosure that would appear on 
its Web site would largely be incurred when the fund files Form N-CR, 
and therefore we do not believe that the one-day time-frame for 
updating the disclosure on the fund's Web site should be overly 
burdensome.
---------------------------------------------------------------------------

    \1119\ See infra section III.F.7.
    \1120\ See id.; see also text following this note 1120 
(discussing Web site disclosure of fees and gates); infra notes 
1124-1127 (discussing prospectus supplements informing money market 
fund investors of the imposition of a fee or gate).
    \1121\ See infra section IV.A.6.d.
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    We maintain our belief that Web site disclosure provides important

[[Page 47833]]

transparency to shareholders regarding occasions on which a particular 
fund's weekly liquid assets have dropped below certain thresholds, or a 
fund has imposed or removed a liquidity fee or gate, because many 
investors currently obtain important fund information on the fund's Web 
site.\1122\ We understand that investors have become accustomed to 
obtaining money market fund information on funds' Web sites, and 
therefore we believe that Web site disclosure provides significant 
informational accessibility to shareholders and the format and timing 
of this disclosure serves a different purpose than the Form N-CR filing 
requirement.\1123\ While we believe that it is important to have a 
uniform, central place for investors to access the required disclosure, 
we note that nothing in these amendments 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.
---------------------------------------------------------------------------

    \1122\ For 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.
    \1123\ See, e.g., 2010 Adopting Release, supra note 16 (adopting 
amendments to rule 2a-7 requiring money market funds to disclose 
information about their portfolio holdings each month on their Web 
sites); Comment Letter of the Securities Industry and Financial 
Markets Association (Jan. 14, 2013) (available in File No. FSOC-
2012-0003) (noting that some industry participants now post on their 
Web sites portfolio holdings-related information beyond that which 
is required by the money market reforms adopted by the Commission in 
2010, as well as daily disclosure of market value per share); see 
also infra note 1454 (discussing recent decisions by a number of 
money market fund firms to begin reporting funds' daily shadow 
prices on the fund Web site).
---------------------------------------------------------------------------

    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 would incorporate the same 
information.\1124\ Although a fund may inform prospective investors of 
any redemption fee or gate currently in place by means of a prospectus 
supplement,\1125\ the prospectus supplement would not inform 
prospective and current shareholders of any fees or gates that were 
imposed, and then were removed, during the previous 12 months.
---------------------------------------------------------------------------

    \1124\ See supra notes 960-961 and accompanying text.
    \1125\ See infra notes 1126-1127 and accompanying text.
---------------------------------------------------------------------------

    In addition, 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. In order to meet this requirement, and as 
discussed in the Proposing Release,\1126\ a money market fund that 
imposes a redemption fee or gate should consider informing prospective 
investors of any fees or gates currently in place by means of a 
prospectus supplement.\1127\
---------------------------------------------------------------------------

    \1126\ See Proposing Release, supra note 25, at section 
III.B.8.c.
    \1127\ We expect that this supplement would include revisions to 
the disclosure in the registration statement concerning restrictions 
on fund redemptions. See supra section III.E.4. The costs of filing 
such a supplement are discussed in section III.E.8, supra.
---------------------------------------------------------------------------

g. Disclosure of Sponsor Support
    We are also amending rule 2a-7 to require that a fund post 
prominently on its Web site substantially the same information that the 
fund is required to report to the Commission on Form N-CR regarding the 
provision of financial support to the fund.\1128\ The amendments that 
we are adopting reflect certain modifications from the proposal to 
address commenter concerns. Specifically, the proposal would have 
required a fund to post on its Web site substantially the same 
information that the fund is required to report to the Commission on 
Form N-CR regarding the provision of financial support to the fund. As 
discussed in more detail below, we are adopting amendments to rule 2a-7 
that would require a fund to post on its Web site only a subset of this 
information.\1129\ In addition, the amendments would require a fund to 
include the following statement as part of its Web site disclosure: 
``The Fund was required to disclose additional information about this 
event [or ``these events,'' as appropriate] on Form N-CR and to file 
this form with the Securities and Exchange Commission. Any Form N-CR 
filing submitted by the Fund is available on the EDGAR Database on the 
Securities and Exchange Commission's Internet site at http://www.sec.gov.'' \1130\ A fund would be required 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.\1131\
---------------------------------------------------------------------------

    \1128\ See rule 2a-7(h)(10)(v); Form N-CR Part C; see also infra 
section III.F.3 (discussing the Form N-CR requirements).
    \1129\ See rule 2a-7(h)(10)(v).
    \1130\ See id.
    \1131\ See id.
---------------------------------------------------------------------------

    For the reasons discussed in the Proposing Release and below, we 
believe it is important for money market funds to inform existing and 
prospective shareholders of any present occasion on which the fund 
receives financial support from a sponsor or other fund 
affiliate.\1132\ In particular, we believe this disclosure could 
influence prospective shareholders' decision to purchase shares of the 
fund and could inform shareholders' assessment of the ongoing risks 
associated with an investment in the fund. While commenters also raised 
concerns about the potential redundancy of the proposed registration 
statement, Web site, and Form N-CR disclosure requirements,\1133\ we 
believe that Web site disclosure provides significant informational 
accessibility to shareholders and that format and timing of this 
disclosure serves a different purpose than the Form N-CR filing 
requirement.\1134\
---------------------------------------------------------------------------

    \1132\ See Proposing Release, supra note 25, at text in 
paragraph prior to note 620; see also infra section III.F.3.
    \1133\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter.
    \1134\ See supra notes 1122 and 1123.
---------------------------------------------------------------------------

    However, in response to commenter concerns about potentially 
duplicative disclosure requirements, we have modified the proposed 
disclosure requirements and are adopting amendments to rule 2a-7 that 
would require a fund to post on its Web site only a subset of the 
information that the fund is required to file on Form N-CR. A fund will 
only be required to present certain summary information about the 
receipt of financial support on its Web site (as well as in the fund's 
SAI \1135\), and will be required to present more detailed discussion 
solely on Form N-CR.\1136\ Specifically, a fund will be required to 
disclose on its Web site only that information that the fund is 
required to file on Form N-CR within one business day after the 
occurrence of any one or more of the events specified in Part C of Form 
N-CR (``Provision of Financial Support to Fund'').\1137\ A fund thus 
will not be required, as proposed, to disclose the reason for support, 
term of support, and any contractual restrictions relating to support 
on its Web site, although a fund will be required to disclose this 
information on

[[Page 47834]]

Form N-CR.\1138\ We believe that the disclosure requirements we are 
adopting appropriately consider commenters' concerns about duplicative 
disclosure as well as our interest in requiring funds to disclose the 
primary information about affiliate financial support that we believe 
shareholders may find useful in assessing fund risks and determining 
whether to purchase fund shares. We also address general commenter 
concerns \1139\ about the possible duplicative effects of the 
concurrent Web site and Form N-CR disclosures in section III.F.3 below, 
where we discuss how Form N-CR and Web site disclosure serve different 
purposes.\1140\
---------------------------------------------------------------------------

    \1135\ See supra section III.E.7.
    \1136\ See infra section III.F.3 (Concerns of Potential 
Redundancy).
    \1137\ See rule 2a-7(h)(10)(v).
    \1138\ See id.; Form N-CR Part C.
    \1139\ See, e.g., Dreyfus Comment Letter.
    \1140\ See infra section III.F.3 (Concerns over Potential 
Redundancy).
---------------------------------------------------------------------------

    As proposed, we are requiring the Web site disclosure to be posted 
for a period of not less than one year following the date on which the 
fund filed Form N-CR concerning the event.\1141\ As we stated in the 
Proposing Release, 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 would incorporate the same 
information.\1142\ We received no comments on this requirement, and we 
are adopting it as proposed.
---------------------------------------------------------------------------

    \1141\ See rule 2a-7(h)(10)(v).
    \1142\ See supra notes 1126-1127 and accompanying text. Of 
course, in the event that the fund files a post-effective amendment 
within one year following the provision of financial support to the 
fund, information about the financial support would appear both in 
the fund's registration statement and on the fund's Web site for the 
remainder of the year following the provision of support.
---------------------------------------------------------------------------

h. Economic Analysis
    As discussed above, and in our proposal, we are adopting a number 
of amendments to rule 2a-7 to amend a number of requirements that money 
market funds post certain information to funds' Web sites. These 
amendments require disclosure of information about money market funds' 
liquidity levels, shareholder flows, market-based NAV per share 
(rounded to four decimal places), and the use of affiliate financial 
support.\1143\ The qualitative benefits and costs of these requirements 
are discussed above. These amendments should improve transparency and 
better inform shareholders about the risks of investing in money market 
funds, which should result in shareholders making investment decisions 
that better match their investment preferences. We believe that this 
will have effects on efficiency, competition, and capital formation 
that are similar to those that are outlined in the Macroeconomic 
Consequences section below.\1144\
---------------------------------------------------------------------------

    \1143\ We believe that the effects on efficiency, competition, 
and capital formation related to the amendments to conform the 
portfolio holdings Web site disclosure to our amendments to Form N-
MFP will be the same as those described in the section discussing 
our amendments to Form N-MFP. See infra section III.G. We also note 
that the economic effects related to disclosure of information 
related to the imposition of fees and/or gates and sponsor support 
reported on Form N-CR will be similar to economic effects we discuss 
relating to new Form N-CR. See infra section III.F.8.
    \1144\ See infra section III.K.2.
---------------------------------------------------------------------------

    We believe that the requirements could increase informational 
efficiency by providing additional information about money market 
funds' liquidity, shareholder flows, market-based NAV per share, 
imposition of fees and/or gates, and use of affiliate financial 
support, to investors and the Commission. This in turn could assist 
investors in analyzing the risks associated with certain funds. In 
particular, the daily disclosure of daily and weekly liquid assets, 
along with the daily disclosure of NAV to four decimal places, should 
better enable investors to understand the risks of a specific fund, 
which could increase allocative efficiency and could positively affect 
competition by permitting investors to choose whether to invest in 
certain funds based on this information. However, if investors were to 
move their assets among money market funds or decide to invest in 
investment products other than money market funds as a result of the 
disclosure requirements, this could adversely affect the competitive 
stance of certain money market funds, or the money market fund industry 
generally.
    Certain parts of the disclosure amendments may have other specific 
effects on competition. To the extent some money market funds do not 
currently and voluntarily calculate and disclose daily market-based NAV 
per share data (rounded to the fourth decimal place), our amended 
disclosure requirements may promote competition by helping to level the 
associated costs incurred by all money market funds and neutralize any 
competitive advantage associated with determining not to calculate and 
disclose daily current per-share NAV. We also note that our amendment 
to require disclosure of affiliate sponsor support may adversely affect 
competition if investors move their assets to larger fund complexes on 
the theory that they may be more likely than smaller entities to 
provide financial support to their funds.
    The requirements to disclose certain information about money market 
funds' liquidity, shareholder flows, market-based NAV per share, 
imposition of fees and/or gates, and use of affiliate financial support 
also could have effects on capital formation. The required disclosures 
may impose external market discipline on portfolio managers, which in 
turn could create market stability and enhance capital formation, if 
the resulting market stability encouraged more investors to invest in 
money market funds. However, the requirements could detract from 
capital formation by decreasing market stability if investors redeem 
more quickly during times of stress as a result of the disclosure 
requirements, and one commenter noted this increased risk as a 
potential cost to the fund.\1145\ The required disclosure could assist 
the Commission in overseeing money market funds and developing 
regulatory policy affecting the money market fund industry, which might 
affect capital formation positively if the resulting regulatory 
framework more efficiently or more effectively encouraged investors to 
invest in money market funds.
---------------------------------------------------------------------------

    \1145\ See State Street Comment Letter, at Appendix A. The 
commenter did not provide a quantitative estimate of such risk.
---------------------------------------------------------------------------

    The requirement to disclose the fund's current NAV to four decimal 
places should not have any effect on capital flows because funds will 
also transact at four decimal places. When compared to alternatives 
like ultra-short bond funds, which disclose and transact at three 
decimal places, money market prices may appear more volatile on a day-
to-day basis if the greater precision in NAV disclosure leads to a 
greater frequency of fluctuations in NAV.\1146\ This could incentivize 
investors to switch to these alternatives. However, over longer 
horizons like a month or a year these alternatives are likely to have 
more volatile NAVs than money market funds. The disclosure of daily and 
weekly liquid assets may increase the volatility of capital flows for 
money market funds, as it may create an incentive for investors to 
redeem shares when liquid assets fall or reach the threshold at which 
the board may impose a redemption fee or gate. Disclosing levels of 
liquid assets could lead to pre-emptive redemptions if daily

[[Page 47835]]

or weekly liquid assets drop to a level at which investors anticipate 
that there is a greater likelihood of the fund imposing a redemption 
fee or gate. However, as discussed in detail above, the board's 
discretion to impose a fee or a gate mitigates the concern that 
investors will be able to accurately forecast such an event, leading 
them to pre-emptively withdraw their assets from the fund. We discuss 
this concern in more detail in section III.A.
---------------------------------------------------------------------------

    \1146\ But see supra note 521 and accompanying text (discussing 
staff analysis showing that, historically, over a twelve-month 
period, 100% of ultra-short bond funds have fluctuated in price 
(using 10 basis point rounding), compared with 53% of money market 
funds that have fluctuated in price (using basis point rounding)).
---------------------------------------------------------------------------

    A possible alternative suggested by commenters was to only have Web 
site disclosure apply to stable NAV funds.\1147\ Allowing floating NAV 
funds not to disclose information on their Web site would lower the 
costs for these funds. Nevertheless, we rejected this alternative 
because we believe that the benefits we discuss above regarding 
disclosure apply regardless of whether a fund has a stable or floating 
NAV. Both types of funds, for example, could impose a fee or a gate so 
this information is valuable to both types of investors and, if only 
offered to one, could affect competition. For example, if a stable NAV 
investor has more information than a floating NAV investor about a 
possible fee or gate, then it is reasonable to assume that a stable NAV 
investor would have more confidence in his or her investment. The added 
disclosure for stable NAV funds could also increase market discipline 
in these funds, leading to investors' increased willingness to 
participate in this market and increase capital formation in these 
funds.
---------------------------------------------------------------------------

    \1147\ See, e.g., Legg Mason & Western Asset Comment Letter; ICI 
Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    Another alternative would have been to require weekly instead of 
daily Web site disclosure of the daily and weekly liquid assets and net 
shareholder flow.\1148\ Being required to disclose this information 
weekly instead of daily would lower the costs on funds because they 
would not have to report daily. However, we rejected this alternative 
because, as discussed above, in times of market stress, money market 
funds may face rapid, heavy redemptions, which could quickly affect 
their liquidity. These stresses could happen over a period of a day. As 
such, if investors have confidence that they will have the necessary 
information to make an informed decision quickly in a time of stress, 
then this may lead to additional capital for funds. Likewise, we also 
believe that daily disclosure instead of weekly could lead to more 
market discipline among funds, resulting in investors' increased 
willingness to participate in this market, which could also lead to 
additional capital for funds.
---------------------------------------------------------------------------

    \1148\ See Schwab Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

i. Costs of Disclosure of Daily and Weekly Liquid Assets and Net 
Shareholder Flows
    Costs associated with the requirement for a fund to disclose 
information about its daily liquid assets, weekly liquid assets, and 
net shareholder flows on the fund's Web site include initial, one-time 
costs, as well as ongoing costs. Initial costs include the costs to 
design the schedule, chart, graph, or other depiction showing 
historical liquidity and flow information in a manner that clearly 
communicates the required information and to make the necessary 
software programming changes to the fund's Web site to present the 
depiction in a manner that can be updated each business day. Funds also 
would incur ongoing costs to update the depiction of daily liquid 
assets and weekly liquid assets and net shareholder flows each business 
day.\1149\ The Proposing Release estimated that the average one-time 
costs for each money market fund to design and present the historical 
depiction of daily liquid assets and weekly liquid assets, as well as 
the fund's net inflows or outflows, would be $20,150.\1150\ The 
Proposing Release also estimated that the average ongoing annual costs 
that each fund would incur to update the required disclosure would be 
$9,184.\1151\
---------------------------------------------------------------------------

    \1149\ See State Street Comment Letter.
    \1150\ See Proposing Release, supra note 25, at n.642.
    \1151\ See Proposing Release, supra note 25, at n.643.
---------------------------------------------------------------------------

    In the Proposing Release, we stated that we believed funds should 
incur no additional costs in obtaining the percentage of daily liquid 
assets and weekly liquid assets, as funds are currently required to 
make such calculation under rule 2a-7. One commenter disagreed, noting 
that there would be costs because of additional controls associated 
with public disclosure, but did not provide a quantitative estimate of 
such costs.\1152\ Two commenters generally believed that weekly 
disclosure of the data, as opposed to daily disclosure, would 
substantially reduce costs to funds, but they did not provide a 
quantitative estimate of the difference between the cost of daily and 
weekly disclosure.\1153\ Additionally, one commenter objected to 
including historical information regarding weekly and daily liquid 
assets and net shareholder flows on a fund's Web site because of the 
expense involved in restructuring fund Web sites and maintaining such 
information, but did not provide a quantitative estimate of such 
expenses.\1154\ One commenter also noted the potential cost of the risk 
of shareholders making redemption decisions in reliance on the 
disclosed information.\1155\ The commenter, however, did not provide a 
quantitative estimate for this risk.\1156\
---------------------------------------------------------------------------

    \1152\ See State Street Comment Letter, at Appendix A.
    \1153\ See Federated VIII Comment Letter; Schwab Comment Letter.
    \1154\ See UBS Comment Letter.
    \1155\ Id.
    \1156\ See supra section III.E.8 for a discussion of the reasons 
that the Commission cannot measure the quantitative benefits of 
these proposed requirements at this time.
---------------------------------------------------------------------------

    We agree that the costs for certain money market funds to upgrade 
internal systems and software, and/or engage third-party service 
providers if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\1157\ While requiring weekly 
disclosure instead of daily disclosure could reduce costs for funds, we 
continue to believe that daily disclosure would convey important 
information to shareholders that weekly disclosure may not.\1158\ We 
also believe that the benefits of increased transparency that would 
result from the disclosure requirements at hand outweigh the potential 
costs of reactionary redemptions resulting from the disclosure.\1159\ 
The Commission agrees that money market funds may incur additional 
costs associated with the enhanced controls required to publicly 
disseminate daily and weekly liquid asset data, which costs were not 
estimated in the Proposing Release. The Commission has incorporated 
these additional costs into its new estimates of ongoing annual costs.
---------------------------------------------------------------------------

    \1157\ See Proposing Release, supra note 25, at n.1044.
    \1158\ See supra notes 1056-1057 and accompanying text.
    \1159\ See supra notes 1060-1063 and accompanying text.
---------------------------------------------------------------------------

    Based on these considerations, as well as updated industry data, we 
now estimate that the average one-time costs for each money market fund 
to design and present the historical depiction of daily liquid assets 
and weekly liquid assets, as well as the fund's net inflows or 
outflows, would be $20,280.\1160\ We

[[Page 47836]]

also estimate that the average ongoing annual costs that each fund 
would incur to update the required disclosure would be $10,274.\1161\ 
Our estimate of average ongoing annual costs incorporates the costs 
associated with the enhanced controls required to publicly disseminate 
daily and weekly liquid asset data.\1162\
---------------------------------------------------------------------------

    \1160\ We estimate that these costs would be attributable to 
project assessment (associated with designing and presenting the 
historical depiction of daily liquid assets and weekly liquid assets 
and net shareholder flows), as well as project development, 
implementation, and testing. The costs associated with these 
activities are all paperwork-related costs and are discussed in more 
detail below. See infra section IV.A.6.b.
    \1161\ See id.
    \1162\ See id.
---------------------------------------------------------------------------

ii. Costs of Disclosure of Fund's Current NAV Per Share
    Costs associated with the requirement for a fund to disclose 
information about its daily current NAV on the fund's Web site include 
initial, one-time costs, as well as ongoing costs. Initial costs 
include the costs to design the schedule, chart, graph, or other 
depiction showing historical NAV information in a manner that clearly 
communicates the required information and to make the necessary 
software programming changes to the fund's Web site to present the 
depiction in a manner that will be able to be updated each business 
day. Funds also would incur ongoing costs to update the depiction of 
the fund's current NAV each business day. Because floating NAV money 
market funds will be required to calculate their sale and redemption 
price each day, these funds should incur no additional costs in 
obtaining this data for purposes of the disclosure requirements. Stable 
price money market funds, which will be required to calculate their 
current NAV per share daily pursuant to amendments to rule 2a-7, 
likewise should incur no additional costs in obtaining this data for 
purposes of the disclosure requirements. The Proposing Release 
estimated that the average one-time costs for each money market fund to 
design and present the fund's current NAV each business day would be 
$20,150.\1163\ The Commission also estimated that the average ongoing 
annual costs that each fund would incur to update the required 
disclosure would be $9,184.\1164\
---------------------------------------------------------------------------

    \1163\ See Proposing Release, supra note 25, at n.664.
    \1164\ See id., at n.665.
---------------------------------------------------------------------------

    Certain commenters generally noted that complying with the new Web 
site disclosure requirements would add costs for funds, including costs 
to upgrade internal systems and software relevant to the Web site 
disclosure requirements, as well as costs to engage third-party service 
providers for those money market fund managers that do not have 
existing relevant systems.\1165\ One commenter noted that these costs 
could potentially be ``significant to [a money market fund] and higher 
than those estimated in the Proposal.'' \1166\ However, another 
commenter stated that it agrees that those money market funds that 
presently publicize their current NAV per share daily on the fund's Web 
site will incur few additional costs to comply with the proposed 
disclosure requirements, and also that it agrees with the Commission's 
estimates for the ongoing costs of providing a depiction of the fund's 
current NAV each business day.\1167\
---------------------------------------------------------------------------

    \1165\ See, e.g., UBS Comment Letter (``The SEC also proposed 
additional information regarding the posting of: (i) The categories 
of a money fund's portfolio securities; (ii) maturity date 
information for each of the fund's portfolio securities; and (iii) 
market-based values of the fund's portfolio securities at the same 
time as this information becomes publicly available on Form N-MFP. 
We believe this information is too detailed to be useful to most 
investors and would be cost prohibitive to provide. Complying with 
these new Web site disclosure requirements would add notable costs 
for each money fund that UBS Global AM advises.''); Chamber II 
Comment Letter (``With respect to the Web site disclosure 
requirements, internal systems and software would need to be 
upgraded or, for those MMF managers that do not have existing 
systems, third-party service providers would need to be engaged. The 
costs (which ultimately would be borne by investors through higher 
fees or lower yields) could potentially be significant to an MMF and 
higher than those estimated in the Proposal.''); Dreyfus Comment 
Letter (noting that ``several of the new Form reporting and Web site 
and registration statement disclosure requirements . . . come with . 
. . material cost to funds and their sponsors''); see also Fin. 
Svcs. Roundtable Comment Letter (noting that the disclosure 
requirements would produce ``significant cost to the fund and 
ultimately to the fund's investors''); SSGA Comment Letter (urging 
the Commission to consider the ``substantial administrative, 
operational, and expense burdens'' of the proposed disclosure-
related amendments); Chapin Davis Comment Letter (noting that the 
disclosure- and reporting-related amendments will result in 
increased costs in the form of fund staff salaries, or consultant, 
accountant, and lawyer hourly rates, that will ultimately be borne 
in large part by investors and portfolio issuers).
    \1166\ See Chamber II Comment Letter.
    \1167\ See State Street Comment Letter, at Appendix A; see also 
HSBC Comment Letter (stating that the proposed disclosure 
requirements should not produce any ``meaningful cost'').
---------------------------------------------------------------------------

    We agree that the costs for certain money market funds to upgrade 
internal systems and software, and/or engage third-party service 
providers if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\1168\ Based on these 
considerations, as well as updated industry data, we now estimate that 
the average one-time costs for each money market fund to design and 
present the fund's daily current NAV would be $20,280.\1169\ We also 
estimate that the average ongoing annual costs that each fund would 
incur to update the required disclosure would be $9,024.\1170\
---------------------------------------------------------------------------

    \1168\ See Proposing Release, supra note 25, at n.1056.
    \1169\ We estimate that these costs would be attributable to 
project assessment (associated with designing and presenting the 
historical depiction of the fund's daily current NAV per share), as 
well as project development, implementation, and testing. The costs 
associated with these activities are all paperwork-related costs and 
are discussed in more detail below. See infra section IV.A.6.c.
    \1170\ See id.
---------------------------------------------------------------------------

iii. Costs of Daily Calculation of Current NAV per Share
    The primary costs associated with the requirement for a fund to 
calculate its current NAV per share each day are the costs for funds to 
determine the current values of their portfolio securities each 
day.\1171\ We estimate that 25% of active money market funds, or 140 
funds, will incur new costs to comply with this requirement,\1172\ 
because the requirement will result in no additional costs for those 
money market funds that presently determine their current NAV per share 
daily on a voluntary basis.\1173\ The Proposing Release estimated that 
the average additional annual costs that a fund would incur associated 
with calculating its current NAV daily would range from $6,111 to 
$24,444.\1174\ One commenter stated that it agrees with the 
Commission's estimates for the ongoing costs of providing a depiction 
of the fund's current NAV each business day.\1175\ However, most 
comments on the proposed current NAV disclosure requirement did not 
discuss the Commission's estimates of the costs a fund would incur to 
calculate its current NAV per share daily, separate from their 
discussion of the general costs

[[Page 47837]]

associated with the proposed NAV Web site disclosure requirement.\1176\ 
After considering these comments, our current methods of estimating the 
costs associated with the NAV calculation requirement, described in 
more detail below, are the same estimation methods we used in the 
Proposing Release.
---------------------------------------------------------------------------

    \1171\ Additionally, funds may incur some costs associated with 
adding the current values of the fund's portfolio securities and 
dividing this sum by the number of fund shares outstanding; however, 
we expect these costs to be minimal.
    \1172\ The Commission estimates that there are currently 559 
active money market funds. This estimate is based on a staff review 
of reports on Form N-MFP filed with the Commission for the month 
ended February 28, 2014. 559 money market funds x 25% = 
approximately 140 money market funds.
    \1173\ Based on our understanding of money market fund valuation 
practices, we estimate that 75% of active money market funds 
presently determine their current NAV daily.
    \1174\ See Proposing Release, supra note 25, at n.692.
    \1175\ See State Street Comment Letter, at Appendix A.
    \1176\ See supra notes 1165-1167.
---------------------------------------------------------------------------

    All money market funds are presently required to disclose their 
market-based NAV per share monthly on Form N-MFP, and the frequency of 
this disclosure will increase to weekly.\1177\ As discussed below, some 
money market funds license a software solution from a third party that 
is used to assist the funds to prepare and file the information that 
Form N-MFP requires, and some funds retain the services of a third 
party to provide data aggregation and validation services as part of 
preparing and filing of reports on Form N-MFP on behalf of the 
fund.\1178\ We expect, based on conversations with industry 
representatives, that money market funds that do not presently 
calculate the current values of their portfolio securities each day 
generally would use the same software or service providers to calculate 
the fund's current NAV per share daily that they presently use to 
prepare and file Form N-MFP.\1179\ For these funds, the associated base 
costs of using this software or these service providers should not be 
considered new costs. However, the third-party software suppliers or 
service providers may charge more to funds to calculate a fund's 
current NAV per share daily, which costs would be passed on to the 
fund. While we do not have the information necessary to provide a point 
estimate (as such estimate would depend on a variety of factors, 
including discounts relating to volume and economies of scale, which 
pricing services may provide to certain funds), we estimate that the 
average additional annual costs that a fund would incur associated with 
calculating its current NAV daily would range from $6,111 to 
$24,444.\1180\ Assuming, as discussed above, that 140 money market 
funds do not presently determine and publish their current NAV per 
share daily, the average additional annual cost that these 140 funds 
will collectively incur would range from $855,540 to $3,422,160.\1181\ 
These costs could be less than our estimates if funds were to receive 
significant discounts based on economies of scale or the volume of 
securities being priced.
---------------------------------------------------------------------------

    \1177\ See Form N-MFP Item A.21 and B.5 (requiring money market 
funds to provide NAV data as of the close of business on each Friday 
during the month reported).
    \1178\ See infra section IV.C.3.
    \1179\ One commenter agreed with this expectation. See State 
Street Comment Letter, at Appendix A.
    \1180\ We estimate, based on discussions with industry 
representatives that obtaining the price of a portfolio security 
would range from $0.25-$1.00 per CUSIP number per quote. We estimate 
that each money market fund's portfolio consists of, on average, 
securities representing 97 CUSIP numbers. Therefore, the additional 
daily costs to calculate a fund's market-based NAV per share would 
range from $24.25 ($0.25 x 97) to $97.00 ($1.00 x 97). The 
additional annual costs would therefore range from $6,111 (252 
business days in a year x $24.25) to $24,444 (252 business days in a 
year x $97.00).
    \1181\ This estimate is based on the following calculations: low 
range of $6,111 x 140 funds = $855,540; high range of $24,444 x 140 
funds = $3,422,160. See supra note 1180. This figure likely 
overestimates the costs that stable price funds would incur if the 
floating NAV proposal were adopted. This is because fewer than 559 
active money market funds would be stable price funds required to 
calculate their current NAV per share daily, and thus the estimate 
of 140 funds (25% x 559 active funds) that would be required to 
comply with this requirement is likely over-inclusive.
---------------------------------------------------------------------------

iv. Costs of Harmonization of Rule 2a-7 and Form N-MFP Portfolio 
Holdings Disclosure Requirements
    Because the new portfolio holdings information that a fund is 
required to present on its Web site overlaps with the information that 
a fund would be required to disclose on Form N-MFP, we believe that the 
costs a fund will incur to draft and finalize the disclosure that will 
appear on its Web site will largely be incurred when the fund files 
Form N-MFP, as discussed below in section III.G. The Proposing Release 
estimated that, in addition, a fund would incur annual costs of $2,484 
associated with updating its Web site to include the required monthly 
disclosure.\1182\
---------------------------------------------------------------------------

    \1182\ See Proposing Release, supra note 25, at n.672.
---------------------------------------------------------------------------

    As discussed above, certain commenters generally noted that 
complying with the new Web site disclosure requirements would add costs 
for funds, including costs to upgrade internal systems and software 
relevant to the Web site disclosure requirements, as well as costs to 
engage third-party service providers for those money market fund 
managers that do not have existing relevant systems.\1183\ One 
commenter, however, noted that the portfolio holdings disclosure 
requirements ``should not cause a significant cost increase . . . as 
long as the information is made available from relevant accounting 
systems,''\1184\ and another commenter stated that the proposed 
disclosure requirements generally should not produce any meaningful 
costs.\1185\ Another commenter urged the Commission to harmonize new 
disclosure requirements so that funds would face lower administrative 
burdens, and investors would bear correspondingly fewer costs.\1186\ As 
described above, the portfolio holdings disclosure requirements we are 
adopting have changed slightly from those that we proposed, in order to 
conform to modifications we are making to the proposed Form N-MFP 
disclosure requirements. However, we believe that these revisions do 
not produce additional burdens for funds and thus do not affect 
previous cost estimates. Because the 2010 money market fund reforms 
already require money market funds to post monthly portfolio 
information on their Web sites,\1187\ funds should not need to upgrade 
their systems and software to comply with the new portfolio holdings 
information disclosure requirements. The Commission therefore does not 
believe that comments about the costs required to upgrade relevant 
systems and software should affect its estimates of the costs 
associated with the portfolio holdings disclosure requirements. Based 
on these considerations, as well as updated industry data, we now 
estimate that each fund would incur annual costs of $2,724 in updating 
its Web site to include the required monthly disclosure.\1188\
---------------------------------------------------------------------------

    \1183\ See supra note 1165.
    \1184\ See State Street Comment Letter, at Appendix A.
    \1185\ See HSBC Comment Letter.
    \1186\ See Fin. Svcs. Roundtable Comment Letter.
    \1187\ See 2010 Adopting Release, supra note 17, at section 
II.E.1.
    \1188\ We estimate that these costs would be attributable to 
project assessment (associated with designing and presenting the 
required portfolio holdings information), as well as project 
development, implementation, and testing. The costs associated with 
these activities are all paperwork-related costs and are discussed 
in more detail below. See infra section IV.A.6.a.
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v. Costs of Disclosure Regarding Financial Support Received by the 
Fund, the Imposition and Removal of Liquidity Fees, and the Suspension 
and Resumption of Fund Redemptions
    Because the required Web site disclosure overlaps with the 
information that a fund must disclose on Form N-CR when the fund 
receives financial support from a sponsor or fund affiliate, or when 
the fund imposes or removes liquidity fees or suspends or resumes fund 
redemptions, we anticipate that the costs a fund will incur to draft 
and finalize the disclosure that will appear on its Web site will 
largely be incurred when the fund files Form N-CR, as discussed below 
in section III.F. The Proposing Release estimated that, in addition, a 
fund

[[Page 47838]]

would incur costs of $207 each time that it updates its Web site to 
include the required disclosure.\1189\
---------------------------------------------------------------------------

    \1189\ See Proposing Release, supra note 25, at nn.464, 629.
---------------------------------------------------------------------------

    While certain commenters generally noted, as discussed above, that 
complying with the new Web site disclosure requirements would add costs 
for funds,\1190\ one commenter stated that the costs of disclosing 
liquidity fees and gates and instances of financial support on the 
fund's Web site would be minimal when compared to other costs,\1191\ 
and another commenter stated that the proposed disclosure requirements 
should not produce any meaningful costs.\1192\ As described above, we 
have modified the required time frame for disclosing information about 
financial support received by a fund on the fund's Web site. However, 
this modification does not produce additional burdens for funds and 
thus does not affect previous cost estimates. Taking this into 
consideration, as well as the fact that we received no comments 
providing specific suggestions or critiques about our methods of 
estimating the burdens associated with the Form N-CR-linked Web site 
disclosure requirements, the Commission has not modified the estimated 
costs associated with these requirements, although it has modified its 
cost estimates based on updated industry data. We now estimate that a 
fund would incur costs of $227 each time that it updates its Web site 
to include the required disclosure.\1193\
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    \1190\ See supra note 1165.
    \1191\ See State Street Comment Letter, at Appendix A.
    \1192\ See HSBC Comment Letter.
    \1193\ The costs associated with these activities are all 
paperwork-related costs and are discussed in more detail below. See 
infra section IV.A.6.d.
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F. Form N-CR

1. Introduction
    Today we are adopting, largely as we proposed, a new requirement 
that money market funds file a current report with us when certain 
significant events occur.\1194\ New Form N-CR will require disclosure 
of certain specified events. Generally, a money market fund will be 
required to file Form N-CR if a portfolio security defaults, an 
affiliate provides financial support to the fund, the fund experiences 
a significant decline in its shadow price, or when liquidity fees or 
redemption gates are imposed and when they are lifted.\1195\ In most 
cases, a money market fund will be required to submit a brief summary 
filing on Form N-CR within one business day of the occurrence of the 
event, and a follow-up filing within four business days that includes a 
more complete description and information.\1196\
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    \1194\ As we proposed, this requirement will be implemented 
through our adoption of new rule 30b1-8, which requires money market 
funds to file a report on new Form N-CR in certain circumstances. 
See rule 30b1-8; Form N-CR.
    \1195\ See Form N-CR Parts B-H. More specifically, adopted 
largely as proposed, these events include instances of portfolio 
security default (Form N-CR Part B), financial support (Form N-CR 
Part C), a decline in a stable NAV fund's current NAV per share 
(Form N-CR Part D), a decline in weekly liquid assets below 10% of 
total fund assets (Form N-CR Part E), whether a fund has imposed or 
removed a liquidity fee or gate (Form N-CR Parts E, F and G), or any 
such other information a fund, at is option, may choose to disclose 
(Form N-CR Part H). In addition, as proposed, Form N-CR Part A will 
also require a fund to report the following general information: (i) 
The date of the report; (ii) the registrant's central index key 
(``CIK'') number; (iii) the EDGAR series identifier; (iv) the 
Securities Act file number; and (v) the name, email address, and 
telephone number of the person authorized to receive information and 
respond to questions about the filing. See Form N-CR Part A. As 
proposed the name, email address, and telephone number of the person 
authorized to receive information and respond to questions about the 
filing will not be disclosed publicly on EDGAR.
    \1196\ A report on Form N-CR will be made public on the 
Commission's Electronic Data Gathering, Analysis, and Retrieval 
system (``EDGAR'') immediately upon filing.
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    We proposed requiring reporting on Form N-CR under both the 
floating NAV and fees and gates reform alternatives, but the Form 
differed in certain respects depending on the alternative.\1197\ Today 
we are adopting a combination of the alternatives, and therefore final 
Form N-CR is a combined single form.\1198\
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    \1197\ For example, under the liquidity fees and gates 
alternative, we proposed Form N-CR to include additional disclosures 
specifically related to liquidity fees and gates, which we did not 
propose to under the floating NAV alternative. See Proposing 
Release, supra note 25, at section III.G.2; proposed (Fees & Gates) 
Form N-CR Parts E, F and G. In addition to other changes we are 
making today to the form, the final version of Form N-CR includes 
these additional Parts. See Form N-CR Parts E, F and G. We are also 
reconciling the introduction of Part D, which was worded differently 
under each of the respective main alternatives. See proposed (FNAV) 
Form N-CR Part D; proposed (Fees & Gates) Form N-CR Part D; see 
also, infra note 1263.
    \1198\ Id.
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    As we stated in the Proposing Release,\1199\ the information 
provided on Form N-CR will enable the Commission to enhance its 
oversight of money market funds and its ability to respond to market 
events. The Commission will be able to use the information provided on 
Form N-CR in its regulatory, disclosure review, inspection, and 
policymaking roles. Requiring funds to report these events on Form N-CR 
will provide important transparency to fund shareholders, and also will 
provide information more uniformly and efficiently to the Commission. 
It will also provide investors and other market observers with better 
and more timely disclosure of potentially important events.
---------------------------------------------------------------------------

    \1199\ See Proposing Release at paragraph containing n.697.
---------------------------------------------------------------------------

    Commenters generally supported new Form N-CR.\1200\ For example, 
one commenter noted that Form N-CR would generally ``[alert] the SEC to 
issues the funds may be having'' and ``[provide] the public with 
current information that investors need.''\1201\ On the other hand, 
some commenters also voiced objections, suggesting that the form may be 
burdensome or redundant, and also offered specific improvements.\1202\ 
As discussed in more detail below, we are making various changes to 
Form N-CR to address some of these concerns. However, while we 
appreciate commenters' concerns about possible redundancies of Form N-
CR in light of the concurrent Web site or SAI disclosures, we believe 
each of these different disclosures to be appropriate because they 
serve distinct purposes.\1203\
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    \1200\ See, e.g., CFA Institute Comment Letter; American Bankers 
Ass'n Comment Letter; Vanguard Comment Letter; Schwab Comment 
Letter; ICI Comment Letter.
    \1201\ See CFA Institute Comment Letter.
    \1202\ See, e.g., Dreyfus Comment Letter; Fidelity Comment 
Letter; ICI Comment Letter; Federated VIII Comment Letter; SIFMA 
Comment Letter.
    \1203\ See discussion following infra notes 1248 and 1249 and 
accompanying text.
---------------------------------------------------------------------------

2. Part B: Defaults and Events of Insolvency
    Part B of Form N-CR is being adopted largely as proposed.\1204\ We 
are

[[Page 47839]]

adopting, as proposed, the requirement that a money market fund report 
to us if the issuer or guarantor of a security that makes up more than 
one half of one percent of a fund's total assets defaults or becomes 
insolvent.\1205\ Such a report will, also as proposed, include the 
nature and financial effect of the default or event of insolvency, as 
well as the security or securities affected.\1206\ As we noted in the 
Proposing Release, the Commission believes that the factors specified 
in the required disclosure are necessary to understand the nature and 
extent of a default, as well as the potential effect of a default on 
the fund's operations and its portfolio as a whole.\1207\
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    \1204\ See proposed (FNAV) Form N-CR Part B; proposed (Fees & 
Gates) Form N-CR Part B. In the Proposing Release, we proposed Form 
N-CR to require a fund to disclose the following information: (i) 
The security or securities affected; (ii) the date or dates on which 
the defaults or events of insolvency occurred; (iii) the value of 
the affected securities on the dates on which the defaults or events 
of insolvency occurred; (iv) the percentage of the fund's total 
assets represented by the affected security or securities; and (v) a 
brief description of the actions the fund plans to take in response 
to such event. See id.
    Among the other changes discussed in this section, in the final 
amendments we are also adding the clause ``or has taken'' to the 
``brief description of actions fund plans to take, or has taken, in 
response to the default(s) or event(s) of insolvency'' as required 
by Item B.5 of Form N-CR. See Form N-CR Item B.5. We are clarifying 
that filers should not omit in Item B.5 any actions that they may 
have already taken in response to a default or event of insolvency 
prior to their filing of Form N-CR. In particular, if a fund were 
able to complete all actions in response to a default before the 
deadline of the follow-up filing, it could have otherwise 
effectively omitted its entire response to the default from being 
disclosed in Item B.5. We believe such an omission would 
significantly diminish the informational utility of Form N-CR to the 
Commission and investors in understanding how a fund has responded 
to a default.
    \1205\ See Form N-CR Part B (requiring filing if the issuer of 
one or more of the fund's portfolio securities, or the issuer of a 
demand feature or guarantee to which one of the fund's portfolio 
securities is subject, and on which the fund is relying to determine 
the quality, maturity, or liquidity of a portfolio security, 
experiences a default or event of insolvency (other than an 
immaterial default unrelated to the financial condition of the 
issuer), and the portfolio security or securities (or the securities 
subject to the demand feature or guarantee) accounted for at least 
\1/2\ of 1 percent of the fund's total assets immediately before the 
default or event of insolvency).
    \1206\ Form N-CR Part B, adopted largely as proposed, will 
require a fund to disclose the following information: (i) The 
security or securities affected, including the name of the issuer, 
the title of the issue (including coupon or yield, if applicable) 
and at least two identifiers, if available; (ii) the date or dates 
on which the defaults or events of insolvency occurred; (iii) the 
value of the affected securities on the dates on which the defaults 
or events of insolvency occurred; (iv) the percentage of the fund's 
total assets represented by the affected security or securities; and 
(v) a brief description of the actions the fund plans to take, or 
has taken, in response to such event. As proposed, an instrument 
subject to a demand feature or guarantee would not be deemed to be 
in default, and an event of insolvency with respect to the security 
would not be deemed to have occurred, if: (i) In the case of an 
instrument subject to a demand feature, the demand feature has been 
exercised and the fund has recovered either the principal amount or 
the amortized cost of the instrument, plus accrued interest; (ii) 
the provider of the guarantee is continuing, without protest, to 
make payments as due on the instrument; or (iii) the provider of a 
guarantee with respect to an asset-backed security pursuant to rule 
2a-7(a)(16)(ii) is continuing, without protest, to provide credit, 
liquidity or other support as necessary to permit the asset-backed 
security to make payments as due. See Instruction to Form N-CR Part 
B. This instruction is based on the current definition of the term 
``default'' in the provisions of rule 2a-7 that require funds to 
report defaults or events of insolvency to the Commission. See 
current rule 2a-7(c)(7)(iv).
    \1207\ See Proposing Release, supra note 25, at text following 
n.703.
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    As stated above, we proposed to require disclosure of the security 
or securities affected by the default.\1208\ In a change from the 
proposal, to help us better identify defaulted portfolio securities, 
the final form now requires funds to report the name of the issuer, the 
title of the issue and at least two identifiers, if available (e.g., 
CUSIP, ISIN, CIK, Legal Entity Identifier (``LEI'')) when they file a 
report under part B of the form.\1209\ This requirement is similar to 
what we proposed and are adopting with respect to Items C.1 to C.5 of 
Form N-MFP.\1210\ In particular, better identification of the 
particular fund portfolio security or securities subject to a default 
or event of insolvency at the time of notice to the Commission will 
facilitate the staff's monitoring and analysis efforts, as well as 
inform any action that may be required in response to the risks posed 
by such an event. Fund shareholders and potential investors will 
similarly benefit from the clear identification of defaulted fund 
portfolio securities when evaluating their investments.\1211\
---------------------------------------------------------------------------

    \1208\ Proposed (FNAV) Form N-CR Item B.1; Proposed (Fees & 
Gates) Form N-CR Item B.1.
    \1209\ See Form N-CR Item B.1. These requirements are similar to 
Form N-MFP Items C.1 to C.5 but are reported on a more timely basis 
on Form N-CR. Much like under Form N-MFP, we note that the 
requirement to include multiple identifiers is only required if such 
identifiers are actually available.
    \1210\ See Proposing Release, supra note 25, at nn.754-757 and 
accompanying text; see supra section III.G.
    \1211\ Although current rule 2a-7(c)(7)(iii)(A) requires money 
market funds to report defaults or events of insolvency to the 
Commission by email, as proposed, we are eliminating this now 
duplicative requirement.
---------------------------------------------------------------------------

    One commenter expressed concern that publicly identifying a single 
security that has defaulted could be problematic if other contextual 
information about the quality of the fund's other holding is not 
immediately available.\1212\ We note that the Form N-CR report will 
provide the value as well as the relative size of any defaulted 
security compared to the rest of a fund's portfolio, providing some 
context for the default. In addition, as further described in section 
III.F.6 below, we are also adopting a new Part H of Form N-CR that will 
permit money market funds, in their discretion, to discuss any other 
events or information that they may consider material or relevant, 
which should allow for additional context if necessary.
---------------------------------------------------------------------------

    \1212\ See Dreyfus Comment Letter.
---------------------------------------------------------------------------

3. Part C: Financial Support
    We are also adopting a requirement that money market funds report 
instances of financial support by sponsors or other affiliates on Part 
C of Form N-CR \1213\ with several changes from the proposal.\1214\ We 
have modified the definition of financial support from the proposal in 
response to comments, as discussed below. This revised definition will 
affect when Part C needs to be filed. When filed, the Part C report 
will, as proposed, require disclosure of the nature, amount, and terms 
of the support, as well as the relationship between the person 
providing the support and the fund \1215\

[[Page 47840]]

except that, in a change from the proposal, the report will also 
require certain identifying information about securities that are the 
subject of any financial support.\1216\
---------------------------------------------------------------------------

    \1213\ See Form N-CR Part C. Today, when a sponsor supports a 
fund by purchasing a security pursuant to rule 17a-9, we require 
prompt disclosure of the purchase by email to the Director of the 
Commission's Division of Investment Management, but we do not 
otherwise receive notice of such support unless the fund needs and 
requests no-action or other relief. See current rule 2a-
7(c)(7)(iii)(B). As proposed, we are eliminating this requirement, 
as it would duplicate the Form N-CR reporting requirements discussed 
in this section. As we stated in the text following note 711 of the 
Proposing Release, the Form N-CR reporting requirement will permit 
the Commission additionally to receive notification of other kinds 
of financial support (which could affect a fund as significantly as 
a security purchase pursuant to rule 17a-9) and a description of the 
reason for the support, and it will also assist investors in 
understanding the extent to which money market funds receive 
financial support from their sponsors or other affiliates.
    \1214\ See proposed (FNAV) Form N-CR Part C; proposed (Fees & 
Gates) Form N-CR Part C. In particular, in the Proposing Release we 
proposed the term ``financial support'' to include, but not be 
limited to, (i) any capital contribution, (ii) purchase of a 
security from the fund in reliance on rule 17a-9, (iii) purchase of 
any defaulted or devalued security at par, (iv) purchase of fund 
shares, (v) execution of letter of credit or letter of indemnity, 
(vi) capital support agreement (whether or not the fund ultimately 
received support), (vii) performance guarantee, or (viii) any other 
similar action to increase the value of the fund's portfolio or 
otherwise support the fund during times of stress. See Proposing 
Release, supra note 25, at nn.705-712 and accompanying discussion. 
We also proposed Form N-CR to require a fund to disclose the 
following information: (i) A description of the nature of the 
support; (ii) the person providing support; (iii) a brief 
description of the relationship between the person providing the 
support and the fund; (iv) a brief description of the reason for the 
support; (v) the date the support was provided; (vi) the amount of 
support; (vii) the security supported, if applicable; (viii) the 
market-based value of the security supported on the date support was 
initiated, if applicable; (ix) the term of support; and (x) a brief 
description of any contractual restrictions relating to support. In 
addition, if an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such a person, 
purchases a security from the fund in reliance on rule 17a-9, we 
proposed that the money market fund would be required to provide the 
purchase price of the security, as well as certain other 
information. See Instruction to proposed (FNAV) Form N-CR Part C; 
Instruction to proposed (Fees & Gates) Form N-CR Part C.
    \1215\ See id. Form N-CR Items C.1 through C.10 will require, 
with changes from the proposal, a fund to disclose the following 
information: (i) A description of the nature of the support; (ii) 
the person providing support; (iii) a brief description of the 
relationship between the person providing the support and the fund; 
(iv) the date the support was provided; (v) the amount of support, 
including the amount of impairment and the overall amount of 
securities supported; (vi) the security supported, including the 
name of the issuer, the title of the issue (including coupon or 
yield, if applicable) and at least two identifiers, if available; 
(vii) the market-based value of the security supported on the date 
support was initiated, if applicable; (viii) a brief description of 
the reason for the support; (ix) the term of support; and (x) a 
brief description of any contractual restrictions relating to 
support. We have also rearranged proposed Item C.4 (description of 
the reason for the support) to be new Item C.8 in order to better 
streamline the disclosures required to be filed within one business 
day (Items C.1 through C.7) versus four business days (Items C.8 
through C.10). See infra section III.F.7.
    \1216\ See Form N-CR Item C.6 (now requiring, for any security 
supported, disclosure of the name of the issuer, the title of the 
issue (including coupon or yield, if applicable) and at least two 
identifiers, if available. We are including the new securities 
identification requirements for the same reasons we are including it 
in Part B, as discussed above.
---------------------------------------------------------------------------

    As we noted in the Proposing Release, we believe that requiring 
disclosure of financial support from a fund sponsor or affiliate will 
provide important, near real-time transparency to shareholders and the 
Commission, and will therefore help shareholders better understand the 
ongoing risks associated with an investment in the fund.\1217\ The 
information provided in the required disclosure is necessary for 
investors to understand the nature and extent of the sponsor's 
discretionary support of the fund and will also assist Commission staff 
in analyzing the economic effects of such financial support.\1218\
---------------------------------------------------------------------------

    \1217\ See Proposing Release, supra note 25, at n.705 and 
accompanying text. See also, e.g., Schwab Comment Letter (noting 
that the ``[p]roposed disclosures around instances of sponsor 
support would provide investors with useful context for analyzing 
the stability of the fund''). In addition, as we discussed at n.712 
in the Proposing Release, money market funds' receipt of financial 
support from sponsors and other affiliates has not historically been 
prominently disclosed to investors, which has resulted in a lack of 
clarity among investors about which money market funds have received 
such financial support.
    \1218\ See Proposing Release, supra note 25, at text following 
n.708. Another commenter also suggested that disclosure of financial 
support on Form N-CR may have the effect of reducing the likelihood 
that funds will need such support in the future. See American 
Bankers Ass'n Comment Letter (``[k]nowing that any form of sponsor 
support would be required to be disclosed within 24 hours, fund 
managers would likely do everything they could to avoid the need for 
sponsor support.'').
---------------------------------------------------------------------------

a. Definition of Financial Support
    Although a number of commenters generally supported the proposed 
financial support disclosure,\1219\ many of these supporters and other 
commenters also argued that the proposed definition of ``financial 
support'' was ambiguous and could trigger unnecessary filings.\1220\ 
Many commenters suggested that the catchall provision of the proposed 
definition, which would require reporting of ``any other similar action 
to increase the value of the Fund's portfolio or otherwise support the 
Fund during times of stress,'' was too broad.\1221\ Some commenters 
stated that the proposed definition would trigger reports on Form N-CR 
of routine transactions that occur in the ordinary course of business, 
which do not indicate stress on the fund.\1222\ For example, a few 
commenters suggested that the proposed definition would result in Form 
N-CR filings with respect to ordinary fee waivers and expense 
reimbursements, inter-fund lending, purchases of fund shares, 
reimbursements made by the sponsor in error, and certain other routine 
fund transactions.\1223\ Because many of the above actions likely would 
not indicate stress on a fund, commenters noted that reporting these 
actions would not enhance investors' ability to fully appreciate the 
risks of investing in a fund, potentially lead to further investor 
confusion and possibly even cause ``disclosure fatigue'' among 
investors.\1224\ We also were asked to clarify what constitutes 
financial support in order to standardize disclosures by different 
funds.\1225\
---------------------------------------------------------------------------

    \1219\ See, e.g., Oppenheimer Comment Letter (``. . . we support 
the SEC's proposal to require money market funds to disclose current 
and historical instances of sponsor support for stable NAV funds [. 
. .].''); Schwab Comment Letter; T. Rowe Price Comment Letter; 
American Bankers Ass'n Comment Letter; Federated VIII Comment 
Letter.
    \1220\ See, e.g., Schwab Comment Letter (noting that the 
``[p]roposed disclosures around instances of sponsor support would 
provide investors with useful context for analyzing the stability of 
the fund, though we would note that not all instances of sponsor 
support are indicative of a fund under even mild stress, let alone 
nearing the point of breaking the buck.''); ICI Comment Letter (``We 
are concerned that the definition of `financial support' for 
purposes of the required disclosures is overly broad and would 
include the reporting of routine fund matters.''); Federated II 
Comment Letter; Deutsche Comment Letter; UBS Comment Letter.
    \1221\ See, e.g., Dreyfus Comment Letter, Deutsche Comment 
Letter, ICI Comment Letter, Fidelity Comment Letter; UBS Comment 
Letter.
    \1222\ See, e.g., Dechert Comment Letter (stating that the 
``definition of `financial support' is over-inclusive and would 
capture certain actions taken in the ordinary course of business 
that would not signal any financial distress on the part of the 
money fund.''); SIFMA Comment Letter, ICI Comment Letter, Federated 
II Comment Letter, Vanguard Comment Letter.
    \1223\ See, e.g., PWC Comment Letter (``. . . an expense waiver 
is more often than not a means to limit a fund's expense ratio, and 
not to avoid the NAV falling below $1.00 per share.''); BlackRock II 
Comment Letter (``[a]ffiliates and fund sponsors often use a fund as 
a cash management vehicle and routinely purchase fund shares. These 
purchases in no way indicate a fund is under stress.''); Fidelity 
Comment Letter (noting that ``a `(iv) purchase of fund shares' may 
be interpreted to include a sponsor's investment of seed money to 
launch a new fund and investment by affiliated funds or transfer 
agents on behalf of either funds using MMFs as an overnight cash 
sweep or central funds investing pursuant to the terms of an 
exemptive order.'' and that other routine items might include 
``expense caps, inter-fund lending, loans and overdrafts due to 
settlement timing issues, and credits that service providers of a 
MMF may give as a result of cash held at the service provider''). 
See also, e.g., Vanguard Comment Letter, Federated VIII Comment 
Letter, SIFMA Comment Letter, Deutsche Comment Letter, ICI Comment 
Letter.
    \1224\ See, e.g., Federated VIII Comment Letter; Fidelity 
Comment Letter; ICI Comment Letter; SIFMA Comment Letter; Chamber II 
Comment Letter.
    \1225\ See SIFMA Comment Letter (stating that clarifying the 
definition of financial support is ``necessary to standardize 
disclosures across the industry.''). With respect to the ``catch-
all'' provision of the definition, see discussion infra and cf., 
e.g., Dreyfus Comment Letter. Certain of our final changes to the 
definition of ``financial support'' are intended to address concerns 
about inconsistent disclosures by different funds. See, e.g., infra 
notes 1226 and 1232 and the respective accompanying discussions.
---------------------------------------------------------------------------

    We appreciate these commenters' concerns, and are today amending 
the final definition of ``financial support'' to minimize unnecessary 
filings of Form N-CR and reduce inconsistencies among different filers. 
In response to these comments, we are, among other things, modifying 
the rule text to specify that certain routine actions, and actions not 
reasonably intended to increase or stabilize the value or liquidity of 
the fund's portfolio, do not need to be reported as financial support 
on Form N-CR, as discussed below.\1226\ The revised definition should 
help avoid Form N-CR filings that do not represent actions that the 
Commission, shareholders, and other market observers would consider 
significant enough in evaluating or monitoring for financial support. 
Each item of financial support in the definition is the same as was 
proposed, except we have deleted ``purchase of fund shares'' from the 
definition, we have refined the ``catch-all provision,'' and we have 
added several exclusions, all discussed below.
---------------------------------------------------------------------------

    \1226\ In addition, in the Proposing Release, we explained that 
the instructions specified that the term financial support included, 
but was not limited to certain examples of financial support. See 
Proposing Release, supra note 25, at n.617 and accompanying text. 
Similarly, in the proposed Form N-CR, we had included the phrase 
``for example'' before the definition of financial support, 
suggesting that this definition was a non-exhaustive list of actions 
that constitute financial support. See proposed (FNAV) Form N-CR 
Part C; proposed (Fees & Gates) Form N-CR Part C. In the final 
amendments, we are eliminating these qualifications in order to 
reduce any ambiguity over what else might constitute sponsor 
support. We also clarify that the final definition encompasses the 
entire universe of what does (and does not) constitute financial 
support for purposes of Form N-CR. We believe these clarifications, 
in addition to our other changes to the definition of ``financial 
support,'' will provide for more standardized disclosures across the 
industry.
---------------------------------------------------------------------------

    As we are adopting it today, the term ``financial support'' is 
defined to include (i) any capital contribution, (ii) purchase of a 
security from the fund in reliance on rule 17a-9, (iii) purchase of any 
defaulted or devalued security at par, (iv) execution of letter of 
credit or

[[Page 47841]]

letter of indemnity, (v) capital support agreement (whether or not the 
fund ultimately received support), (vi) performance guarantee, (vii) or 
any other similar action reasonably intended to increase or stabilize 
the value or liquidity of the fund's portfolio; excluding, however, any 
(i) routine waiver of fees or reimbursement of fund expenses, (ii) 
routine inter-fund lending, (iii) routine inter-fund purchases of fund 
shares, or (iv) any action that would qualify as financial support as 
defined above, that the board of directors has otherwise determined not 
to be reasonably intended to increase or stabilize the value or 
liquidity of the fund's portfolio.\1227\
---------------------------------------------------------------------------

    \1227\ See Form N-CR Part C. This definition is the same as the 
one we are adopting today for purposes of the Web site disclosure of 
sponsor support. See supra section III.F.3. See also, supra note 
1214 for a description of the proposed definition in the Proposing 
Release.
---------------------------------------------------------------------------

    As some commenters suggested,\1228\ we are refining the ``catch-
all'' provision of the financial support definition.\1229\ In the 
Proposing Release, we had proposed to require disclosure of ``any other 
similar action to increase the value of the fund's portfolio or 
otherwise support the fund during times of stress.'' \1230\ Under the 
final definition, we are changing this provision to read: ``any other 
similar action reasonably intended to increase or stabilize the value 
or liquidity of the Fund's portfolio.'' \1231\ In particular, we have 
eliminated the phrases ``otherwise support'' and ``during times of 
stress'' contained in the proposed definition to address more general 
concerns that the ``catch-all'' provision was too vague and could be 
subject to different interpretations by different funds.\1232\ We also 
eliminated the phrase ``during times of stress'' because sponsors may 
also provide support pre-emptively, before a fund is experiencing any 
actual stress. Instead, we believe this new intentionality standard 
\1233\ should serve to reduce the chance that a fund would need to 
report an action on Form N-CR that does not represent true financial 
support that the Commission or investors would likely be concerned 
with. By focusing on the primary intended effects of sponsor support--
increasing or stabilizing the value or liquidity of a fund's portfolio 
\1234\--we believe the revised ``catch-all'' provision will better 
capture actions that the Commission, shareholders, and other market 
observers would consider significant in evaluating or monitoring for 
financial support.\1235\ Actions that would likely fall within this 
``catch-all'' provision include, for example, the purchase of a 
defaulted or devalued security at a price above fair value, or 
exchanges of securities with longer maturities for ones with shorter 
maturities.
---------------------------------------------------------------------------

    \1228\ See, e.g., Dreyfus Comment Letter (``we recommend that 
`or otherwise support the fund during times of market stress' be 
eliminated from subparagraph (viii), or revised to be made more 
specific as to actual financial support provided. As proposed, this 
broad `catch-all' provision re-opens the door for debate about what 
constitutes `instances of sponsor support.' ''); ICI Comment Letter.
    \1229\ See Form N-CR Part C.
    \1230\ See Proposing Release, supra note 25, at n.617 and 
accompanying text; proposed (FNAV) Form N-CR Part C; proposed (Fees 
& Gates) Form N-CR Part C.
    \1231\ See Form N-CR Part C.
    \1232\ See Dreyfus Comment Letter. See generally, e.g., SIFMA 
Comment Letter (with respect to definition of financial support 
generally, stating that clarifications are ``necessary to 
standardize disclosures across the industry.''). But cf., ICI 
Comment Letter (proposing a modified ``catch-all'' provision that 
would retain the phrase ``during periods of stress.'').
    \1233\ See Form N-CR Part C. As noted above, if increasing or 
stabilizing the value or liquidity of the Fund's portfolio is an 
intended effect of an action, even if not the primary purpose, then 
it would need to be reported on Form N-CR.
    \1234\ To that end, we have also added ``or stabilize'' and ``or 
liquidity'' to what we had originally proposed as the catch-all 
provision. See supra note 1231 and accompanying text. We are doing 
so because we believe that increasing the value of a fund may not be 
the only primary intended effect of financial support. Rather, we 
believe that stabilizing the value of a fund (e.g., where a sponsor 
provides support to counter foreseeable adverse market effects that 
may otherwise depress the fund's value), as well as increasing or 
stabilizing the fund's liquidity (e.g., where a sponsor might 
exchange securities with longer maturities for ones of equal value 
but with shorter maturities) may also be intended effects of 
financial support.
    \1235\ We also considered whether to make this ``catch-all'' 
provision (or the definition of financial support generally) subject 
to a specific threshold or general materiality qualification. See, 
e.g., T. Rowe Price Comment Letter (stating that ``if the sponsor is 
investing in its own fund in order to support the NAV, we agree that 
the SEC could consider requiring disclosure [on Form N-CR] if a 
money market fund's NAV has dropped below a certain threshold and 
the sponsor's investment in the fund materially changes the market-
based NAV.''); Cf., e.g., ICI Comment Letter (among other things, 
proposing to qualify purchases of fund shares by adding ``to support 
the fund during periods of stress (e.g., when the fund's NAV 
deviates by more than \1/4\ of 1 percent)'' behind it). However, we 
are not including a specific threshold (e.g., a specific drop in the 
fund's NAV or liquidity) at this time (to the ``catch-all'' 
provision or any other part of the definitions) because not all 
types of sponsor support (e.g., a capital support agreement or 
performance guarantee) may result in an immediate change in a fund's 
NAV or liquidity. The utility of the reporting might also be 
diminished with such a threshold if sponsors provided support pre-
emptively, before the specified threshold is met.
---------------------------------------------------------------------------

    We have also added exclusions to the definition in a change from 
the proposal. The revised definition of financial support explicitly 
excludes routine waivers of fees or reimbursement of fund expenses, 
routine inter-fund lending, and routine inter-fund purchases of fund 
shares.\1236\ We agree with commenters that the actions we are 
excluding from the final definition are not generally indicative of 
stress at a fund.\1237\ Correspondingly, we have also deleted purchases 
of fund shares as one of the items that had been explicitly included in 
the proposed definition.\1238\ We note that these actions must be 
``routine'' meaning that any such actions are excluded only to the 
extent they are not reasonably intended to increase or stabilize the 
value or liquidity of the fund's portfolio.\1239\
---------------------------------------------------------------------------

    \1236\ Cf., e.g., ICI Comment Letter (proposing to add 
``nonroutine'' before ``purchase of fund shares'' to ``make it clear 
that routine affiliate purchases normally should not be deemed 
``financial support.'').
    \1237\ See generally, commenters' concerns at supra note 1223 
and accompanying discussion.
    \1238\ See clause (iv) of the proposed definition, supra note 
1227.
    \1239\ If increasing or stabilizing the value or liquidity of 
the Fund's portfolio is an intended effect of an action, even if not 
the primary purpose, then it would need to be reported on Form N-CR.
---------------------------------------------------------------------------

    The final definition of financial support also includes a new 
intentionality exclusion that may be invoked by boards.\1240\ Under 
this new exclusion, a particular action need not be reported as 
financial support under Part C of Form N-CR if the board of directors 
of the fund finds that the action was not ``reasonably intended to 
increase or stabilize the value or liquidity of the Fund's portfolio.'' 
We are adding this exclusion as a way to address certain remaining 
concerns by commenters about the reporting of actions that might 
otherwise still technically fall within the definition of financial 
support, but are not intended as such.\1241\ During times of fund or 
market stress, however, we believe that boards likely would find it 
difficult to determine that a particular action that is otherwise 
captured by the definition of financial support should be excluded 
under this intentionality exception. We recognize that an action may be 
made for a number of reasons, but note that if an intent of the action 
is to increase or stabilize the value or liquidity of the Fund's 
portfolio, even if that is not the primary or sole purpose of the 
action, then it must be reported on the

[[Page 47842]]

Form.\1242\ As is the case with any board determination, boards would 
typically record in the board minutes the bases of any such 
determinations by the board.\1243\
---------------------------------------------------------------------------

    \1240\ See Form N-CR Part C.
    \1241\ See, e.g., Fidelity Comment Letter (``For example, `(i) 
any capital contribution' could be interpreted to include a 
reimbursement of error, as a MMF adviser or sponsor may reimburse a 
MMF for an error that occurred whether part of investment 
operations, investment activity or other services provided by a 
service provider to the funds.'') In such a case, a fund's board 
might be able to determine that such reimbursement was not 
``reasonably intended to increase or stabilize the value or 
liquidity of the Fund's portfolio'' and thus would not report the 
action on Form N-CR.
    \1242\ For example, a sponsor might purchase a security from a 
fund (or take another similar action) to eliminate potential future 
risk associated with that security, and may engage in such an action 
primarily out of concern for their reputation or other reasons. 
Nonetheless, if any intent of the action, even if it is not the 
primary intent, is to increase or stabilize the value or liquidity 
of the fund's portfolio (in the present or future), then such an 
action would be reportable on Form N-CR. Similarly, one commenter 
suggested that we exclude certain capital contributions provided by 
the sponsor of an acquired fund in the case of a merger or 
reorganization from the definition of financial support for purposes 
of Form N-CR. See Federated VIII Comment Letter. We have not done so 
because in some cases such a contribution might be reasonably 
intended to increase or stabilize the value or liquidity of the 
fund's portfolio, even if the primary intent was to facilitate the 
merger or reorganization. In particular, such a contribution may 
qualify as a ``capital contribution'' for purposes of clause (i) of 
the proposed definition of financial support. Given that the capital 
contribution in the commenter's example was intended to cover ``any 
net losses previously realized by the acquired fund'' or ``if the 
shadow price of the acquired fund differs materially from the 
acquiring fund's shadow price,'' the recipient fund's board would 
likely find it difficult to conclude that such a capital 
contribution was not reasonably intended to increase or stabilize 
the value or liquidity of the fund's portfolio. Id.
    \1243\ See supra note 709.
---------------------------------------------------------------------------

b. Amount of Support
    In the Proposing Release, we proposed that filers disclose, among 
other things, the ``amount of support'' in Part C of Form N-CR.\1244\ 
One commenter asked the Commission to clarify the ``amount'' of 
financial support that they must report under Part C of the form to 
avoid misleading disclosures and to facilitate comparability in 
disclosures across the industry.\1245\ For example, in the case of a 
purchase of a security from the fund, this commenter believed that it 
may be misleading to report the size of the position purchased as the 
``amount'' supported and rather thought the amount of support should be 
the increase in the fund's NAV that results from the purchase. This 
commenter also asked that the Commission clarify that SEC staff 
interpretations relating to reporting the valuation of capital support 
agreements on Form N-MFP would be applicable for these purposes.\1246\
---------------------------------------------------------------------------

    \1244\ See proposed (FNAV) Form N-CR Item C.6; proposed (Fees & 
Gates) Form N-CR Item C.6.
    \1245\ See SIFMA Comment Letter.
    \1246\ This commenter was discussing Staff Responses to 
Questions about Rule 30b1-7 and Form N-MFP updated July 29, 2011, 
available at http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
---------------------------------------------------------------------------

    Below we are providing guidance to clarify what amounts should be 
reported specifically with respect to share purchases on Part C of Form 
N-CR. With respect to share purchases in particular, we disagree with 
the commenter that when financial support is provided through the 
purchase of a fund portfolio security, the size of the security 
position purchased is not relevant in considering the amount of 
support. When a distressed or potentially distressed security is 
purchased out of a fund's portfolio, support can be provided in two 
ways. First, if it is purchased at amortized cost and the security's 
market-based value is below amortized cost, one measure of the amount 
of support is the amount of the security's impairment below amortized 
cost. However, the purchase of the security position from the fund also 
removes this entire risk exposure from the fund and protects the fund 
from subsequent further price declines in the security. Accordingly, we 
believe that the size of the position purchased from the fund is also 
relevant when considering the ``amount'' of financial support. 
Therefore, in such a case filers should report under Part C of Form N-
CR the following two separate items with respect to the ``amount'' of 
financial support: (i) The amount of the impairment below amortized 
cost in the security purchased and (ii) the amortized cost value of the 
securities purchased.
    In the case of a capital support agreement, historically such 
agreements have supported a particular security position while others, 
as noted by a commenter, may support the market-based NAV per share of 
the fund as a whole.\1247\ Where a capital support agreement is 
supporting a particular security position, we would consider the amount 
of reportable financial support on Form N-CR similar to that described 
above relating to purchases of portfolio securities. That is, the 
``amount'' of financial support is the amount of security impairment 
effectively removed through the capital support agreement as well as 
the amortized cost value of the overall position supported (assuming 
the entire position is subject to the capital support agreement). For a 
capital support agreement that supports the fund as a whole, the amount 
of reportable financial support is the amount of impairment to the 
fund's NAV per share effectively removed through the capital support 
agreement with a notation describing that the capital support agreement 
supports the value of the fund as a whole (or the extent of the fund's 
value that is supported, if less than the full amortized cost value).
---------------------------------------------------------------------------

    \1247\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    This guidance differs somewhat from the staff guidance relating to 
capital support agreement disclosures on Form N-MFP because the context 
differs. Form N-MFP already requires reporting on the overall size of 
the security position reported (and information about the size of the 
fund), so the additional capital support agreement reporting focuses on 
valuing the impairment effectively removed through the capital support 
agreement. Our guidance regarding ``amount'' of financial support 
reportable on Form N-CR for capital support agreements thus provides 
similar information to that which could be collectively determined by 
reviewing various Form N-MFP line items.
c. Concerns Over Potential Redundancy
    One commenter argued that the financial support disclosure in Form 
N-CR is redundant in light of the corresponding financial support 
disclosures in the SAI, raising concerns about the additional 
preparation costs and burdens on fund personnel.\1248\ More generally, 
commenters were also concerned about the redundancy of various other 
Parts of Form N-CR, Form N-CR as a whole, and even the various proposed 
disclosures in the aggregate.\1249\ While we appreciate these concerns 
and have considered the costs and burdens of Form N-CR,\1250\ we note 
that each of the Form N-CR and the corresponding Web site and SAI 
disclosure requirements serves a distinct purpose.\1251\ Therefore, 
although we acknowledge there will be some textual overlap between 
these different formats, we believe there are strong public policy 
reasons for requiring the various different disclosures. We also note 
that we have required other such parallel reporting for similar 
reasons.\1252\
---------------------------------------------------------------------------

    \1248\ See Dreyfus Comment Letter.
    \1249\ See, e.g., Dreyfus Comment Letter; SIFMA Comment Letter; 
Federated II Comment Letter; Fin. Svcs. Roundtable Comment Letter.
    \1250\ We consider and estimate the various costs and burdens of 
Form N-CR in more detail in infra section III.F.8 as well as in 
infra section IV.D.2.a.
    \1251\ We note that there are also certain overlapping 
disclosures with respect to Form N-MFP, which we generally discuss 
in supra section III.G.
    \1252\ For example, money market funds are currently required to 
disclose much of the portfolio holdings information they disclose on 
Form N-MFP on the fund's Web site as well. See current rule 2a-
7(c)(12)(ii); current rule 30b1-7; Form N-MFP, General Instruction 
A.
---------------------------------------------------------------------------

    Most significantly, Form N-CR will alert Commission staff, 
shareholders and other market observers about any reportable events on 
Form N-CR

[[Page 47843]]

(including any financial support) on a near real-time basis.\1253\ In 
particular, Form N-CR will enable the Commission and other market 
observers to better monitor the entire fund industry, as they will be 
able to locate on EDGAR all Form N-CR reports specific to any 
particular time frame without having to search through the SAIs of all 
the funds in the industry. We expect financial news services to be 
among the market observers who will benefit from Form N-CR, which in 
turn could then also alert investors about these important developments 
more expeditiously.\1254\ Although any corresponding SAI disclosures 
will also be available on EDGAR, because SAI filings contain many other 
disclosures (including those unrelated to financial support or the 
other reportable events on Form N-CR), it could take significant 
amounts of time for the Commission and other market observers (such as 
the aforementioned financial news services) to continually review all 
SAI filings for any relevant alerts.\1255\ Similarly, we believe it 
would be significantly more time-consuming, if not impractical, if the 
Commission and other market observers had to continually check each 
fund's Web site for any relevant updates.\1256\ We therefore believe 
that the corresponding Web site and SAI disclosures alone would not 
accomplish the primary goal of Form N-CR in alerting the Commission, 
investors and other market observers about important events in a timely 
and meaningful manner. Moreover, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than either 
the corresponding Web site or SAI disclosures,\1257\ which further 
minimizes the degree to which there would have been any functionally 
overlapping disclosures. Finally, Form N-CR filings will also provide a 
permanent historical record of any financial support provided to the 
entire money market fund industry, which will be accessible on EDGAR.
---------------------------------------------------------------------------

    \1253\ With respect to the need of the Commission staff, 
shareholders and other market observers to receive the alerts on 
Form N-CR on a near real-time basis, cf. infra notes 1329-1333 and 
the accompanying text for a discussion on the importance of the one 
and four business day deadlines of Form N-CR.
    \1254\ As noted in supra notes 1211 and 1213, with respect to 
any portfolio defaults or fund share purchases under rule 17a-9, we 
are eliminating the corresponding email notifications to the 
Director of Investment Management or the Director's designee under 
current rules 2a-7(c)(7)(iii)(A) and (B). Among other reasons, we 
are replacing them with Form N-CR is because these email 
notifications are currently not publicly available to investors and 
other market observers.
    \1255\ Even where a fund updates its registration statement with 
equal promptness as Form N-CR, as noted by the commenter cited 
below, it would still likely take the Commission and other market 
observers extensive effort and time to continually review all SAI 
filings for any relevant alerts. See Dreyfus Comment Letter (stating 
that ``[w]hile the Commission may feel that Form N-CR will provide 
the information on a more real-time basis, we expect registration 
statements also will have to be updated with equal promptness with 
these disclosures (via Rule 497 filings with the Commission).''). In 
addition, as discussed below, we note that certain Parts of Form N-
CR as amended today will require more extensive disclosures than 
either the corresponding Web site or SAI disclosures.
    \1256\ Such Web site monitoring could be particularly burdensome 
because the presentation of this information would likely be 
different on each fund's Web site.
    \1257\ For example, with respect to disclosure of any financial 
support, funds will be required to disclose on their Web sites and 
in their SAIs only that information that the fund is required to 
report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and 
C.7 of Form N-CR. See supra notes 993 and 1137-1138 and accompanying 
text. We also note that Parts E, F, and G of Form N-CR as amended 
today will require more extensive disclosures than the rule 2a-7 and 
Form N-1A provisions requiring funds to disclose certain information 
about the imposition of fees or gates on the fund's Web site and in 
the fund's SAI. See supra notes 960 and 1112 and accompanying text.
---------------------------------------------------------------------------

    On the other hand, we believe that the consolidated discussion in 
the SAI will be the most accessible format for disclosing historical 
instances of sponsor support in the past 10 years, as it would be a 
significant burden on the Commission, investors and other market 
observers if they had to review various prior Form N-CR filings to 
piece together a specific fund's history of sponsor support,\1258\ even 
in light of the additional costs and burdens faced by funds in 
providing these SAI disclosures.\1259\ We also believe that, to the 
extent investors may not be familiar with researching filings on EDGAR, 
including these disclosures in a fund's SAI (which investors may 
receive in hard copy through the U.S. Postal Service or may access on a 
fund's Web site, as well as accessing on EDGAR) may make this 
information more readily available to these investors than disclosure 
on other SEC forms that are solely accessible on EDGAR.
---------------------------------------------------------------------------

    \1258\ Given that funds will be required to disclose historical 
instances of sponsor support for the past 10 years, the 
corresponding filings on Form N-CR will provide a permanent record 
for any instances of financial support that occurred more than 10 
years ago in a single place.
    \1259\ We generally consider and estimate the costs and burdens 
of the SAI disclosures in infra sections III.F.8 and IV.G.
---------------------------------------------------------------------------

    Similarly, the Web site disclosures are intended to be more 
accessible than Form N-CR for individual investors interested in 
information about particular funds, in particular to the extent such 
investors may not be familiar with researching filings on EDGAR.\1260\ 
Given that individual investors are typically most interested in 
information about their own (or potential) investments and do not 
necessarily monitor the entire fund industry, visiting the Web sites of 
a few particular funds would likely not become overly time-consuming or 
burdensome for these investors.\1261\
---------------------------------------------------------------------------

    \1260\ See CFA Institute Comment Letter (``We particularly 
endorse the proposed requirement that money market funds would have 
to post on their Web sites much of the information required in Form 
N-CR. While Form N-CR information is publicly available upon SEC 
filing, investors will more readily find and make use of this 
information if posted on a particular fund's Web site.'')
    \1261\ We also generally consider and estimate the costs and 
burdens of the related Web site disclosures in infra section III.F.8 
as well as in infra section IV.A.6.
---------------------------------------------------------------------------

4. Part D: Declines in Shadow Price
    Part D of Form N-CR will, as proposed, require funds that transact 
at a stable price to file a report when the fund's current NAV per 
share deviates downward from its intended stable price (generally, 
$1.00) by more than \1/4\ of 1 percent (i.e., generally below 
$0.9975).\1262\ Today we are adopting Part D of Form N-CR largely as 
proposed.\1263\ As we discussed in the

[[Page 47844]]

Proposing Release,\1264\ this requirement will not only permit the 
Commission and others to better monitor indicators of stress in 
specific funds or fund groups and in the industry, but also will help 
increase money market funds' transparency and permit investors to 
better understand money market funds' risks.\1265\ To better understand 
the cause of such a decline in the fund's shadow price, we are also 
requiring, largely as proposed, funds to provide the principal reason 
or reasons\1266\ for the reduction, which would involve identifying the 
particular securities or events that prompted the decline.\1267\ In a 
change from the proposal, we are also requiring the disclosure of the 
same identifying information included in other parts of the Form.\1268\ 
In particular, the final amendments to Item D.3 also now require funds 
to report the name of the issuer, the title of the issue and at least 
two identifiers, if available.\1269\ In particular, better 
identification of the particular fund portfolio security or securities 
that may have prompted a shadow price decline will facilitate the 
staff's monitoring and analysis efforts, which we expect to help us 
better understand the nature and extent of the shadow price decline, 
the potential effect on the fund, potential contagion risk across funds 
more broadly, as well as inform any action that may be required in 
response to the risks posed by such an event. Fund shareholders and 
potential investors will similarly benefit from the clear 
identification of a fund portfolio security or securities that may have 
prompted a shadow price decline when evaluating their 
investments.\1270\
---------------------------------------------------------------------------

    \1262\ Form N-CR Part D. As stated in the introduction to Part 
D, with some changes from the proposal, the disclosure requirement 
under Part D is triggered ``[if] a retail money market fund's or a 
government money market fund's current net asset value per share 
deviates downward from its intended stable price per share by more 
than \1/4\ of 1 percent [. . .].'' In turn, for each day the fund's 
current NAV is below this threshold, Part D will require, with some 
changes from the proposal, a fund to disclose the following 
information: (i) The date or dates on which such downward deviation 
exceeded \1/4\ of 1 percent; (ii) the extent of deviation between 
the fund's current NAV per share and its intended stable price; and 
(iii) the principal reason or reasons for the deviation, including 
the name of any security whose market-based value or sale price, or 
whose issuer's downgrade, default, or event of insolvency (or 
similar event) has contributed to the deviation.
    \1263\ See proposed (FNAV) Form N-CR Part D; proposed (Fees & 
Gates) Form N-CR Part D. Under either main alternative, in the 
Proposing Release we proposed Form N-CR to require an applicable 
fund, if its current NAV (rounded to the fourth decimal place in the 
case of a fund with a $1.00 share price, or an equivalent level of 
accuracy for funds with a different share price) deviates downward 
from its intended stable price per share by more than \1/4\ of 1 
percent, to disclose the following information: (i) The date or 
dates on which such deviation exceeded \1/4\ of 1 percent; (ii) the 
extent of deviation between the fund's current NAV per share and its 
intended stable price; and (iii) the principal reason for the 
deviation, including the name of any security whose market-based 
value or sale price, or whose issuer's downgrade, default, or event 
of insolvency (or similar event) has contributed to the deviation. 
See Proposed (FNAV) Form N-CR Part D; Proposed (Fees & Gates) Form 
N-CR Part D. In addition to the other change discussed in this 
section, we are making various conforming and clarifying changes in 
the final amendments to Part D. In the introduction to Part D, in a 
conforming change to the other amendments we are adopting today, we 
are now referring to retail and government money market funds 
instead of just to ``Fund'' as proposed under the floating NAV 
alternative or to funds ``subject to the exemption provisions of 
rule 2a-7(c)(2) or rule 2a-7(c)(3)'' as proposed under the liquidity 
fees and gates alternative). We are also pluralizing the ``principal 
reason'' in Item D.3 to principal reason or reasons,'' as there may 
be several successive or concurrent causes that resulted in a 
reduction in the shadow NAV. Furthermore, as another conforming 
change, we are inserting the word ``downward'' before ``deviation'' 
in Item D.1 to remove any doubt that only downward deviations need 
to be reported, consistent with the introduction of Part D (which 
already includes a reference to ``downward'').
    \1264\ See Proposing Release, supra note 25, at text 
accompanying n.714.
    \1265\ See generally, supra section III.B.8.a (discussing the 
potential benefits and costs of the requirement for a money market 
fund to disclose its current NAV on its Web site).
    \1266\ In a change from the Proposing Release, we are 
pluralizing the ``principal reason'' in Item D.3, as there may be 
several successive or concurrent causes that resulted in a reduction 
in the shadow NAV.
    \1267\ Form N-CR Item D.3. This item would not require 
additional analysis or explanation of the principal reason or 
reasons for the deviation, beyond identifying the particular 
securities or events that prompted the deviation.
    \1268\ See Form N-CR Item D.3 (requiring, for any such security, 
disclosure of the name of the issuer, the title of the issue 
(including coupon or yield, if applicable) and at least two 
identifiers, if available); see Form N-CR Item B.1.
    \1269\ These changes are similar to what we proposed and are 
adopting with respect to Items C.1 to C.5 of Form N-MFP. See 
Proposing Release, supra note 25, at nn.754-757 and accompanying 
text; see supra section III.G.2.f. As under Form N-MFP and with 
respect to Item B.1, we note that the requirement to include 
multiple identifiers is only required if such identifiers are 
actually available.
    \1270\ With respect to our corresponding changes to Parts B and 
C of Form N-CR, see also, supra notes 1209 and 1216 and the 
accompanying discussions.
---------------------------------------------------------------------------

    Some commenters expressed concerns about the reporting of shadow 
price declines on Form N-CR. For example, commenters argued that it 
would be redundant and unduly burdensome in light of funds' concurrent 
Web site disclosure of the shadow price.\1271\ However, as already 
discussed with respect to the various concurrent disclosures of 
financial support in section III.F.3 above, while we are sensitive to 
commenters' concerns about duplication, we believe it appropriate given 
the different audiences and uses for such information.\1272\
---------------------------------------------------------------------------

    \1271\ See Federated VIII Comment Letter (stating that ``so long 
[a]s the current shadow price is publicly available, Federated does 
not view such a deviation as a material event that necessitates a 
separate reporting.''); Dreyfus Comment Letter.
    \1272\ See discussion following supra notes 1248 and 1249 and 
accompanying text.
---------------------------------------------------------------------------

    With respect to the particular deviation threshold of \1/4\ of 1 
percent that we are adopting today as proposed, one commenter 
considered this level of deviation to be arbitrary, ``as there are no 
other implications under Rule 2a-7 for the money market fund if it has 
a 25 basis point deviation.'' \1273\ However, as noted in the Proposing 
Release,\1274\ we continue to believe that a deviation of \1/4\ of 1 
percent is sufficiently significant that it could signal future, 
further deviations in the fund's NAV that could require a stable price 
fund's board to consider re-pricing the fund's shares (among other 
actions). We note that we previously have similarly determined that a 
\1/4\ of one percent decline in the shadow price from its intended 
stable price is an appropriate threshold requiring money market funds 
to report to us.\1275\ Moreover, if a Form N-CR filing were not 
triggered until a higher threshold such as after a fall in the NAV that 
would require the re-pricing of fund shares (such as 0.5%),\1276\ the 
disclosures would come too late to meaningfully allow the Commission 
and others to effectively monitor and respond to indicators of stress. 
We also believe a threshold of \1/4\ of 1 percent strikes an 
appropriate balance with respect to the frequency of filings, because 
during periods of normal market activity we would expect relatively few 
Form N-CR filings for this part of the form.\1277\ In fact, our staff 
has analyzed Form N-MFP data from November 2010 to February 2014 and 
found that only one fund had a \1/4\ of 1 percent deviation from the 
stable $1.00 per share NAV, suggesting the burden to funds would be 
minimal during normal market activity. We note that funds may also 
provide additional context about the circumstances leading to the 
shadow price decline in Part H of Form N-CR, discussed below.
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    \1273\ See Federated VIII Comment Letter.
    \1274\ See Proposing Release, supra note 25, at n.715 and 
accompanying text.
    \1275\ See rule 30b1-6T (interim final temporary rule (no longer 
in effect) requiring money market funds to provide the Commission 
certain weekly portfolio and valuation information if their market-
based NAV declines below 99.75% of its stable NAV).
    \1276\ See Federated VIII Comment Letter (proposing a deviation 
of 0.5% as the reporting trigger).
    \1277\ Cf., e.g., State Street Comment Letter at Appendix A 
(``During the September 2008 failure of Lehman Brothers Holdings, a 
large number of money market funds had a \1/4\ of 1% or greater 
deviation between the amortized-cost NAV and the market NAV. During 
times of market stress similar to the 2008 crisis, our expectation 
is that the percentages would be similar. However, during times of 
normal market activity, our expectation is that [a \1/4\ of 1%] or 
greater deviation between stable NAV and market NAV would be 
infrequent.'')
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    Another commenter suggested that disclosure of a deviation in the 
NAV might result in an increase in pre-emptive run risk, as 
shareholders could come to use these filings as a trigger for 
redemptions.\1278\ Although we cannot predict individual shareholder 
actions with certainty, as discussed previously, we believe that the 
transparency provided by this information is important to the ability 
of money market fund shareholders to understand and assess the risks of 
their investments. Furthermore, while we acknowledge the possibility of 
pre-emptive redemptions, some of the other reforms we are adopting 
today (such as liquidity fees and redemption gates) will provide some 
fund managers additional tools for managing such redemptions, if they 
were to occur. We also note that some of our responses in section 
III.A.1.c.i to concerns over pre-emptive run risk related to the 
liquidity fees and gates requirement would similarly apply to run risk 
concerns over the disclosure of a deviation in the NAV in Part D of 
Form N-CR.\1279\ More generally, we

[[Page 47845]]

expect that Form N-CR could decrease, rather than increase, redemption 
risk by heightening self-discipline at funds.\1280\
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    \1278\ See Federated VIII Comment Letter.
    \1279\ For example, as discussed in further detail in section 
III.A.1.c.i, we expect that the additional discretion we are 
granting fund boards to impose a fee or gate at any time after the 
fund's weekly liquid assets have fallen below the 30% required 
minimum should substantially mitigate the risk of pre-emptive 
redemptions. As discussed in supra note 171 and the accompanying 
text, board discretion concerning when to impose a fee or gate may 
reduce shareholder incentive to pre-emptively redeem shares, because 
shareholders will be less able to accurately predict specifically 
when, and under what circumstances, fees and gates will be imposed. 
See Wells Fargo Comment Letter; see also Proposing Release, supra 
note 25, at n.362. For similar reasons, we believe that it is less 
likely that investors would use these filings under Part D of Form 
N-CR as a trigger for redemptions in the first place.
    \1280\ See American Bankers Ass'n Comment Letter (noting that 
certain disclosures including Form N-CR ``would exert a discipline 
on fund advisers to manage assets so conservatively as to avoid 
raising concerns among investors about the credit quality of fund 
investments that could lead to heavy redemptions.''). See also, 
infra note 1346-1350 and the accompanying text for our additional 
discussion of concerns over widespread redemption risk as a result 
of Form N-CR.
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5. Parts E, F, and G: Imposition and Lifting of Liquidity Fees and 
Gates
    Today we are adopting a requirement that a money market fund file a 
report on Form N-CR when a fund imposes or lifts a liquidity fee or 
redemption gate, or if a fund does not impose a liquidity fee despite 
passing certain liquidity thresholds.\1281\ As discussed in more detail 
below, we are making some changes from what we proposed.\1282\ This 
report, as adopted, will require a description of the primary 
considerations the board took into account in taking the action 
(modified from the proposal and discussed below), as well as certain 
additional basic information, such as the date when the fee or gate was 
imposed or lifted, the fund's liquidity levels, and the size of the 
fee.\1283\ Except for the change to the requirement to describe the 
primary considerations the board took into account in taking the 
action, the other changes to Parts E, F and G generally derive from the 
amendments to the liquidity fees and gates requirements that are being 
adopted today and are designed to conform these Parts of Form N-CR to 
those operative requirements. These changes are discussed below.\1284\
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    \1281\ See Form N-CR Parts E, F, and G.
    \1282\ See proposed (Fees & Gates) Form N-CR Parts E, F, and G. 
In particular, in the Proposing Release, if, at the end of a 
business day, a fund (except any government money market fund that 
has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) has invested less than 15% of its total assets in weekly 
liquid assets, we proposed to require the fund to disclose the 
following information: (i) The initial date on which the fund's 
weekly liquid assets fell below 15% of total fund assets; (ii) if 
the fund imposes a liquidity fee pursuant to proposed (Fees & Gates) 
rule 2a-7(c)(2)(i), the date on which the fund instituted the 
liquidity fee; (iii) a brief description of the facts and 
circumstances leading to the fund's weekly liquid assets falling 
below 15% of total fund assets; and (iv) a short discussion of the 
board of directors' analysis supporting its decision that imposing a 
liquidity fee pursuant to proposed (Fees & Gates) rule 2a-7(c)(2)(i) 
(or not imposing such a liquidity fee) would be in the best 
interests of the fund. Proposed Part E further included instructions 
that a fund must file a report on Form N-CR responding to items (i) 
and (ii) above on the first business day after the initial date on 
which the fund has invested less than fifteen percent of its total 
assets in weekly liquid assets, and that a fund must amend its 
initial report on Form N-CR to respond to items (iii) and (iv) above 
by the fourth business day after the initial date on which the fund 
has invested less than fifteen percent of its total assets in weekly 
liquid assets. See proposed (Fees & Gates) Form N-CR Part E.
     Similarly, a fund (except any government money market fund that 
has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) that has invested less than 15% of its total assets in 
weekly liquid assets (as provided in proposed (Fees & Gates) rule 
2a-7(c)(2)) suspends the fund's redemptions pursuant to rule 2a-
7(c)(2)(ii), we proposed that the fund disclose the following 
information: (i) The initial date on which the fund's weekly liquid 
assets fell below 15% of total fund assets; (ii) the date on which 
the fund initially suspended redemptions; (iii) a brief description 
of the facts and circumstances leading to the fund's weekly liquid 
assets falling below 15% of total fund assets; and (iv) a short 
discussion of the board of directors' analysis supporting its 
decision to suspend the fund's redemptions. Proposed Part F further 
included instructions providing that a fund must file a report on 
Form N-CR responding to items (i) and (ii) above on the first 
business day after the initial date on which the fund suspends 
redemptions, and that a fund must amend its initial report on Form 
N-CR to respond to items (iii) and (iv) by the fourth business day 
after the initial date on which the fund suspends redemptions. See 
proposed (Fees & Gates) Form N-CR Part F.
     Finally, if a fund (except any government money market fund 
that has chosen to rely on the proposed (Fees & Gates) rule 2a-7 
exemption) that has imposed a liquidity fee and/or suspended the 
fund's redemptions pursuant to proposed (Fees & Gates) rule 2a-
7(c)(2) determines to remove such fee and/or resume fund 
redemptions, we proposed to require funds to disclose, as 
applicable, the date on which the fund removed the liquidity fee 
and/or resumed fund redemptions. See proposed (Fees & Gates) Form N-
CR Part G.
    \1283\ See Form N-CR Parts E, F, and G. We note that a fund 
would file a new Part E filing of Form N-CR if it were to change the 
size of its liquidity fee after its initial imposition. Observers 
will also be able to determine the duration of any gate by comparing 
initial filings of Part F (suspension of redemptions) with filings 
of Part G (lifting of such suspensions).
    \1284\ Also see infra note 1313 for a discussion of our related 
conforming changes and clarification to Form N-CR.
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    As we noted in the Proposing Release, we believe that the items 
required to be disclosed are necessary for investors and us better to 
understand the circumstances leading to the imposition or removal of a 
liquidity fee or redemption gate, or the decision not to impose one 
despite a reduction in liquidity.\1285\ We believe such a better 
understanding will in turn enhance the Commission's oversight of the 
fund and regulation of money market funds generally,\1286\ and could 
inform investors' decisions to purchase shares of the fund or remain 
invested in the fund.\1287\
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    \1285\ See Proposing Release, supra note 25, at text following 
n.719.
    \1286\ For example, by knowing the reason(s) for why a board 
imposed a liquidity fee or gate, we expect to be able to better 
understand the potential cause(s) that led to a fund experiencing 
stress, which could inform our determination as to whether further 
regulatory or other action on our part is warranted.
    \1287\ Government money market funds which are not subject to 
our fees and gates requirements and which have not opted to apply 
them are exempt from the reporting requirements of parts E, F, and G 
of Form N-CR.
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a. Board Disclosures
    A number of commenters objected to the proposed requirement that 
funds provide a ``short discussion of the board of director's analysis 
supporting its decision'' \1288\ whether or not to impose liquidity 
fees or when imposing redemption gates.\1289\ Many of these commenters 
raised concerns that the disclosures might chill deliberations among 
board members, hinder board confidentiality and encourage opportunistic 
litigation.\1290\ More generally, commenters also challenged the 
materiality or usefulness of the board disclosures to investors.\1291\ 
For example, one commenter stated that although ``whether the fund is 
imposing a liquidity fee or suspending redemptions'' would be material, 
the board's underlying analysis would not be.\1292\ Some commenters 
also expressed concern that such disclosure would set a precedent for 
board disclosures in other contexts.\1293\
---------------------------------------------------------------------------

    \1288\ See proposed (Fees & Gates) Form N-CR Item E.4 and Item 
F.4.
    \1289\ See, e.g., Dreyfus Comment Letter; Legg Mason & Western 
Asset Comment Letter; MFDF Comment Letter; NYC Bar Committee Comment 
Letter; SIFMA Comment Letter.
    \1290\ See, e.g., Dreyfus Comment Letter (noting that ``[t]his 
analysis will implicate significant amounts of confidential 
information, including the identity of shareholders and future 
expectations about investment flows.''); NYC Bar Committee Comment 
Letter (noting that this ``disclosure would subsequently be reviewed 
with the benefit of hindsight and could be used against the board 
and the fund in the sort of opportunistic litigation that follows 
any financial crisis.''); Legg Mason & Western Asset Comment Letter; 
MFDF Comment Letter; Stradley Ronon Comment Letter. In addition, one 
commenter stated that ``[o]utside of the advisory contract approval 
process, for which there is a statutory basis under Section 15(c) of 
the 1940 Act, the Commission has respected the confidentiality of 
board deliberations and findings that are recorded in board 
minutes.'' See Dreyfus Comment Letter.
    \1291\ See, e.g., Legg Mason & Western Asset Comment Letter; NYC 
Bar Committee Comment Letter; Stradley Ronon Comment Letter; SIFMA 
Comment Letter.
    \1292\ See Legg Mason & Western Asset Comment Letter.
    \1293\ See, e.g., SIFMA Comment Letter (stating that ``a 
requirement to disclose the board's analysis that is otherwise 
memorialized in fund minutes is unique, outside of advisory contract 
approval. We oppose setting a precedent that could imply that board 
analysis must be publicly disclosed for each important decision made 
for a fund.''); MFDF Comment Letter; Dreyfus Comment Letter.

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[[Page 47846]]

    We appreciate these concerns, but we believe that the imposition of 
a fee or gate is likely to be a very significant event for a money 
market fund \1294\ and information about why it was imposed may prove 
pivotal to shareholders, many of whom may be evaluating their 
investment decision in the money market fund at that time.\1295\ 
Accordingly, as discussed in the Proposing Release, we continue to 
believe that shareholders have a strong interest in understanding why a 
board determined to impose (or not to impose) a liquidity fee or 
gate.\1296\ For example, this information may enable investors to 
better understand the events that are affecting and potentially causing 
stress to the fund.\1297\ This information may also permit investors to 
confirm that the board is, as our rule requires, acting in the best 
interests of the fund.\1298\ And given that under our final rules a 
board can impose a fee or gate as soon as the fund's weekly liquid 
assets fall below the 30% regulatory minimum (and thus different boards 
may impose fees or gates at different times), investors' interest in 
understanding the board's reasoning is likely to be even more 
important.\1299\ For these reasons, we believe this disclosure will 
convey material information to those investors who are considering 
whether to redeem their shares in response to a fee or gate.
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    \1294\ Our conclusion that the imposition of a fee or gate may 
often be a significant event for a money market fund is supported by 
the view of many commenters that the imposition of a fee or gate 
could have significant implications for a fund that takes this step 
and that investors may engage in heavy redemptions after a fee is 
imposed or a gate is lifted. See, e.g., supra notes 189 and 190 and 
accompanying text.
    \1295\ We note that disclosure of board reasoning is not 
uncommon in context where shareholders may be evaluating their 
investment decision, such as when a fund engages in a merger or 
acquisition. In those circumstances, a fund board usually provides a 
recommendation to shareholders and the reasons for their 
recommendation. C.f., e.g., Independent Directors Council, Board 
Consideration of Fund Mergers, (June 2006), available at http://www.idc.org/pdf/ppr_idc_fund_mergers.pdf (``Directors typically 
explain the reasons for their decision to recommend that 
shareholders approve a merger in the fund's proxy statement.''). We 
note that mergers and acquisitions can also be the subject of 
litigation and nevertheless board disclosure of their primary 
reasons for their recommendation is commonplace.
    \1296\ See Proposing Release, supra note 25, at section III.G.2.
    \1297\ Cf., e.g., MFDF Comment Letter (acknowledging that 
``[d]epending on the situation, fund investors may well have an 
interest in better understanding the circumstances that led to the 
imposition of redemption fees or gates.'').
    \1298\ See, e.g., ABA Business Law Section Comment Letter (with 
respect to the liquidity fees and gates proposal, stating that the 
``Commission would assign the money market fund's board of directors 
substantial new responsibilities over `life and death' decisions in 
the event of a run on the fund.'').
    \1299\ See supra section III.A.1.b.iii.
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    With respect to concerns that the board disclosures set a precedent 
implying that the reasoning underlying every other important decision 
taken by the board should be similarly disclosed,\1300\ we disagree. As 
discussed in section II.A, ready access to liquidity is one of the 
hallmarks that has made money market funds popular cash management 
vehicles for both retail and institutional investors. Because liquidity 
fees and redemption gates could affect this core feature by potentially 
limiting the redeemability of money market fund shares under certain 
conditions,\1301\ we believe the decision whether to impose those 
measures is sufficiently different in kind from most other significant 
decisions a board could make that the disclosures required by the rule 
would not be a precedent for broadly requiring the disclosure of 
boards' rationales in other contexts.
---------------------------------------------------------------------------

    \1300\ See discussion of SIFMA Comment Letter at supra note 
1293.
    \1301\ See supra section III.A.1.b.iii. See also supra notes 
196-199 and the accompanying text for a discussion of commenters' 
concerns of the potentially detrimental effects of a liquidity fee 
or gate.
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    In addition, we have amended this disclosure requirement to address 
some of the commenters' concerns, while still eliciting useful 
information for the Commission and investors. More specifically, we are 
revising Form N-CR to require disclosure of a brief discussion of the 
``primary considerations or factors taken in account by the board of 
directors in its decision'' to impose or not impose a liquidity fee or 
gate.\1302\ One commenter suggested we make a similar change, requiring 
disclosure of ``a list of material factors considered by the board in 
making its determination.'' \1303\ Rather than just a list of material 
factors, however, we believe it important that funds provide a more 
substantive, but brief, discussion of the primary considerations or 
factors taken in account by the board, so that our staff and investors 
better understand why the board determined they were important. This 
report would not need to include every factor considered by the board, 
only the most important or primary ones that shaped the determination 
of the board's action. This should help alleviate commenters' concerns 
that funds would need to provide lists of all possible factors or 
dissect a board's internal deliberations. Instead, we would expect only 
a description of the primary considerations or factors leading to the 
action taken by the board, and a brief discussion of each.
---------------------------------------------------------------------------

    \1302\ See Form N-CR Part E.6 and Part F.4.
    \1303\ See NYC Bar Committee Comment Letter.
---------------------------------------------------------------------------

    That said, we caution that in preparing these board disclosures, 
funds should avoid ``boilerplate'' summaries of all possible factors in 
addition to or in lieu of a more substantive narrative.\1304\ Instead, 
filers generally should provide information that is tailored to their 
fund's particular situation and the context in which their board's 
decision was made. In preparing these filings, funds should consider 
discussing present circumstances as well as any potential future risks 
and contingencies to the extent the board took them into account. We 
also note that we provided a non-exhaustive list of possible factors 
that a board may have considered in imposing a liquidity fee or gate in 
section III.A.2.b above.\1305\
---------------------------------------------------------------------------

    \1304\ Cf., e.g., SIFMA Comment Letter (stating that the 
discussion of the board's analysis ``will likely be tailored to 
preempt shareholder plaintiffs' counsel who might target boards for 
liability in connection with their decisions.'' which ``. . . may 
encourage lengthy, but not necessarily useful, disclosure.'').
    \1305\ See supra section III.A.2.b.
---------------------------------------------------------------------------

    Another commenter argued that the board disclosures themselves 
might incite widespread redemptions, particularly where the board 
considered but chose not to impose a liquidity fee.\1306\ As discussed 
in section III.A.1.c above, we acknowledge the possibility that the 
prospect of a liquidity fee or gate may cause pre-emptive redemptions, 
but we believe that several aspects of our final reforms both make pre-
emptive runs less likely and substantially mitigate their broader 
effects if they occur. In addition, we believe disclosure of a board's 
reasoning is particularly important in times of stress in order to 
mitigate against investor flight to transparency that might otherwise 
occur.\1307\
---------------------------------------------------------------------------

    \1306\ See Federated V Comment Letter. But cf., e.g., American 
Bankers Ass'n Comment Letter (arguing that the disclosures of Form 
N-CR more generally will decrease redemption risk by heightening 
self-discipline at funds).
    \1307\ Moreover, with respect to a fund whose weekly liquid 
assets have dropped below 10%, we might be concerned that such a 
fund may imminently become unable to meet redemptions. Such a 
relative lack of liquidity at one fund could also be an indicator of 
larger effects that might spread to other funds. Either scenario may 
raise concerns that further action by the Commission is warranted. 
However, if the particular fund's board waived the liquidity fee, 
the related disclosure thereof (e.g., because the drop in liquidity 
is temporary and only related to the particular fund) could inform 
our determination that no further action by the Commission would be 
required.
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    Finally, we received comments discussing concerns about potentially

[[Page 47847]]

duplicative disclosures, in particular the possible redundancy of the 
board disclosures on a fund's Web site as well as Form N-CR.\1308\ 
However, as already discussed with respect to the various concurrent 
disclosures of financial support in section III.F.3 above, while we are 
sensitive to commenters' concerns about duplication, we believe it 
appropriate given the different audiences and uses for such 
information.\1309\
---------------------------------------------------------------------------

    \1308\ See Dreyfus Comment Letter. See also, generally, SIFMA 
Comment Letter (noting that the ``fund's actions and the triggering 
event for the Form N-CR filing may require prospectus disclosure or 
notification to the Commission under other rule provisions, so that 
in many cases the Form N-CR filing will be duplicative of existing 
disclosure and notice requirements.'').
    \1309\ See discussion following supra notes 1248 and 1249 and 
accompanying text.
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b. Conforming and Related Changes
    As discussed earlier, the final amendments lower the weekly liquid 
asset threshold for triggering the default liquidity fee from 15% to 
10% of total assets, and accordingly, we are making corresponding 
changes that would require reporting under Form N-CR at the lower 
weekly liquid asset threshold.\1310\ In addition, in a change from the 
proposal, the final amendments permit money market fund boards to 
institute a liquidity fee or impose a gate at any time once weekly 
liquid assets fall below 30% if they find that doing so is in the best 
interests of the fund.\1311\ We are therefore amending Form N-CR to 
reflect these changes.\1312\ We are making certain additional changes 
to Form N-CR for clarity and to be consistent with our final amendments 
to the liquidity fees and gates requirement.\1313\ Accordingly, under 
the revised reporting standard, Parts E and/or F of Form N-CR must be 
filed: (i) When a fund, at the end of a business day, has invested less 
than 10% of its portfolio in weekly liquid assets and is required to 
impose a liquidity fee (unless the board determines otherwise), or (ii) 
when a fund voluntarily imposes a liquidity fee or redemption gate any 
time it has invested less than 30% of its portfolio in weekly liquid 
assets.\1314\
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    \1310\ See supra section III.A.2.a.ii; see also, Form N-CR Part 
E, (where applicable, now referencing 10% instead of 15% of weekly 
liquid assets).
    \1311\ See supra section III.A.2.
    \1312\ See Form N-CR Parts E and F.
    \1313\ In particular, for clarity, in the introduction to Part E 
we now define any affected fund as ``a fund (except a government 
money market fund that is relying on the exemption in rule 2a-
7(c)(2)(iii))'' as opposed to ``a Fund (except any Fund that is 
subject to the exemption provisions of rule 2a-7(c)(2)(iii) and that 
has chosen to rely on the rule 2a-7(c)(2)(iii) exemption 
provisions'' as proposed. See proposed (Fees & Gates) Form N-CR Part 
E, Introduction. Similarly, for clarity and because of fund's 
additional flexibility under our final amendments to the liquidity 
fees and gates requirement, in the introduction to Part F we now 
simply refer to ``fund'' as opposed to ``a Fund (except any Fund 
that is subject to the exemption provisions of rule 2a-7(c)(2)(iii) 
and that has chosen to rely on the rule 2a-7(c)(2)(iii) exemption 
provisions) that has invested less than fifteen percent of its Total 
Assets in weekly liquid assets (as provided in rule 2a-7(c)(2)).'' 
In addition, we received no comments on Part G of Form N-CR 
(requiring reporting when a liquidity fee or redemption gate is 
removed) and are adopting it unchanged from the proposal. See Form 
N-CR Part G. However, in the Proposing Release, the introduction to 
Part G contained a parenthesis specifying that certain exempt funds 
are not subject to Part G. See proposed (FNAV) Form N-CR Part G; 
proposed (Fees & Gates) Form N-CR Part G. Because we no longer 
consider this parenthesis to be necessary, we have deleted it in the 
final amendments to enhance the clarity of the instructions of Part 
G.
    \1314\ See Form N-CR Part E, clauses (i) and (ii) of the 
Introduction (generally triggering disclosure under Part E of Form 
N-CR if a non-exempt fund (i) at the end of a business day, has 
invested less than 10% of its total assets in weekly liquid assets, 
or (ii) has invested less than 30% of its total assets in weekly 
liquid assets and imposes a liquidity fee pursuant to rule 2a-7(c). 
Correspondingly, we are also adding ``if applicable'' to Item E.1 
(requiring disclosure of the initial date on which the fund invested 
less than 10% of its total assets in weekly liquid assets, if 
applicable), and amending Item E.5 (requiring a brief description of 
the facts and circumstances leading to the fund's investing in the 
amount of weekly liquid assets reported in Item E.3). See Form N-CR 
Items E.1, E.3 and E.5.
---------------------------------------------------------------------------

    In addition, revised Form N-CR includes a new requirement that 
funds report their level of weekly liquid assets at the time of the 
imposition of fees or gates.\1315\ We believe this new requirement will 
allow the Commission and investors to better track and understand 
funds' liquidity levels when boards impose a fee or gate using their 
discretion, which we expect will enhance the Commission's and 
investors' ability to evaluate the extent to which a fund is 
experiencing stress as well as the context in which the board made its 
decision. Similarly, because we are revising the default liquidity fee 
from the proposed 2% to 1%, and thus we expect that there may be 
instances where liquidity fees are above or below the default fee 
(rather than just lower as permitted under the proposal), we are 
requiring that funds disclose the size of the liquidity fee, if one is 
imposed.\1316\ In particular, we expect the particular size of the 
liquidity fee to be highly relevant to an investor determining whether 
to redeem fund shares, as it has a direct impact on the particular 
costs that such a shareholder would have to bear for redeeming fund 
shares. These changes are closely tailored to our final amendments to 
the liquidity fees and gate requirement, which we expect will enhance 
the quality and usefulness of Form N-CR to the Commission and 
investors.
---------------------------------------------------------------------------

    \1315\ Form N-CR Items E.3 and F.1. In the Proposing Release we 
did not explicitly require funds to disclose their size of weekly 
liquid assets at the time of the imposition of fees or gates, given 
that as proposed funds could only impose a fee or gate once they 
crossed the 15% weekly liquid asset threshold. Proposed (Fees & 
Gates) Form N-CR Parts E and F. Item F.1 as originally proposed 
required disclosure of the initial date on which the fund invested 
less than 15% in weekly liquid assets. See proposed (Fees and Gates) 
Form N-CR Item F.1. Today we are not requiring an analogous 
disclosure of the initial date on which the fund invested less than 
10% in weekly liquid assets, because this threshold does not have 
any impact on the imposition of a gate and, in any event, would be 
disclosed in Item E.1.
    \1316\ See Form N-CR Item E.4.
---------------------------------------------------------------------------

6. Part H: Optional Disclosure
    We are also adopting a new Part H in Form N-CR which allows money 
market funds the option to discuss any other events or information that 
they may wish to disclose. We intend new Part H to clarify and expand 
the scope and range of formats of any additional information that a 
fund may wish to provide. In particular, we are adopting Part H to 
address commenter concerns that the information provided in the other 
parts of Form N-CR may become outdated or lack context.\1317\ We 
believe that this new optional disclosure could address some of these 
concerns.
---------------------------------------------------------------------------

    \1317\ For example, one commenter cautioned ``in a rapidly 
changing environment, the reasons for which the board acted may well 
change within a period of four days or significant amounts of 
additional information may be available to the fund and its board. 
In this context, a filing requirement focused on a prior decision 
risks inadvertently misleading fund investors and others about the 
state of the fund's operations.'' See MFDF Comment Letter.
---------------------------------------------------------------------------

    This optional disclosure is intended to provide money market funds 
with additional flexibility to discuss any other information not 
required by Form N-CR, or to supplement and clarify other required 
disclosures.\1318\ This optional disclosure does not impose on money 
market funds any affirmative obligation. Rather, this is solely 
intended as a discretionary forum where funds, if they so choose, can 
disclose any other information they deem helpful or relevant. In 
addition, although we expect that funds would typically file Part H 
along with a filing under another part of Form N-CR, we are not 
imposing any particular deadline for these filings, and thus a fund may 
file an optional disclosure on Part H of Form N-CR at any time.
---------------------------------------------------------------------------

    \1318\ See Form N-CR Item H.1, Instructions.
---------------------------------------------------------------------------

7. Timing of Form N-CR
    We are requiring initial filings of Form N-CR to be submitted 
within one business day of the triggering event, and in some cases, 
requiring a follow-up

[[Page 47848]]

amendment with additional detail to be submitted four days after the 
event with some modifications from the proposal. A number of commenters 
requested additional time for Form N-CR filings, expressing concern 
over the timing requirements for specific items of Form N-CR,\1319\ as 
well as objecting to the timing requirements more generally.\1320\ For 
example, one commenter recommended that the filing deadline for the 
initial filing be extended from one to three business days and the 
follow-up filing from four to seven business days.\1321\ Commenters 
argued that providing additional time would permit funds to ensure that 
filings are prepared accurately and thoughtfully \1322\ while also 
better enabling fund personnel to prioritize other exigent matters 
during times of crisis.\1323\ They also argued that it may not be 
feasible or may be extremely costly for a fund in times of crisis to 
formulate within one business day the actions it may take in response 
to an event of default and prepare a corresponding description, as 
required under the proposal.\1324\ We are not changing the filing 
deadlines of Form N-CR. The Commission and shareholders have a 
significant interest in knowing about the events reported on Form N-CR 
as soon as possible, to be able to effectively monitor events and to 
respond as necessary. We believe the longer reporting periods or 
entirely alternative reporting format (such as periodic reports, which 
might not be filed until significantly later) as proposed by commenters 
would frustrate the intent of Form N-CR in alerting the Commission, 
investors and other market observers about such important events in a 
timely and meaningful manner.
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    \1319\ See, e.g., Fidelity Comment Letter, Schwab Comment 
Letter.
    \1320\ Commenters proposed a range of alternative deadlines. 
See, e.g., SSGA Comment Letter (generally extend time frame), 
Dechert Comment Letter (extend one-day filing deadline from 5:30pm 
to 10pm on the next business day), Schwab Comment Letter (four 
business days for filings related to a default or insolvency under 
Part B of Form N-CR), Dreyfus Comment Letter (2-3 day time frame), 
Stradley Ronon Comment Letter (seven business days for certain 
items), SIFMA Comment Letter (three and seven business days 
respectively for the initial and follow-up filings), IDC Comment 
Letter (two weeks for the second filing). Others proposed moving 
parts of Form N-CR to other annual or periodic reports altogether. 
See, e.g., MFDF Comment Letter (move the discussion of the 
circumstances that led to a fee or gate to a new annual management 
discussion of fund performance.), NYC Bar Committee Comment Letter 
(proposing to revise and move the discussion of the board's analysis 
to the report to shareholders covering the relevant period).
    \1321\ SIFMA Comment Letter.
    \1322\ See, e.g., SIFMA Comment Letter; IDC Comment Letter, SSGA 
Comment Letter, Stradley Ronon Comment Letter, MFDF Comment Letter.
    \1323\ See SIFMA Comment Letter. See also, e.g., Dreyfus Comment 
Letter.
    \1324\ See, e.g., Schwab Comment Letter (noting that ``[s]ome of 
the requested information can be provided in one business day, such 
as the securities affected, the date or dates on which the default 
or event of insolvency occurred, the value of the affected 
securities, and the percentage of the fund's total assets 
represented by the affected security. But we believe it is 
unreasonable to require a fund's board to determine in a single day 
what actions it should take in response to the event.''). Commenters 
also noted that it may be extremely costly to provide some of the 
reported information in a single business day. See, e.g., Fidelity 
Comment Letter (stating that ``[i]t would be difficult for MMFs to 
produce validated data ready for public dissemination within one 
business day . . . . Further, providing data within a short 
timeframe would come at an estimated cost of $300,000-$500,000 [. . 
.].'').
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    We appreciate commenters' concerns, however, and to help ease the 
filing burden we are revising Form N-CR to move certain disclosures in 
Items B, C and D that may take longer to prepare from the initial 
filing due within a single day to the follow-up filing due in four 
business days.\1325\ In particular, the items moved to the follow-up 
filing are the description of actions the fund plans to take, or has 
taken, in response to a default (Item B.5), the explanation for the 
reasons and terms of any financial support provided (Item C.8), the 
term of any financial support provided (Item C.9), the brief 
description of any contractual restrictions relating to any financial 
support (Item C.10), and the principal reason or reasons for a decline 
in a fund's shadow price (Item D.3).\1326\ We appreciate commenters' 
concerns that disclosures such as these may take additional time to 
prepare.\1327\ We believe these specific disclosure items may be more 
labor intensive and take longer to prepare because they generally 
solicit qualitative and analytical information, whereas the other items 
in Parts B through D generally focus more on initially alerting the 
Commission and shareholders about a particular event and other key 
quantitative data.\1328\
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    \1325\ In particular, filers are required to respond to Items 
B.5, C.8, C.9, C.10, and D.3 in an amendment to the initial report 
within four business days. All other Items in Parts B, C, and D must 
be disclosed in the initial report within one business day. We have 
made corresponding changes to the instructions to the form. See Form 
N-CR Part B, C, D, Instructions. In addition, we have rearranged 
what used to be proposed Item C.4 in the Proposing Release to be new 
Item C.8 in order to better streamline the disclosures required to 
be filed within one business day (Items C.1 through C.7) versus four 
business days (Items C.8 through C.10). See Proposing Release, 
proposed (Fees & Gates) Form N-CR Item C.4, Form N-CR Item C.8.
    \1326\ See Fidelity Comment Letter (suggesting ``that the SEC 
simplify the filing requirements for the first business day 
following the event to focus on shareholder notification of the 
event and key quantitative data,'' while ``providing the remaining 
qualitative information (proposed Form N-CR Item B.5, C.4, C.9, 
C.10, D.3, E.3, E.4, F.3, F.4) on the second filing.''
    \1327\ See supra note 1324.
    \1328\ Cf. Fidelity Comment Letter.
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    Reducing the number of items included in the initial filing and 
moving the more time consuming and complicated disclosures to a second 
filing is designed to help address commenters' concerns about the one-
day deadline of the initial filing,\1329\ while still ensuring that the 
Commission, shareholders and other market observers are provided with 
these critical alerts as quickly as possible. We expect the information 
filed on the initial report will be sufficient to alert the Commission, 
investors and other interested parties about certain significant 
events. While important, we also believe that the Items we are moving 
to the follow-up filing of Form N-CR may be of less immediate concern 
to the Commission and shareholders.
---------------------------------------------------------------------------

    \1329\ See, e.g., SIFMA Comment Letter, SSGA Comment Letter, 
Dreyfus Comment Letter.
---------------------------------------------------------------------------

    We are not, however, generally changing the one-day deadline of the 
initial filing,\1330\ nor are we extending the four-day deadline for 
the follow-up filing of Form N-CR.\1331\ We are concerned that 
extending the initial filing deadline beyond one business day could 
substantially diminish the informational utility of Form N-CR. The 
Commission and shareholders have a significant interest in knowing 
about the events reported on Form N-CR as soon as possible, to 
effectively monitor events and respond as necessary. We need this 
information to be reported promptly to effectively monitor money market 
funds that have come under stress and respond as necessary. A longer 
reporting period would frustrate the intent of Form N-CR in alerting 
the Commission, investors and other market observers about such 
important events in a timely and meaningful manner.\1332\
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    \1330\ We have, however, revised the instructions on timing of 
the one-day deadline of the initial filing in each of Parts B 
through F to conform them to the wording used in the instruction on 
timing generally in General Instruction A. See Form N-CR Part B, C, 
D, E, F, Instructions.
    \1331\ We proposed to allow the discussion of the boards' 
analysis related to imposing fees or gates be included in the 
follow-up filing, and we are adopting that requirement as proposed, 
as modified by the amendments to the board reporting discussed 
above. See supra section III.F.5 (Board Disclosures); Form N-CR Item 
E.5, E.6, F.3, F.4.
    \1332\ For example, if funds were permitted three business days 
to prepare an initial filing, a fund that experienced a portfolio 
security default on a Friday would not be required to make an 
initial filing under Part B of Form N-CR until just before the close 
of business the following Wednesday. Depending on the circumstances, 
such a delay could prevent investors from taking into account this 
disclosure when making an investment decision until the next morning 
on Thursday (such as with respect to potential investors evaluating 
whether to purchase fund shares). Similarly, such a long delay would 
hinder our ability to effectively monitor money market funds that 
have come under stress and respond as necessary (in particular in 
light of our elimination of rule 2a-7(c)(7)(iii)(A), which currently 
requires money market funds to report defaults or events of 
insolvency to the Commission by email. See supra note 1211).

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[[Page 47849]]

    We also remain unpersuaded that the benefits of extending the 
follow-up filing beyond four business days is justified in light of the 
corresponding reduction in the utility of the information reported on 
Form N-CR to the Commission, shareholders and other market observers. 
Extending the follow-up filing deadline could lead to a prolonged lack 
of material information about the triggering event. Such a delay could 
hinder investors' ability to evaluate their investments and undermine 
investor confidence.\1333\ Furthermore, it could frustrate the 
Commission's ability to effectively monitor and take any appropriate 
response with respect to money market funds that have come under 
stress.\1334\
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    \1333\ For example, a prolonged lack of material information may 
undermine investors' expectations that they are making investment 
decisions in a transparent market, which may lead to increased 
market volatility in affected money market funds as a result of the 
relative lack of accurate and timely information.
    \1334\ For example, the Commission has a strong interest in 
knowing why a fund imposed a fee or gate. Depending on whether the 
reasons for such a gate were unique to the particular fund or 
related to broader market events, further action on the part of the 
Commission may be required to protect other investors and markets. 
Accordingly, given that the Commission generally needs this 
information as quickly as possible, we do not think the marginal 
benefits to funds of extending the deadline beyond what we believe 
to be reasonably required to prepare a follow-up filing is 
justified.
---------------------------------------------------------------------------

    Because we expect that the information required to be provided in 
follow-up reports on Form N-CR should be readily accessible, we 
continue to believe four business days should be a sufficient amount of 
time for funds to prepare the report, even in light of the likely 
competing priorities on fund personnel during times of stress. We also 
recognize that some of the preparatory burdens faced by fund personnel 
could (and likely will) \1335\ be shifted to legal counsel to the 
extent a fund chooses to engage legal counsel to assist in the drafting 
of a Form N-CR filing. Accordingly, we are adopting a deadline of one 
business day for an initial report and four business days for a follow-
up report under Form N-CR.\1336\
---------------------------------------------------------------------------

    \1335\ See infra discussion containing note 1376.
    \1336\ See Form N-CR General Instruction, A; Form N-CR Part B, 
C, D, E, F, Instructions which specify that responses to Items B.5, 
C.8, C.9, C.10, D.3, E.5, E.6, F.3 and F.4 may be filed within four 
business days.
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8. Economic Analysis
    As discussed above and in our proposal,\1337\ we believe that the 
Form N-CR reporting requirements will provide important transparency to 
investors and the Commission, and also should help investors better 
understand the risks associated with a particular money market fund, or 
the money market fund industry generally. The Form N-CR reporting 
requirements will permit investors and the Commission to receive 
information about certain money market fund material events 
consistently and relatively quickly. As discussed above, we believe 
that investors and the Commission have a significant interest in 
receiving this information in this format and with this timing because 
it will permit investors and the Commission to monitor indicators of 
stress in specific funds or fund groups, as well as the money market 
fund industry, and also to analyze the economic effects of certain 
material events. The Form N-CR reporting requirements will give 
investors and the Commission a greater understanding of the 
circumstances leading to stress events, and how a fund manages them. We 
believe that investors may find this information to be meaningful in 
determining whether to purchase fund shares or remain invested in a 
fund.
---------------------------------------------------------------------------

    \1337\ See Proposing Release, supra note 25, at section III.G.3.
---------------------------------------------------------------------------

    However, we recognize that the Form N-CR reporting requirements 
have operational costs (discussed below), and also may result in 
opportunity costs, in that personnel of a fund that has experienced an 
event that requires Form N-CR reporting may lose a certain amount of 
time that could be used to respond to that event because of the need to 
comply with the reporting requirement.\1338\ For example, as discussed 
with respect to timing in section III.F.7 above, commenters argued that 
providing additional time would permit funds to ensure that filings are 
prepared accurately and thoughtfully \1339\ while also better enabling 
fund personnel to prioritize other exigent matters during times of 
crisis.\1340\ They also argued that it may not be feasible or may be 
extremely costly for a fund in times of crisis to formulate within one 
business day the actions it may take in response to an event of default 
and prepare a corresponding description, as required under the 
proposal.\1341\ As discussed in section III.F.7 above, to help ease the 
filing burden we have revised Form N-CR to move certain disclosures 
that may take longer to prepare from the initial filing due within one 
day to the follow-up filing due in four business days. We therefore 
believe that the final deadlines adopted today for Form N-CR balance 
the exigency of the report with the time and cost it will reasonably 
take a fund to compile the required information.
---------------------------------------------------------------------------

    \1338\ Various commenters expressed concern that preparing Form 
N-CR would likely compete with other priorities that fund personnel 
would be handling during a crisis. See, e.g., SIFMA Comment Letter, 
Dreyfus Comment Letter.
    \1339\ See, e.g., SIFMA Comment Letter; IDC Comment Letter, SSGA 
Comment Letter, Stradley Ronon Comment Letter, MFDF Comment Letter.
    \1340\ See SIFMA Comment Letter. See also, e.g., Dreyfus Comment 
Letter.
    \1341\ See, e.g., Schwab Comment Letter (noting that ``[s]ome of 
the requested information can be provided in one business day, such 
as the securities affected, the date or dates on which the default 
or event of insolvency occurred, the value of the affected 
securities, and the percentage of the fund's total assets 
represented by the affected security. But we believe it is 
unreasonable to require a fund's board to determine in a single day 
what actions it should take in response to the event.''). Commenters 
also noted that it may be extremely costly to provide some of the 
reported information in a single business day. See, e.g., Fidelity 
Comment Letter (stating that ``[i]t would be difficult for MMFs to 
produce validated data ready for public dissemination within one 
business day . . . . Further, providing data within a short 
timeframe would come at an estimated cost of $300,000-$500,000 [. . 
.].'').
---------------------------------------------------------------------------

    We believe that the proposed Form N-CR reporting requirements may 
complement the benefits of increased transparency of publicly available 
money market fund information that have resulted from the requirement 
that money market funds report their portfolio holdings and other key 
information on Form N-MFP each month. The DERA Study noted that the 
additional disclosures that money market funds are required to make on 
Form N-MFP improve fund transparency (although funds file the form on a 
monthly basis with no interim updates, and the Commission currently 
makes the information public with a 60-day lag).\1342\ The DERA Study 
also noted that this ``increased transparency, even if reported on a 
delayed basis, might affect a fund manager's willingness to hold 
securities whose ratings are at odds with the underlying risk, 
especially at times when credit conditions are deteriorating.'' \1343\ 
Additionally, the availability of public, standardized, money market 
fund-related data that has resulted from the Form N-MFP filing 
requirement has assisted both the Commission and the money market fund 
industry in various

[[Page 47850]]

studies and analyses of money market fund operations and risks.\1344\
---------------------------------------------------------------------------

    \1342\ See DERA Study, supra note 24, at 31; see also, infra 
note 1441 and accompanying text (discussing the elimination of the 
60-day delay in making Form N-MFP information publicly available).
    \1343\ See DERA Study, supra note 24, at 38.
    \1344\ See Money Market Mutual Funds, Risk, and Financial 
Stability in the Wake of the 2010 Reforms, 19 ICI Research 
Perspective No. 1 (Jan. 2013), at note 29 (noting that certain 
portfolio-related data points are often only available from the 
SEC's Form N-MFP report).
---------------------------------------------------------------------------

    The Form N-CR reporting requirement should enhance our 
understanding of the money market fund industry that the Commission has 
gained from analyzing Form N-MFP data by providing complementary data 
and additional transparency about money market funds' risks on a near 
real-time basis that is not currently available on Form N-MFP. This 
requirement may, like Form N-MFP disclosure, help impose market 
discipline on portfolio managers \1345\ and provide additional data 
that would allow investors to make investment decisions, and allow the 
Commission and the money market fund industry to conduct risk- and 
operations-related analyses.
---------------------------------------------------------------------------

    \1345\ See American Bankers Ass'n Comment Letter (for example, 
stating that ``[k]nowing that any form of sponsor support would be 
required to be disclosed within 24 hours, fund managers would likely 
do everything they could to avoid needing sponsor support.'').
---------------------------------------------------------------------------

    We believe that the reporting requirements we are adopting today 
may positively affect regulatory efficiency because all money market 
funds would be required to file information about certain material 
events on a standardized form. This will improve the consistency of 
information disclosure and reporting, and assist the Commission in 
overseeing individual funds, and the money market fund industry 
generally, more effectively. The requirements also could positively 
affect informational efficiency. This should assist investors in 
understanding various risks associated with certain funds, and risks 
associated with the money market fund industry generally, which in turn 
should assist investors in choosing whether to purchase or redeem 
shares of certain funds. Currently, funds compete on information 
provided on a fund's Web site and Form N-MFP, as well as on more 
traditional competitive factors such as price and yield. Implicitly, 
investors have also relied on sponsors to step in and support a fund 
when there is an adverse event. However, as we observed with the 
Reserve Primary Fund, this does not always happen. As such, the 
requirements should positively affect competition because funds may 
compete with each other based on information required to be disclosed 
on Form N-CR. For instance, investors might view a fund that invests in 
securities whose issuers have never experienced a default as a more 
attractive investment than another fund that frequently files reports 
in response to Form N-CR Part B (``Default or Event of Insolvency of 
portfolio security issuer''). However, it is also possible that 
investors may move their assets to larger fund complexes if, based on 
Form N-CR disclosures, they determine that such fund complexes are more 
likely than smaller entities to provide financial support to their 
funds. Also, if investors move their assets among money market funds or 
decide to invest in investment products other than money market funds 
as a result of the Form N-CR reporting requirements, this could 
negatively affect the competitive stance of certain money market funds, 
or the money market fund industry generally.
    The filing of Form N-CR could have additional effects on capital 
formation. The information filed on Form N-CR could improve capital 
formation if investors better understand that a fund is not 
sufficiently addressing the cause that led to the Form N-CR filing. One 
commenter \1346\ suggested that certain Form N-CR disclosures would 
make money market funds more susceptible to heavy redemptions during 
times of stress. While we acknowledge the possibility of pre-emptive 
redemptions, as discussed in detail above, several aspects of today's 
amendments are designed to mitigate this risk. In addition, the other 
reforms we are adopting today (such as liquidity fees and redemption 
gates) will provide some fund managers additional tools for managing 
such redemptions, if they were to occur.\1347\ Moreover, the additional 
information should assist investors in making a more informed 
investment decision, which leads to improved efficiency and capital 
formation. Furthermore, commenters have also argued that the proposed 
Form N-CR disclosures will actually decrease redemption risk by 
heightening self-discipline at funds, which would also increase capital 
formation.\1348\ In addition, it is possible that investors will react 
positively to the information on Form N-CR if they feel the fund is 
sufficiently addressing the cause of the Form N-CR filing. For example, 
as noted in section III.F.5, we believe disclosure of a board's 
reasoning is particularly important in times of stress in order to 
mitigate against investor flight to transparency that might otherwise 
occur.
---------------------------------------------------------------------------

    \1346\ See, e.g., Federated V Comment Letter (``The goal of 
reform should be not to have the filing of a Form N-CR cause the 
widespread redemptions the Reform Proposal seeks to avoid.''); 
Federated VIII Comment Letter.
    \1347\ In addition, as discussed in more detail in sections 
III.F.4 and III.F.5 above, we note that some of our responses in 
section III.A.1.c.i to concerns over pre-emptive run risk related to 
the liquidity fees and gates requirement would similarly apply to 
run risk concerns with respect to certain specific disclosures in 
Form N-CR.
    \1348\ See, e.g., American Bankers Ass'n Comment Letter.
---------------------------------------------------------------------------

    If money market fund investors decide to move all or a substantial 
portion of their money out of the market, this could negatively affect 
capital formation.\1349\ On the other hand, capital formation could be 
positively affected if the Form N-CR reporting requirements were to 
assist the Commission in overseeing and regulating the money market 
fund industry, and the resulting regulatory framework would allow 
investors to more efficiently or more effectively invest in money 
market funds. Additional effects of these filing requirements on 
efficiency, competition, and capital formation would vary according to 
the event precipitating the Form N-CR filing, and they are 
substantially similar to the effects of other disclosure requirements, 
as discussed in more detail above.\1350\
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    \1349\ For an analysis of the potential macroeconomic effects of 
our main reforms, see supra section III.K.
    \1350\ We believe that the effects on efficiency, competition, 
and capital formation of filing Form N-CR in response to Part B or C 
overlap significantly with the effects of the disclosure 
requirements regarding the financial support provided to money 
market funds. See discussion in supra section III.F. We believe that 
the effects of filing Form N-CR in response to Part D overlap 
significantly with the effects of the disclosure requirements 
regarding a money market fund's daily market-based NAV per share. 
See discussion in supra section III.F.4. We believe that the effects 
of filing Form N-CR in response to Parts E, F, and G overlap 
significantly with the effects of the disclosure requirements 
regarding current and historical instances of the imposition of 
liquidity fees and/or gates. See supra section III.F.5.
---------------------------------------------------------------------------

    The Commission is unable to measure the quantitative benefits of 
these requirements because of uncertainty about how increased 
transparency may affect different investors' behavior, their 
understanding of the risks associated with money market funds, and the 
potential effects of the disclosure on market discipline.
a. Alternatives Considered
    As a possible alternative, we could have chosen to not adopt Form 
N-CR or any of its disclosures (as well as any of the corresponding SAI 
or Web site disclosures). A variation of this alternative would have 
been to eliminate Form N-CR but adopt the corresponding SAI and/or Web 
site disclosures. As discussed above, commenters expressed concern 
about

[[Page 47851]]

the potential redundancy of Form N-CR or parts thereof in light of the 
corresponding Web site and SAI disclosures.\1351\ If we did not adopt 
Form N-CR and/or any of the corresponding SAI and Web site disclosures, 
affected funds would not incur the additional costs related to Form N-
CR that we discuss in more detail below.\1352\ In addition, with 
respect to the board disclosure requirements in Parts E and F for Form 
N-CR, fund boards would not be concerned about the loss of board 
confidentiality or the possibility of opportunistic shareholder 
litigation.\1353\ However, we rejected this set of alternatives for a 
number of reasons, including the following. First, each of the 
disclosures in Form N-CR serves to alert Commission staff, investors, 
and other market observers (such as news services, which in turn may 
alert investors) about important events in a timely manner.\1354\ 
Second, as discussed in more detail in section III.F.3 (Concerns over 
Potential Redundancy), although we acknowledge there will be some 
textual overlap between these different forms, we believe each serves a 
distinct purpose.\1355\ Moreover, as discussed in section III.F.5 
(Board Disclosure) above, we have revised the board disclosure 
requirements in a number of ways in order to minimize any concerns over 
board confidentiality or opportunistic litigation.
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    \1351\ See supra note 1249 and accompanying discussion.
    \1352\ Similarly, if we also had not adopted the corresponding 
SAI or Web site disclosures, funds would further not incur their 
related costs previously described. See supra sections III.E.8 and 
III.E.9.h.
    \1353\ See our discussion about commenters' concerns in supra 
note 1290 and accompanying discussion.
    \1354\ See also supra section III.F.8 for our discussion of the 
other economic benefits of Form N-CR.
    \1355\ See supra section III.F.3. (Concerns over Potential 
Redundancy).
---------------------------------------------------------------------------

    Another alternative suggested by a number of commenters is to 
extend the deadline for filing Form N-CR by up to two weeks. \1356\ A 
variation of this alternative would have been to move all or certain 
parts of Form N-CR to other (and typically later) periodic reports. For 
example, one commenter recommended that the board disclosure 
requirements under Parts E and F of Form N-CR ``be provided in the 
report to shareholders covering the relevant period.'' \1357\ Extending 
the deadline or moving these disclosures to a later periodic report or 
other filing could lower the cost for funds since funds may have 
additional cost due to the short time period to prepare the initial 
filings within one day and the follow-up within four days. Such 
additional preparation time may also lower opportunity costs for the 
fund, in that personnel of a fund can spend the initial time responding 
to the event that requires Form N-CR reporting rather than filing the 
Form N-CR. However, we rejected this set of alternatives because, as 
discussed above, in times of market stress the purpose of Form N-CR is 
to alert the Commission, shareholders and other market observers about 
significant events that affect the fund.\1358\ If investors feel that 
they will have the necessary information to make an informed decision 
in times of stress, then this may lead to additional capital for funds. 
Likewise, we also believe that having the initial filing within one 
business day and the follow-up within four business days may lead to 
more market discipline among funds, resulting in increased investor 
willingness to participate in this market, which could also lead to 
additional capital for funds.
---------------------------------------------------------------------------

    \1356\ See supra note 1320 and accompanying text for a 
discussion of commenters who proposed extending the filings 
deadlines.
    \1357\ NYC Bar Committee Comment Letter. See, also, e.g., MFDF 
Comment Letter (move the discussion of the circumstances that led to 
a fee or gate to a new annual management discussion of fund 
performance.).
    \1358\ For example, see also our related discussion in supra 
notes 1329-1333 and the accompanying text.
---------------------------------------------------------------------------

    We also considered making the definition of financial support 
subject to a specific threshold or general materiality qualification, 
such as a specific drop in the NAV or liquidity.\1359\ For example, 
such a threshold might apply if a fund's NAV drops by more than \1/4\ 
of 1 percent and the sponsor's investment in the fund causes the fund's 
NAV to recover. We rejected this alternative for several reasons. 
First, some types of sponsor support like a sponsor support agreement 
or a performance guarantee, which is included in the definition, does 
not necessarily or immediately result in a change in NAV or liquidity. 
Second, it is possible that sponsors would provide financial support to 
their funds before reaching the particular threshold, thereby avoiding 
the reporting requirement. As one commenter stated, ``[k]nowing that 
any form of sponsor support would be required to be disclosed within 24 
hours, fund managers would likely do everything they could to avoid the 
need for sponsor support.''\1360\
---------------------------------------------------------------------------

    \1359\ See, e.g., T. Rowe Price Comment Letter.
    \1360\ See American Bankers Ass'n Comment Letter.
---------------------------------------------------------------------------

    We also considered various other refinements that specifically 
related to one of the particular disclosure items in Form N-CR, such as 
commenters' proposal to increase the deviation in the NAV triggering a 
report on Part D of Form N-CR from 0.25% to 0.5%.\1361\ We generally 
consider and address these other suggestions in our discussion of the 
final amendments above.
---------------------------------------------------------------------------

    \1361\ See supra note 1276.
---------------------------------------------------------------------------

b. Operational Costs: Overview
    The operational costs of filing Form N-CR in response to the events 
specified in Parts B though H of Form N-CR are discussed below.\1362\ 
Our estimates of operational costs below generally reflect the costs 
associated with an actual filing of Form N-CR. We continue to expect 
that the operational costs to money market funds to report the new 
information will generally be the same costs we discuss in the 
Paperwork Reduction Act analysis in section IV.D.2.a below.\1363\
---------------------------------------------------------------------------

    \1362\ These costs incorporate the costs of responding to Part A 
(``General information'') of Form N-CR. We anticipate that the costs 
associated with responding to Part A will be minimal, because Part A 
requires a fund to submit only basic identifying information.
    \1363\ As discussed in more detail in infra section IV.D.2.a, we 
have revised our cost estimates associated with filing a report with 
respect to each Part of Form N-CR. The Proposing Release originally 
estimated that a fund would spend on average approximately 5 burden 
hours and total time costs of $1,708 to prepare, review, and submit 
a report under any Part of Form N-CR. See Proposing Release, supra 
note 24, at nn.1203 and 1204 and accompanying text. This resulted in 
a total annual burden of approximately 301 burden hours and total 
annual time costs of approximately $102,765 under the floating NAV 
alternative and approximately 341 burden hours and total annual time 
costs of approximately $116,429 under the liquidity fees and gates 
alternative. See Proposing Release, supra note 25, at nn.1113 and 
1205 and accompanying text.
---------------------------------------------------------------------------

    We recognize that there could also be some advance discussions and 
preparation within the industry and at money market funds about having 
the necessary monitoring systems and controls in place to detect 
relevant issues immediately, escalate them quickly and get the form 
approved and filed. While we acknowledge these potential additional 
costs, we are unable to estimate them with any specificity,\1364\ 
largely because we do not have the necessary information on how 
prepared funds may already be or how much advance preparation is needed 
in regards to filing a report in Form N-CR. For example, because 
certain disclosures such as Part B and C of Form N-CR will in part 
replace existing email notification

[[Page 47852]]

requirements,\1365\ we expect that many funds may already be prepared 
to detect and respond to these particular items. Moreover, in 
particular with respect to the disclosures about any liquidity fee or 
gate on Parts E through G of Form N-CR, we question the extent to which 
any advance preparation would be useful in light of the highly fact-
specific nature of these disclosures.\1366\ Accordingly, some funds may 
engage in very little or no advance preparation. In addition, we 
believe that most (if not all) preparational costs related to an event 
reportable on Parts E through G of Form N-CR, such as planning 
appropriate processes for the consideration of a liquidity fee or gate 
by the board, are more directly attributable to the liquidity fees and 
gates requirement itself,\1367\ rather than the corresponding 
disclosure requirement on Form N-CR.\1368\
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    \1364\ No commenters provided concrete cost estimates 
specifically in regards to these potential preparatory costs. For a 
more general discussion of commenters' comments on the burdens of 
Form N-CR, see, e.g., supra note 1363 and III.F.8.
    \1365\ See supra notes 1211 and 1213.
    \1366\ For similar reasons, our cost estimates in the PRA 
analysis in infra section IV.D.2 generally presume no particular 
advance preparation when preparing a filing on Form N-CR.
    \1367\ See, e.g., SIFMA Comment Letter (estimating costs of 
implementing the ability to impose liquidity fees and gates).
    \1368\ See supra section III.A.1.
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    As discussed in sections III.F.2-III.F.6 above, we are making a 
number of changes in our final amendments, a number of which we expect 
to impact the costs associated with filing a report on Form N-CR.\1369\ 
For example, with respect to Parts B, C and D, we are now permitting 
filers to split their response into an initial and follow-up 
filing,\1370\ similar to what we had already proposed for Parts E and F 
in the Proposing Release. Accordingly, in addition to our new estimate 
for Part H, we are updating and providing a more nuanced estimate of 
the costs associated with filing a report with respect to each of Parts 
B through G of Form N-CR.
---------------------------------------------------------------------------

    \1369\ See supra sections III.F.2-III.F.6 for a more detailed 
discussion of each of our final amendments.
    \1370\ See supra section III.F.7.
---------------------------------------------------------------------------

    In updating our estimates, we also considered comments about the 
operational costs related to Form N-CR. One commenter estimated that 
requiring disclosure of certain Items in Form N-CR within one business 
day could cost $300,000 to $500,000.\1371\ However, our final 
amendments incorporate this commenter's proposed solution by shifting 
Items B.5, C.4, C.9, C.10, and D.3 from the initial filing to the 
follow-up filing.\1372\ Because today's amendments permit funds to file 
a response to these Items within four business days instead of just one 
business day, we expect the costs of filing Form N-CR to be notably 
less than what this commenter originally estimated.\1373\ Although we 
received no other specific cost estimates from commenters with respect 
to Form N-CR, we also took into account commenters' general concerns 
and suggestions about the timing and various costs and burdens of Form 
N-CR.\1374\ For example, we noted that commenters particularly cited 
the burdens and the role of the board in drafting and reviewing the 
board disclosures in Parts E and F.\1375\
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    \1371\ See Fidelity Comment Letter (stating that ``[i]t would be 
difficult for MMFs to produce validated data ready for public 
dissemination within one business day, particularly for items such 
as B.5, C.4, C.9, and C.10. Providing quantitative data within one 
business day would not only call for the coordination of information 
and its sources, but also its review and verification to ensure 
accuracy and completeness. Accordingly, we do not believe that this 
strict filing deadline is operationally feasible. Further, providing 
data within a short timeframe would come at an estimated cost of 
$300,000-$500,000, without factoring in the costs of ongoing 
compliance and filing, all of which greatly exceeds the SEC's 
estimated cost of $1,700 and five hours to prepare and review 
information.'').
    \1372\ See supra note 1326 and accompanying text.
    \1373\ We are generally unable, however, to fully evaluate the 
basis or validity of this commenter's cost estimate, as we do not 
have all the data or assumptions on which this commenter's estimate 
is based. See supra note 1324 and accompanying text; Fidelity 
Comment Letter.
    \1374\ See, e.g., Dreyfus Comment Letter, Federated VIII Comment 
Letter, Legg Mason & Western Asset Comment Letter, MFDF Comment 
Letter.
    \1375\ See, e.g., IDC Comment Letter (``Any public disclosure 
about a board's decision-making process would require careful and 
thoughtful drafting and multiple layers of review (by board counsel, 
fund counsel, and the directors, among others).''); Stradley Ronon 
Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    We also updated our estimates to reflect the likelihood that some 
funds may engage legal counsel to assist with the drafting and review 
of Form N-CR, by which they would incur additional external costs. For 
example, as noted above, commenters cited the particular burdens and 
the role of various parties in drafting and reviewing the board 
disclosures in Parts E and F.\1376\ In addition, given commenters' 
concern about timing as noted in section III.F.7, we take these various 
concerns to be an indicator that some funds may engage legal counsel. 
Accordingly, we estimate, in particular with respect to the follow-up 
reports under Parts B through F as well as any reports on Part H, that 
certain funds will engage legal counsel to assist with the drafting and 
review of Form N-CR, thereby incurring additional external costs.\1377\
---------------------------------------------------------------------------

    \1376\ See id.
    \1377\ See infra note 2386 and accompanying discussion.
---------------------------------------------------------------------------

c. Operational Costs of Part B: Default Events
    As noted in the Proposing Release,\1378\ we have estimated that the 
costs of filing a report in response to an event specified on Part B of 
Form N-CR will be higher than the costs that money market funds 
currently incur in complying with the rule 2a-7 provision which 
currently requires money market funds to report defaults or events of 
insolvency to the Director of Investment Management or the Director's 
designee by email.\1379\
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    \1378\ See Proposing Release, supra note 25, at n.730 and 
accompanying text.
    \1379\ The requirements of current rule 2a-7(c)(7)(iii)(A) and 
the requirement of Part B of Form N-CR are substantially similar, 
although Part B on its face specifies more information to be 
reported than current rule 2a-7(c)(7)(iii)(A). However, we 
understand that funds disclosing events of default or insolvency 
pursuant to current rule 2a-7(c)(7)(iii)(A) already have 
historically reported substantially the same information required by 
Part B. As noted, we are eliminating the existing email notification 
requirements in rule 2a-7 and are replacing it with the notification 
requirements of Form N-CR. See supra note 1211. We discuss the 
impact on costs of this elimination in sections III.F.8 and III.N.3.
---------------------------------------------------------------------------

    In updating our estimates for Part B of Form N-CR, we estimate the 
costs of filing and amending the report in response to an event 
specified on Part B of Form N-CR to include time costs of $4,830 and 
external costs of $1,000, for total costs of $5,830 for each set of 
initial and follow-up reports,\1380\ and we expect, based on our 
estimate of the average number of notifications of events of default or 
insolvency that money market funds currently file each year, that the 
Commission would receive approximately 20 such filings per year.\1381\ 
Therefore, we expect that the annual costs relating to filing a report 
on Form N-CR in response to an event specified on Part B would be 
$116,600.\1382\
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    \1380\ The costs associated with filing Form N-CR in response to 
an event specified on Part B of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.b.
    \1381\ The Commission estimates this figure based in part by 
reference to our current estimate of an average of 20 notifications 
to the Commission of an event of default or insolvency that we 
previously estimated money market funds to file pursuant to current 
rule 2a-7(c)(7)(iii) each year. See Submission for OMB Review, 
Comment Request, Extension: Rule 2a-7, OMB Control No. 3235-0268, 
Securities and Exchange Commission 77 FR 236 (Dec. 7, 2012). We 
believe that this estimate is likely to be high, in particular when 
markets are not in crisis as they were during 2008 or 2011. However, 
we are continuing to use this higher estimate to be conservative in 
our analysis.
    \1382\ These estimates are based on the following calculations: 
$5,830 (cost per complete filing) x 20 filings per year = $116,600 
per year. See supra notes 1380 and 1381 and accompanying text.

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[[Page 47853]]

d. Operational Costs of Part C: Financial Support
    In addition to the general discussion above, in updating our 
estimate for Part C we also considered certain changes from the 
proposal specifically related to Part C of Form N-CR,\1383\ most 
notably our changes to the definition of financial support,\1384\ which 
we estimate will impact the frequency of filings on Part C of Form N-
CR. As we noted in the Proposing Release,\1385\ we have estimated the 
costs of filing a report in response to an event specified on Part C of 
Form N-CR in part by reference to the costs that money market funds 
currently incur in complying with the rule 2a-7 provision that requires 
disclosure to the Director of Investment Management or the Director's 
designee by email when a sponsor supports a money market fund by 
purchasing a security in reliance on rule 17a-9.\1386\ However, because 
Part C of Form N-CR is more extensive and defines ``financial support'' 
more broadly than the current requirements, we expect that the costs 
associated with filing a report in response to a Part C event would be 
higher than the current estimated costs of compliance with the current 
notification requirement.\1387\
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    \1383\ See supra section III.F.3. (Definition of Financial 
Support).
    \1384\ See supra section III.F.3 and note 1242.
    \1385\ See Proposing Release, supra note 25, at paragraph 
following n.733.
    \1386\ Current rule 2a-7(c)(7)(iii)(B).
    \1387\ As previously noted, we are eliminating the existing 
email notification requirements in rule 2a-7 and are replacing it 
with the notification requirements of Form N-CR. See supra note 
1213. We discuss the impact on costs of this elimination in sections 
III.F.8 and III.N.3.
---------------------------------------------------------------------------

    In updating our proposed estimates for Part C of Form N-CR, we 
estimate the costs of filing and amending the report in response to an 
event specified on Part C of Form N-CR to include time costs of $6,660 
and external costs of $1,400, for total costs of $8,060 for each set of 
initial and follow-up reports,\1388\ and we expect, based in part by 
reference to our estimate of the average number of notifications of 
security purchases in reliance on rule 17a-9 that money market funds 
currently file each year, that the Commission would receive 
approximately 30\1389\ such filings per year.\1390\ Therefore, we 
expect that the annual costs relating to filing a report on Form N-CR 
in response to an event specified on Part C would be $241,800.\1391\
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    \1388\ The costs associated with filing Form N-CR in response to 
an event specified on Part C of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.c.
    \1389\ In the Proposing Release, we originally estimated 40 
filings per year under Part C of Form N-CR. See Proposing Release, 
supra note 25, at n.735 and accompanying text. As discussed in supra 
section III.F.3, today we are adopting certain exclusions from the 
definition of financial support that will narrow the definition to a 
certain degree. Correspondingly, in anticipation of a slight 
reduction in instances that meet the definition as amended today, we 
predict an estimated 30 filings per year under Part C of Form N-CR.
    \1390\ See Submission for OMB Review, Comment Request, 
Extension: Rule 2a-7, OMB Control No. 3235-0268, Securities and 
Exchange Commission [77 FR 236 (Dec. 7, 2012)].
    \1391\ These estimates are based on the following calculations: 
$8,060 (cost per complete filing) x 30 filings per year = $241,800 
per year. See supra note 1388-1390 and accompanying text.
---------------------------------------------------------------------------

e. Operational Costs of Part D: Shadow Price Declines
    In an event of filing, we continue to believe a fund's particular 
circumstances that gave rise to a reportable event under Part D would 
be the predominant factor in determining the time and costs associated 
with filing a report on Form N-CR, in particular with respect to the 
follow-up filing amending the initial report.\1392\
---------------------------------------------------------------------------

    \1392\ See Proposing Release, supra note 25, at paragraph 
following n.736.
---------------------------------------------------------------------------

    In updating our proposed estimates for Part D of Form N-CR, we 
estimate the costs of filing and amending the report in response to an 
event specified on Part D of Form N-CR to include time costs of $4,830 
and external costs of $1,000, for total costs of $5,830 for each set of 
initial and follow-up reports,\1393\ and we expect, based in part by 
reference to our estimate of the average number of instances in which 
the shadow price for a non-institutional money market fund has deviated 
downward by more than \1/4\ of 1 percent from its stable per share NAV 
price each year, that we will receive approximately 0.3 such filings 
per year.\1394\ Therefore, we expect that the annual costs relating to 
filing a report on Form N-CR in response to an event specified on Part 
D would be $1,749.\1395\
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    \1393\ The costs associated with filing Form N-CR in response to 
an event specified on Part D of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.d.
    \1394\ Our staff has analyzed form N-MFP data from November 2010 
to February 2014 and found that only one non-institutional fund had 
a \1/4\ of 1 percent deviation from the stable $1.00 per share NAV. 
1 fund in over 39 months is equivalent to less than 1 (1 x 12 / 39 = 
0.31) funds per year. In the Proposing Release, we had estimated 
0.167 reports filed per year in respect of Part D. See Proposing 
Release, supra note 25, at n.1205. We revised this estimate to 
reflect more accurate accounting and updated data.
    \1395\ These estimates are based on the following calculations: 
$5,830 (cost per complete filing) x 0.3 filings per year = $1,749 
per year. See supra note 1393 and 1394 and accompanying text.
---------------------------------------------------------------------------

f. Operational Costs of Part E and F: Imposition of Fees and Gates
    In addition to the general discussion above, in updating our 
estimates we also considered certain changes from the proposal 
specifically related to Parts E and F of Form N-CR,\1396\ most notably 
our changes to the board disclosure requirements \1397\ and the weekly 
liquid asset thresholds permitting or triggering board consideration of 
a liquidity fee or gate.\1398\ Moreover, in particular with respect to 
the board disclosures, we expect that most if not all funds may engage 
legal counsel to assist with the drafting and review of Form N-CR, 
thereby incurring additional external costs. \1399\ We have also 
revised our estimates of the frequency of filings under Parts E and 
F.\1400\ In an event of filing, we continue to believe a fund's 
particular circumstances that gave rise to a reportable event under 
Parts E or F would be the predominant factor in determining the time 
and costs associated with filing a report on Form N-CR, in particular 
with respect to the follow-up filing amending the initial report.\1401\
---------------------------------------------------------------------------

    \1396\ See supra section III.F.5.
    \1397\ See supra section III.F.5. (Board Disclosures).
    \1398\ See supra section III.F.5. (Conforming and Related 
Changes).
    \1399\ For example, commenters cited the particular burdens and 
the role of the board in drafting and reviewing the board 
disclosures in Parts E and F. See, e.g., IDC Comment Letter (``Any 
public disclosure about a board's decision-making process would 
require careful and thoughtful drafting and multiple layers of 
review (by board counsel, fund counsel, and the directors, among 
others).''); Stradley Ronon Comment Letter; SIFMA Comment Letter.
    \1400\ See infra notes 1410-1414 and accompanying text.
    \1401\ See Proposing Release, supra note 25, at paragraph 
following n.736.
---------------------------------------------------------------------------

    In revising our estimates for Part E of Form N-CR,\1402\ we 
estimate the costs of filing and amending the report in response to an 
event specified on Part E of Form N-CR to include time costs of $10,910 
and external costs of $3,600, for total costs of $14,510 for each set 
of initial and follow-up reports.\1403\ The Proposing Release and the 
DERA Study analyzed the distribution of weekly liquid assets to 
determine how often a prime fund's weekly liquid asset percentage fell 
below the 30% and 10% thresholds. The analysis found that on

[[Page 47854]]

average 6.9 out of 253 prime funds, or 2.7% of the funds, had their 
monthly weekly liquid assets percentages fall below 30%.\1404\ This 
corresponds to 83 funds per year.\1405\ The analysis also found that on 
average 0.05 out of 253 prime funds, or 0.02% of the funds, had their 
monthly weekly liquid assets percentages fall below 10%.\1406\ This 
corresponds to 0.6 funds per year.\1407\ As a result of the new 
reporting requirements, we believe that funds will in general try to 
avoid having to file Form N-CR by keeping their weekly liquid asset 
percentages above 10%.\1408\ In addition, of the 83 funds per year that 
reported a weekly liquid assets value below 30%, it is unclear how many 
would have decided to impose a fee, but we expect it to be lower than 
83 funds given that not all boards would have likely imposed such a 
discretionary fee. As such, we expect, based on our calculation of the 
average number of instances in which a fund would breach the 10% and 
30% weekly liquid asset threshold each year, that the Commission would 
receive between 0.6 and 83 such filings per year. For purposes of the 
Paperwork Reduction Act section below,\1409\ we estimate that 0.6 funds 
per year would file a report triggered by the 10% weekly liquid asset 
threshold\1410\ and an additional 0.6 funds per year would file a 
report because they crossed the 30% weekly liquid asset threshold and 
their board determined to impose a liquidity fee,\1411\ for a total 
average of 1.2 instances per year. Therefore, we expect that the annual 
costs relating to filing a report on Form N-CR in response to an event 
specified on Part E will be $17,412.\1412\
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    \1402\ The Proposing Release estimated that a fund would spend 
on average approximately 5 burden hours and total time costs of 
$1,708 to prepare, review, and submit a report under any Part of 
Form N-CR, including Part E. See Proposing Release, supra note 25, 
at nn.1203 and 1204 and accompanying text.
    \1403\ The costs associated with filing Form N-CR in response to 
an event specified on Part E of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.e.
    \1404\ See the table in the Proposing Release, supra note 25, 
referencing n.384; DERA Study, supra note 24, at 22.
    \1405\ We estimate 83 funds per year as follows: 6.9 funds per 
month x 12 months = 83 funds per year.
    \1406\ See the table in the Proposing Release, supra note 25, 
referencing n.384; DERA Study, supra note 24, at 22.
    \1407\ We estimate 0.6 funds per year as follows: 0.05 funds per 
month x 12 months = 0.6 funds per year.
    \1408\ See generally, e.g., SIFMA Comment Letter (``[Some 
members] believe the existence of the liquidity trigger for the fee 
and gate will motivate fund managers to maintain fund liquidity well 
in excess of the trigger level, to avoid triggering the fee or 
gate.'');
    \1409\ See infra section IV.D.2.e. In the Proposing Release, we 
had previously estimated a total of 4 reports in response to Parts E 
and F based on the previously proposed 15% weekly liquid asset 
trigger. See Proposing Release, supra note 25, at n.1202. For a more 
detailed discussion of the reasons for our changed estimates, see 
also infra note 2408.
    \1410\ As noted above, as a result of the new reporting 
requirements, we believe that funds will in general try to avoid 
having to file Form N-CR by keeping their weekly liquid asset 
percentages above 10%. Accordingly, we believe our estimates of the 
frequency of filings in response to Part E of Form N-CR are likely 
to be high. However, we are using these higher estimates to be 
conservative in our analysis.
    \1411\ As discussed in section IV.D.2.e, we estimate that funds 
will voluntarily impose a liquidity fee at most as often as they 
will be required to consider a liquidity fee based on the 10% weekly 
liquid asset trigger. Accordingly, the Commission conservatively 
estimates that 0.6 additional funds per year would file a report in 
response to Part E because it breached the 30% weekly liquid asset 
threshold and their board determined to impose such a discretionary 
liquidity fee.
    \1412\ These estimates are based on the following calculations: 
$14,510 (cost per complete filing) x [0.6 + 0.6] filings per year = 
$17,412 per year. See supra notes 1403-1410 and accompanying text.
---------------------------------------------------------------------------

    In revising our estimates for Part F of Form N-CR,\1413\ we 
estimate the costs of filing and amending the report in response to an 
event specified on Part F of Form N-CR of Form N-CR to include time 
costs of $10,910 and external costs of $3,600, for total costs of 
$14,510 for each set of initial and follow-up reports.\1414\ As stated 
above, the DERA study found that 83 prime funds per year had their 
weekly liquid asset percentages fall below 30%.\1415\ Of these 83 
funds, it is unclear how many would have decided to impose a gate, but 
we expect it to be lower than 83 funds given that not all boards would 
have likely imposed such a discretionary gate. Thus, we expect, based 
on our calculation of the average number of instances in which a fund 
would breach the 30% weekly liquid asset threshold each year, that the 
Commission would receive between zero and 83 such sets of initial and 
follow-up reports per year. For purposes of the Paperwork Reduction Act 
section below,\1416\ we conservatively estimate that 0.6 funds per year 
would file a report because they breached the 30% weekly liquid asset 
threshold and their board determined to impose a gate.\1417\ Therefore, 
we expect that the annual costs relating to filing a report on Form N-
CR in response to an event specified on Part F would be $8,706. \1418\
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    \1413\ The Proposing Release estimated that a fund would spend 
on average approximately 5 burden hours and total time costs of 
$1,708 to prepare, review, and submit a report under any Part of 
Form N-CR, including Part F. See Proposing Release, supra note 25, 
at nn.1203 and 1204 and accompanying text.
    \1414\ The costs associated with filing Form N-CR in response to 
an event specified on Part F of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.f.
    \1415\ See DERA Study, supra note 24, at 22.
    \1416\ See infra section IV.D.2.f. In the Proposing Release, we 
had previously estimated a total of 4 reports in response to Parts E 
and F based on the previously proposed 15% weekly liquid asset 
trigger. See Proposing Release, supra note 25, at n.1202. For a more 
detailed discussion of the reasons for our changed estimates, see 
also infra note 2421.
    \1417\ As discussed and estimated in more detail in infra 
section IV.D.2.f, we conservatively estimate the number of instances 
in which a fund breached the 30% weekly liquid asset threshold and 
its board determined to impose a voluntary gate to be equal to the 
number of instances in which a fund breached the 30% weekly liquid 
asset threshold and its board determined to impose a voluntary fee, 
or 0.6 instances per year.
    \1418\ These estimates are based on the following calculations: 
$14,510 (cost per complete filing) x 0.6 filings per year = $8,706 
per year. See supra notes 1414-1417.
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g. Operational Costs of Part G: Lifting of Fees and Gates
    As discussed in the Proposing Release, we continue to believe the 
frequency of filings under Part G on Form N-CR to be closely correlated 
to the frequency of filings under Parts E and F.\1419\ Given our 
revised estimates of the number of filings under Parts E and F,\1420\ 
we are correspondingly revising our estimate of the number of filings 
under Part G.\1421\ We are further revising our estimates for Part G, 
because we expect the cost per filing associated with responding to 
Part G to be lower than for Parts E or F.\1422\ Unlike Parts B through 
F and H, for which we have included estimated external costs to account 
for the possibility that funds may engage legal counsel to assist in 
the preparation and review of Form N-CR,\1423\ we have not done so here 
because of the relative simplicity of Part G.
---------------------------------------------------------------------------

    \1419\ See, e.g., Proposing Release, supra note 25, at n.1202 
and accompanying discussion. We expect there to be a close 
correlation because Part G requires disclosure of the lifting of any 
liquidity fee or gate imposed in connection with Part E or F.
    \1420\ See supra notes 1410 and 1417 and accompanying 
discussions.
    \1421\ See infra section IV.D.2.g. The Proposing Release 
estimated a total of 4 reports in response to Part G. See Proposing 
Release, supra note 25, at n.1202. For a more detailed discussion of 
the reasons for our revised estimates, see also infra notes 2433-
2437 and accompanying text.
    \1422\ In the Proposing Release, our staff originally estimated 
that a fund would spend on average approximately 5 burden hours and 
total time costs of $1,708 to prepare, review, and submit a report 
under any Part of Form N-CR. See Proposing Release, supra note 25, 
at nn.1203 and 1204 and accompanying text. However, we expect a 
response to Part G to be shorter than under Parts E or G, given that 
Part G only requires disclosure of the date on which a fund removed 
a liquidity fee and/or resumed Fund redemptions. See Form N-CR Item 
G.1. In addition, unlike Part E or F, Part G would not require any 
follow-up report.
    \1423\ See supra sections IV.D.2.b--IV.d.2.f; see also infra 
section IV.D.2.h.
---------------------------------------------------------------------------

    In revising our estimates for Part G of Form N-CR,\1424\ we 
estimate the costs of

[[Page 47855]]

filing a report in response to an event specified on Part G of Form N-
CR to include time costs of $695 per filing,\1425\ and we expect, based 
in part by reference to our estimate of how often funds would file Form 
N-CR under Part E or F each year, that the Commission would receive 
between zero and 83 such filings per year.\1426\ For purposes of the 
Paperwork Reduction Act section below, we estimate that 1.8 funds per 
year would file a report because they lifted a liquidity fee or 
gate.\1427\ Therefore, we expect that the annual costs relating to 
filing a report on Form N-CR in response to an event specified on Part 
G would be $1,251.\1428\
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    \1424\ The Proposing Release estimated that a fund would spend 
on average approximately 5 burden hours and total time costs of 
$1,708 to prepare, review, and submit a report under any Part of 
Form N-CR, including Part F. See Proposing Release, supra note 25, 
at nn.1203 and 1204 and accompanying text.
    \1425\ The costs associated with filing Form N-CR in response to 
an event specified on Part G of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.g.
    \1426\ For purposes of this estimate of filings under Part G, we 
conservatively assume that there would be a filing under Part G for 
every filing under either Parts E or F. Given that some affected 
funds may liquidate instead of ever lifting the respective liquidity 
fee or gate, we therefore expect this estimate of the frequency of 
Part G filings may be high.
    \1427\ See infra section IV.D.2.g.
    \1428\ These estimates are based on the following calculations: 
$695 (cost per complete filing) x 1.8 filings per year = $1,251 per 
year. See supra notes 1425-1427 and accompanying text.
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h. Operational Costs of Part H: Optional Disclosure
    Given the broad scope and voluntary nature of the optional 
disclosure under Part H of Form N-CR, we believe that, in an event of 
filing, a fund's particular circumstances that led it to decide to make 
such a voluntary disclosure would be the predominant factor in 
determining the time and costs associated with filing a report on Form 
N-CR. In estimating costs, we expect that some funds may engage legal 
counsel to assist with the drafting and review of Form N-CR, thereby 
incurring additional external costs.\1429\
---------------------------------------------------------------------------

    \1429\ In particular, we expect that funds are more likely to 
file a report on Part H when there are more complex events that need 
to be addressed, which we believe will make it correspondingly more 
likely that funds will engage legal counsel.
---------------------------------------------------------------------------

    Accordingly, we estimate the costs of a filing in response to an 
event specified on Part H of Form N-CR to include time costs of $1,390 
and external costs of $800, for a total cost of $2,190 per 
filing,\1430\ and we expect that the Commission will receive 
approximately 18 such filings per year.\1431\ Therefore, we expect that 
the annual costs relating to filing a report on Form N-CR in response 
to an event specified on Part H will be $32,850.\1432\
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    \1430\ The costs associated with filing Form N-CR in response to 
an event specified on Part H of Form N-CR are paperwork-related 
costs and are discussed in more detail in infra section IV.D.2.h.
    \1431\ For purposes of our estimate in section IV.D.2.h below, 
we conservatively estimate that funds would include a disclosure 
under Part H in about a quarter of the instances they submit a 
follow-up filing under Parts B through F, as well as with respect to 
a quarter of all filings under Part G. Because of the timing 
constraints, we generally would not expect funds would to make a 
Part H disclosure in an initial filing. We also would not generally 
expect funds to make a Form N-CR filing under Part H alone. However, 
given the possibility that funds might make a Part H disclosure in 
the initial filing or on a stand-alone basis, we conservatively 
estimate one additional Part H filing per year under each scenario. 
As calculated in in section IV.D.2.h below, we therefore estimate an 
annual total of 15 filings in response to Part H.
    \1432\ These estimates are based on the following calculations: 
$2,190 (cost per complete filing) x 15 filings per year = $32,850 
per year. See supra notes 1430 and 1431 and accompanying text.
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i. Aggregate Operational Costs
    In the aggregate, we estimate that compliance with new rule 30b1-8 
and Form N-CR would result in total annual time costs of approximately 
$339,588\1433\ and total external costs of $80,780.\1434\ Given an 
estimated 559 money market funds that would be required to comply with 
new rule 30b1-8 and Form N-CR,\1435\ this would result in average 
annual time costs of approximately $607 and average annual external 
costs of $145 on a per-fund basis.\1436\
---------------------------------------------------------------------------

    \1433\ See infra note 2446.
    \1434\ See infra note 2447.
    \1435\ See supra note 2448.
    \1436\ See infra note 2449.
---------------------------------------------------------------------------

G. Amendments to Form N-MFP Reporting Requirements

    The Commission is today adopting amendments to Form N-MFP, the form 
that money market funds use to report their portfolio holdings and 
other key information to us each month. We use the information to 
monitor money market funds and support our examination and regulatory 
programs. Each fund must file the required information on Form N-MFP 
electronically within five business days after the end of each month. 
Currently, we make the information public 60 days after the end of the 
month.\1437\ Money market funds began reporting this information to us 
in November 2010.\1438\
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    \1437\ See current rule 30b1-7(b).
    \1438\ On average, 575 money market funds (excluding feeder 
funds) filed Form N-MFP with us each month throughout 2013. Funds 
reported information on approximately 67,000 securities on average 
each month.
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    Today we are amending Form N-MFP to reflect the amendments to rule 
2a-7 discussed above. In addition, we are requiring the reporting of 
certain new information that will be useful for our oversight of money 
market funds, and making other improvements to the form based on our 
previous experience with filings submitted to us. Most commenters 
generally supported the proposed amendments to Form N-MFP, agreeing 
that the improved reporting would be useful to the Commission and 
investors.\1439\ Although these commenters generally supported the 
proposed amendments, many of them raised concerns with certain specific 
changes and additional reporting items.\1440\ We did not receive any 
comment on a number of the proposed amendments, and are generally 
adopting those amendments as proposed.
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    \1439\ See, e.g., Wells Fargo Comment Letter; ICI Comment Letter 
(``We generally support the proposed amendments. . .''); Boston 
Federal Reserve Comment Letter. One commenter opposed the amendments 
generally, suggesting that Form N-MFP is a tool for the Commission, 
not investors, and argued that the cost of the greater reporting 
requirements is not justified by the usefulness of the information 
to the Commission. See Dreyfus Comment Letter. We discuss the 
usefulness of the information reported on Form N-MFP to investors 
throughout this section, and similarly discuss the costs of 
compliance in section III.G.5. below.
    \1440\ See, e.g., Wells Fargo Comment Letter (objecting to 
shareholder flow reporting); Fidelity Comment Letter (objecting to 
lot level purchase and sale data); SIFMA Comment Letter (objecting 
to shareholder concentration reporting).
---------------------------------------------------------------------------

    To respond to comments we received, the final form amendments 
differ in some respects from what we proposed, such as not adopting the 
lot level security and shareholder concentration reporting 
requirements, as well as certain other refinements which are discussed 
below. We are adopting many of the other proposed amendments unchanged, 
including eliminating the 60-day delay on public availability of the 
data. As proposed, we are not changing the requirement that funds 
continue to file reports on Form N-MFP once each month (as they do 
today), but are adopting a requirement that certain limited information 
(such as the NAV per share, liquidity levels, and shareholder flow) be 
reported on a weekly basis within the monthly filing.\1441\
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    \1441\ We requested comment on potentially requiring filing of 
Form N-MFP on a weekly, rather than a monthly basis. Commenters 
generally opposed such an increase in frequency of filing of the 
form, and we are retaining the requirement to file the form on a 
monthly basis at this time. See, e.g., Dreyfus Comment Letter; SIFMA 
Comment Letter.
---------------------------------------------------------------------------

    We are adopting these changes to Form N-MFP because they further 
support the Commission's efforts to oversee the stability of money 
market funds and compliance with rule 2a-7,\1442\ and should assist 
money

[[Page 47856]]

market fund shareholders in better understanding the risks of their 
investments. As proposed, in connection with these amendments, we are 
renumbering the items of Form N-MFP to separate the items into four 
separate sections and are making other minor reformatting 
changes.\1443\ These amendments will apply to all money market funds, 
with both stable value and floating NAV money market funds reporting on 
Form N-MFP as amended.
---------------------------------------------------------------------------

    \1442\ References to amended Form N-MFP will be to ``Form N-MFP 
Item'' or to ``Item'' and references to Form N-MFP as it was 
proposed to be amended in 2013 will be to ``Proposed Form N-MFP 
Item.'' We are not amending items in Form N-MFP that reference 
credit ratings at this time.
    \1443\ See Form N-MFP: (i) General information (Items 1-8); (ii) 
information about each series of the fund (Items A.1-A.21; (iii) 
information about each class of the fund (Items B.1-B.8); and (iv) 
information about portfolio securities (Items C.1-C.25). Our 
renumbering of the items will enable us to add or delete items in 
the future without having to re-number all subsequent items in the 
form.
---------------------------------------------------------------------------

1. Amendments Related to Rule 2a-7 Reforms
    We proposed a number of changes to Form N-MFP designed to conform 
it with the general reforms of rule 2a-7.\1444\ Commenters generally 
did not object to these proposed amendments, and we are adopting them 
largely as proposed, with some revisions to reflect the revised 
approach we are taking to the primary reforms.
---------------------------------------------------------------------------

    \1444\ See Proposing Release supra note 25, at section III.H.1.
---------------------------------------------------------------------------

a. Amortized Cost
    As part of the primary reforms to rule 2a-7, we proposed to 
eliminate the use of the amortized cost valuation method for stable 
value money market funds, and to correspond with that elimination, we 
also proposed to remove references to amortized cost and shadow prices 
from Form N-MFP. However, as discussed previously in section II.B.5, 
the final amendments will permit the continued use of the amortized 
cost valuation method for stable value money market funds.\1445\ 
Accordingly, to conform the changes to Form N-MFP to the final 
amendments to rule 2a-7, we are not adopting the Form N-MFP amendments 
that would have removed references to the amortized cost of securities 
in certain existing items, although we are moving and rephrasing the 
references where appropriate to be consistent with the final amendments 
to rule 2a-7.\1446\
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    \1445\ See supra section II.B.5.
    \1446\ Form N-MFP currently requires that each series of a fund 
disclose the total amortized cost of its portfolio securities (Item 
13) and the amortized cost for each portfolio security (Item 41). As 
we proposed, we are amending Items 13 and 41 by replacing amortized 
cost with ``value'' as defined in section 2(a)(41) of the Act 
(generally the market-based value). See Form N-MFP Items A.14.b and 
C.18, and Form N-MFP General Instructions, E. Definitions. As a 
result, we are removing current Form N-MFP Items 45 and 46, which 
require that a fund disclose the value of each security using 
available market quotations, both with and without the value of any 
capital support agreement. Form N-MFP Item C.18 would require that 
money market funds report portfolio security market values both 
including and excluding the value of any sponsor support. As we 
proposed, to improve transparency of MMF's risks, we are also 
clarifying that money market funds must disclose the value of ``any 
sponsor support'' applicable to a particular portfolio security, 
rather than ``capital support agreements'' as stated in current Form 
N-MFP Items 45 and 46. We are also continuing to require, as 
proposed, reporting of the amortized cost value of money market 
funds that use that method to value securities for all or any 
portion of their portfolio. See Form N-MFP Item A.14.b.i .
---------------------------------------------------------------------------

    Because we proposed to eliminate amortized cost valuation (which 
would have required all money market funds to value their shares at 
market-based values even if they transacted at a dollar through penny 
rounding), we had correspondingly proposed to eliminate the reporting 
requirements related to money market fund ``shadow prices'' from Form 
N-MFP and instead require funds to report their market-based NAV. As a 
result of the final amendments to rule 2a-7 permitting the continued 
use of amortized cost for certain money market funds, the final 
amendments to Form N-MFP also continue to require reporting of fund 
shadow prices (on a series and class level) for funds that use the 
amortized cost method of valuation.\1447\ This requirement would be 
part of the requirement to report the fund's NAV on a class and series 
level.
---------------------------------------------------------------------------

    \1447\ See Form N-MFP Items A.20 and B.5. These requirements are 
moved and reformatted from the existing form as part of the overall 
renumbering and re-organizing of the form.
---------------------------------------------------------------------------

b. Weekly Reporting Within Monthly Filing
    The final rules also require reporting of a money market fund's NAV 
per share (and shadow price), daily and weekly liquid assets, and 
shareholder flows on a weekly basis within the monthly filing of the 
form, as we proposed.\1448\ Two commenters generally objected to the 
proposed requirements for weekly reporting within a monthly form.\1449\ 
These commenters argued that weekly information gathering will increase 
fund costs and suggested that the benefits are speculative. They also 
noted that this weekly reported information would be available on the 
fund's Web site, resulting in redundant disclosure.\1450\ We appreciate 
these concerns, but disagree. Form N-MFP and Web site disclosure have 
different purposes. Under our final disclosure amendments, as discussed 
above funds will be required to report market-based NAV per share 
information daily on their Web sites (as well as the liquidity and 
shareholder flow information), so the weekly information should be 
readily available at little additional cost. Including this weekly 
information on the fund's filing will allow Commission staff to better 
monitor risks and trends in fund valuation (as well as liquidity and 
shareholder flow) in an efficient and more precise manner without 
requiring frequent visits to the Web sites of many different funds, and 
will be a useful resource for investors and others as well. Because it 
will be housed in a central repository of data, this information can be 
aggregated and analyzed across the fund industry and can be used in a 
standardized manner to enhance comparability.\1451\ The additional data 
points we collect will enable us to better monitor trends and risks on 
a more granular time level for individual funds and money market funds 
as a whole. In contrast, the Web site disclosures are intended to be 
more accessible and ``user-friendly'' than Form N-MFP for individual 
investors trying to research particular funds. We have required other 
such parallel reporting for similar reasons.\1452\
---------------------------------------------------------------------------

    \1448\ Form N-MFP Items A.13, A.20, B.5 and B.6. As discussed in 
section IV.A.6.c funds would also be required to report their NAV 
per share and shadow price on a daily basis on their Web site.
    \1449\ Dreyfus Comment Letter; SIFMA Comment Letter. These 
commenters objected to all of the proposed weekly items, including 
reporting on the funds' NAV per share, levels of daily and weekly 
liquid assets, and shareholder flows.
    \1450\ Id.
    \1451\ See also supra section III.F.
    \1452\ For example, money market funds are currently required to 
disclose much of the portfolio holdings information they disclose on 
Form N-MFP on the fund's Web site as well. See current rule 2a-
7(c)(12)(ii); Form N-MFP General Instruction A.
---------------------------------------------------------------------------

c. NAV Per Share (and Shadow Price) Reporting to Fourth Decimal Place
    Today on Form N-MFP, funds report, both for each series and each 
class, shadow price of their NAV, rounded to the fourth decimal place 
for a fund with a $1.00 share price (or an equivalent level of accuracy 
for funds with a different share price).\1453\ Under the proposed 
amendments to the Form, we proposed to keep this reporting requirement 
(although in a different place within the Form consistent with the 
general reformatting). This reporting is consistent with the rounding 
convention that was proposed for floating NAV money market funds to 
price and transact in our rule proposal. No commenters specifically 
addressed this current Form N-MFP requirement, or its reformatting. As 
discussed in section III.B.3.c above we are adopting a requirement for 
floating NAV funds to transact at this ``basis point rounding''

[[Page 47857]]

level of accuracy. As when we originally adopted this requirement in 
2010, we continue to believe that information about a fund's NAV priced 
to a basis point rounding level of accuracy will be relevant and useful 
for the Commission and investors when monitoring money market fund 
risks and trends.\1454\ This information will be used by the Commission 
and others to identify money market funds that continue to seek to 
maintain a stable price per share \1455\ and help us better evaluate 
any potential deviations in their unrounded share price. Reporting the 
NAV per share to the fourth decimal place on Form N-MFP is also 
consistent with the precision of NAV reporting that funds would be 
required to provide on their Web sites under our final amendments. 
Accordingly, the Form continues to require reporting of a money market 
fund's NAV to the fourth decimal place, as is required today and under 
the proposal.\1456\
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    \1453\ Form N-MFP Items 18 and 25. See also Proposing Release 
supra note 25, at section III.H.1.
    \1454\ See 2010 Adopting Release, supra note 81, at section 
II.E.2. We note that many large fund complexes already disclose on 
their Web sites the 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). See also sections III.B and IV.A.6.
    \1455\ We are also adopting, as proposed, a new item requiring 
reporting for funds that seek to maintain a stable price per share 
to state the price that the fund seeks to maintain. See Form N-MFP 
Item A.18.
    \1456\ Form N-MFP Items A.20 and B.5.
---------------------------------------------------------------------------

d. Category Reporting
    As we proposed, we are also amending the category options at the 
series level that money market funds use to identify themselves to 
include exempt government fund as an option.\1457\ We are also adding a 
sub question, new from the proposal, asking if the fund is an exempt 
retail fund under rule 2a-7.\1458\ This new subsection is necessary to 
help identify whether a fund is exempt because it is a government fund 
or if it is exempt because it is a retail fund which will be important 
in our ongoing monitoring efforts. These new categories will allow us 
to better identify the types of funds operating.
---------------------------------------------------------------------------

    \1457\ See Form N-MFP, Item A.10.
    \1458\ See Form N-MFP, Item A.10.a.
---------------------------------------------------------------------------

e. Economic Analysis
    Consistent with the proposal, any effect resulting from these 
amendments (except as noted below), including the requirement that each 
monthly report include information on a weekly basis, is included in 
our economic analysis of our amendments that require money market funds 
to disclose NAV, liquidity and shareholder flow daily on fund Web 
sites.\1459\ Accordingly, we do not believe that the proposed 
amendments would impose other costs not discussed in that section on 
money market funds other than those required to modify systems used to 
aggregate data and file reports on Form N-MFP, as discussed below. We 
expect, as discussed previously in this section, that the revised forms 
will benefit investors by enhancing their understanding of money market 
funds, and will enhance our monitoring and regulatory programs.
---------------------------------------------------------------------------

    \1459\ See supra section III.E.9.h.
---------------------------------------------------------------------------

    We believe that the revised form will be easier for investors to 
understand because the amendments will allow investors to better focus 
on a single market-based valuation for individual portfolio securities 
and the fund's overall NAV per share. Accordingly, we expect that the 
overall effects will be to increase efficiency for investors. Because 
we believe that investors are likely to make at least incremental 
changes to their trading patterns in money market funds due to the 
changes to Form N-MFP, it is likely that the changes will affect 
competition and capital formation. Although it is difficult to quantify 
the size of these effects without better knowledge about how investors 
will respond, we believe that the effects from the changes to Form N-
MFP will be small relative to the effects of the underlying reforms.
2. New Reporting Requirements
    We are also adopting several new items to Form N-MFP that we 
believe will improve our (and investors') ability to monitor money 
market funds. As discussed further below, these final amendments 
include some, but not all of the new reporting requirements that we had 
proposed. For example, as proposed, the final amendments include 
additional information about fair value categorization and LEIs (if 
available). We are also adopting, with some changes from the proposal, 
revisions to several other items, including revised investment 
categories for portfolio securities and repurchase agreement 
collateral. However, we are not adopting the lot level portfolio 
security disclosure, top 20 shareholder information, and security 
identifier level reporting on repo collateral that we had proposed. 
These amendments we are adopting should help address gaps in data that 
have become apparent from analysis of Form N-MFP filings that we have 
received to date. As discussed further below, each amendment requires 
reporting of additional information that should be readily available to 
the fund and, in many cases, should infrequently change from report to 
report.
a. Security Identifiers
    Certain of the final amendments we are adopting today are designed 
to help us and investors better identify fund portfolio 
securities.\1460\ To facilitate monitoring and analysis of the risks 
posed by funds, it is important for Commission staff to be able to 
identify individual portfolio securities. Fund shareholders and 
potential investors that are evaluating the risks of a fund's portfolio 
will similarly benefit from the clear identification of a fund's 
portfolio securities. Currently, the form requests information about 
the CUSIP number of a security, which the staff uses as a search 
reference. The staff has found that some securities reported by money 
market funds lack a CUSIP number, and this absence has reduced the 
usefulness of other information reported.\1461\ To address this issue, 
we are adopting as proposed the requirement that funds also report the 
LEI that corresponds to the security, if available.\1462\ We are also

[[Page 47858]]

adopting as proposed final amendments that require that funds report at 
least one other security identifier, if available.\1463\ One commenter 
suggested that the proposed requirement to include multiple securities 
identifiers might not be possible for certain securities, such as 
municipal securities, which may only have a single identifier 
available.\1464\ We note that the requirement to include multiple 
identifiers is only required if such identifiers are actually 
available.\1465\
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    \1460\ We also are also adopting, as proposed, a requirement 
that a fund provide the name, email address, and telephone number of 
the person authorized to receive information and respond to 
questions about Form N-MFP from Commission staff. We will exclude 
this information from Form N-MFP information that is made publicly 
available through EDGAR. See Form N-MFP Item 8.
    \1461\ Our inability to identify specific securities, for 
example, limits our ability to compare ownership of the security 
across multiple funds and monitor issuer exposure. As discussed in 
the proposal, during the month of February 2013, funds reported 
6,821 securities without CUSIPs (approximately 10% of all securities 
reported on the form).
    \1462\ See Form N-MFP Item C.4; Form N-MFP General Instructions, 
E. Definitions (defining ``LEI''). To ensure accurate identification 
of Form N-MFP filers and update the Form for pending industry-wide 
changes, we are also requiring, as proposed, that each registrant 
provide its LEI, if available. See Form N-MFP Item 3. The Legal 
Entity Identifier is a unique identifier associated with a single 
corporate entity and is intended to provide a uniform international 
standard for identifying counterparties to a transaction. The 
Commission has begun to require disclosure of the LEI, once 
available. See, e.g., Form PF, Reporting Form for Investment 
Advisers to Private Funds and Certain Commodity Pool Operators and 
Commodity Trading Advisors, available at http://www.sec.gov/rules/final/2011/ia-3308-formpf.pdf. A global LEI standard is currently in 
the implementation stage. See Frequently Asked Questions: Global 
Legal Entity Identifier (LEI) (Feb. 2013), U.S. Treasury Dept., 
available at http://www.treasury.gov/initiatives/ofr/data/Documents/LEI_FAQs_February2013_FINAL.pdf. Consistent with staff guidance 
provided in a Form PF Frequently Asked Questions, available at 
http://www.sec.gov/divisions/investment/pfrd/pfrdfaq.shtml, funds 
that have been issued a CFTC Interim Compliant Identifier (``CICI'') 
by the Commodity Futures Trading Commission may provide this 
identifier in lieu of the LEI until a global LEI standard is 
established.
    \1463\ See Form N-MFP Item C.5 (requiring that, in addition to 
the CUSIP and LEI, a fund provide at least one additional security 
identifier, if available). Security identifiers should be readily 
available to funds. See, e.g., http://www.sec.gov/edgar/searchedgar/cik.htm (providing a CIK lookup that is searchable by company name). 
We are also requiring that a fund provide the LEI (if available) for 
a security subject to a repurchase agreement (but unlike under the 
proposal, not the CUSIP). See Form N-MFP Items C.8.
    \1464\ See Vanguard Comment Letter.
    \1465\ Form N-MFP Items C.4 and C.5.
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b. Fair Value Categorization
    We are also adopting, with certain modifications from the proposal 
described below, amendments that are designed to help the staff and 
investors better identify certain risk characteristics that the form 
currently does not capture. Responses to these new items, together with 
other information reported, would improve the staff and investors' 
understanding of a fund and its potential risks by providing 
information about how the fund is valuing its investments.
    We proposed to require funds to report whether a security is 
categorized as a level 1, level 2, or level 3 measurement in the fair 
value hierarchy under U.S. GAAP.\1466\ We noted in the Proposing 
Release that we understood that most money market fund portfolio 
securities are categorized as level 2, and that although we understood 
that very few of a money market fund's portfolio securities are 
currently valued using significant unobservable inputs, and thus 
categorized as level 3, information about any such securities would 
enable our staff to identify individual securities that may be more 
susceptible to wide variations in pricing.\1467\ We also discussed how 
Commission staff could use this information to monitor for increased 
valuation risk in these securities, and to the extent there is a 
concentration in the security across the industry, identify potential 
outliers that warrant additional monitoring or investigation. One 
commenter objected to the requirement to report the fair value level of 
portfolio securities, arguing that because most money market fund 
securities are categorized as level 2, a more efficient approach would 
be to only require disclosure if a security is categorized as level 
3.\1468\ We agree that because most money market fund securities are 
categorized as level 2, the relevant information for us and investors 
is whether the security is categorized as level 3, and that it would be 
simpler and less costly for funds to report whether a security is 
categorized as level 3, rather than the level used for each security in 
the fund's portfolio. Accordingly, the final amendments require funds 
to disclose whether a security is categorized at level 3, not the fair 
value level of each security.\1469\ We believe that most funds directly 
evaluate the fair value level measurement categorization when they 
acquire the security and reassess the categorization when they perform 
portfolio valuations.\1470\ Accordingly, we continue to believe that 
funds should have ready access to the nature of the portfolio security 
valuation inputs used.
---------------------------------------------------------------------------

    \1466\ See Accounting Standards Codification 820, ``Fair Value 
Measurement''; Proposed Form N-MFP Item C.20. Level 1 categorized 
measurements include quoted prices for identical securities in an 
active market. Level 2 categorized measurements include: (i) Quoted 
prices for similar securities in active markets; (ii) quoted prices 
for identical or similar securities in non-active markets; and (iii) 
pricing models whose inputs are observable or derived principally 
from or corroborated by observable market data through correlation 
or other means for substantially the full term of the security. 
Security measurements categorized as level 3 are those whose value 
cannot be determined by using observable measures (such as market 
quotes and prices of comparable instruments) and often involve 
estimates based on certain assumptions.
    \1467\ For a discussion of some of the challenges regulators may 
face with respect to Level 3 accounting, see, e.g., Konstantin 
Milbradt, Level 3 Assets: Booking Profits and Concealing Losses, 25 
Rev. Fin. Stud. 55,95 (2011).
    \1468\ See Federated VIII Comment Letter.
    \1469\ Form N-MFP Item C.20.
    \1470\ Funds should regularly evaluate the pricing methodologies 
used and test the accuracy of fair value prices (if used). See 
Accounting Series Release No. 118, Financial Reporting Codification 
(CCH) section 404.03 (Dec. 23, 1970).
---------------------------------------------------------------------------

c. Lot Level Reporting
    We proposed to require funds to report additional information about 
each portfolio security, including, in addition to the total principal 
amount, the purchase date, the yield at purchase, the yield as of the 
Form N-MFP reporting date (for floating and variable rate securities, 
if applicable),\1471\ and the purchase price.\1472\ This information 
would have been required to be reported separately for each lot 
purchased.\1473\ In addition, we proposed to require that money market 
funds disclose the same information for any security sold during the 
reporting period.\1474\ In the Proposing Release, we suggested that 
because money market funds often hold multiple maturities of a single 
issuer, each time a security is purchased or sold, price discovery 
occurs and an issuer yield curve could be updated and used for 
revaluing all holdings of that particular security. Therefore, our 
proposed amendments, if adopted, could have had the incidental benefit 
of facilitating price discovery and would have enabled the Commission, 
investors, and others to evaluate pricing consistency across funds (and 
identify potential outliers).\1475\
---------------------------------------------------------------------------

    \1471\ We understand that the yields on variable rate demand 
notes, for example, may vary daily, weekly, or monthly. Our 
amendments would have provided Commission staff and others with a 
way to monitor the market's response to changes in credit quality, 
as well as identify potential outliers.
    \1472\ See proposed N-MFP Item C.17. Because yield at purchase 
would be disclosed in a separate item, we proposed to delete the 
reference to ``(including coupon or yield)'' from current Form N-MFP 
Item 27 (Form N-MFP Item C.2). Because as discussed below, we are 
not adopting the lot level reporting requirements we proposed, we 
are retaining the reference to coupon in the title of the issue. 
However, to facilitate use of the data collected and to clarify the 
time that the yield of the security must be calculated (as of the 
Form N-MFP reporting date), we are moving the question about yield 
out of the title question and adopting it as a standalone response. 
See proposed N-MFP Item C.17. When disclosing a security's coupon or 
yield (as required in proposed Form N-MFP Items C.2 or C.8.e), funds 
generally should report (i) the stated coupon rate, where the 
security is issued with a stated coupon, and (ii) the coupon rate as 
of the Form N-MFP reporting date, if the security is floating or 
variable rate. Because we not adopting the lot level reporting 
requirement, funds would not need to report, as discussed in the 
proposal, the interest rate at purchase. Finally, funds generally 
should disclose the name of the collateral issuer (and not the name 
of the issuer of the repurchase agreement).
    \1473\ See proposed Form N-MFP Item C.17.
    \1474\ See proposed Form N-MFP Item C.25.
    \1475\ See 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''), supra 
note 48 (suggesting that more frequent reporting on Form N-MFP might 
increase price discovery for market-based NAV calculations).
---------------------------------------------------------------------------

    A number of commenters strongly opposed this proposed new lot level 
reporting requirement.\1476\ They noted that the number of reporting 
line items could go up tenfold under this requirement, and that costly 
new systems would need to be built to effectively report this 
information on an ongoing basis.\1477\ Commenters also

[[Page 47859]]

noted that the lot level security information is proprietary, and could 
be used to the disadvantage of funds and shareholders.\1478\ They also 
questioned the value of this information to the Commission, noting the 
high costs of providing it.\1479\ We appreciate the concerns of 
commenters, and are modifying the final amendments to eliminate the 
proposed lot level security reporting requirement. Although collecting 
data on the purchase and sale of money market fund securities could 
improve pricing transparency, and allow us to better monitor risks and 
valuation issues, we are persuaded by commenters that reporting this 
information at the lot level may be costly and could disclose 
proprietary information about security purchase prices that could harm 
funds, and therefore their shareholders. We also believe that this data 
might be more useful if collected on a systematic, market-wide basis 
which may both provide more comprehensive and consistent coverage and 
mitigate the concerns about proprietary data disclosure.\1480\ 
Accordingly, we are not adopting the lot level purchase and sale data 
reporting requirements that we proposed.
---------------------------------------------------------------------------

    \1476\ See, e.g., ICI Comment Letter; Federated II Comment 
Letter; Wells Fargo Comment Letter.
    \1477\ See, e.g., Dreyfus Comment Letter; Fidelity Comment 
Letter (noting that for one fund, one month's reporting included 336 
lines at the CUSIP level, and under the proposed lot level 
requirement, that fund would have contained over 2100 reporting 
lines, and that of those lots, only 15 were purchased at different 
yields, and 11 of those were Treasury securities).
    \1478\ See, e.g., Vanguard Comment Letter; BlackRock II Comment 
Letter.
    \1479\ See, e.g., ICI Comment Letter (``Indeed, our members have 
expressed concern that the reporting of this type of confidential 
trading information could compromise management of their 
portfolios.''); Fidelity Comment Letter.
    \1480\ One commenter discussed a similar approach, suggesting 
that ``price discovery might be enhanced through other methods, such 
as increasing the categories of securities reported through the 
Financial Industry Regulatory Authority's Trade Reporting and 
Compliance Engine (TRACE) system.'' Wells Fargo Comment Letter.
---------------------------------------------------------------------------

d. Liquidity and Shareholder Flow Data
    We are also adopting amendments, with certain modifications from 
the proposal as described below, that require funds to report the 
amount of cash they hold,\1481\ the fund's daily liquid assets and 
weekly liquid assets,\1482\ and whether each security is considered a 
daily liquid asset or weekly liquid asset.\1483\ Unlike the other items 
of disclosure on Form N-MFP that must be disclosed on a monthly basis, 
as discussed previously, we are requiring that funds report their Daily 
Liquid Assets and Weekly Liquid Assets on a weekly basis.\1484\ One 
commenter suggested that we align reporting of fund liquid assets on 
Form N-MFP (which is dollar based) with the reporting of liquid assets 
on fund Web sites (which is percentage based).\1485\ We agree that such 
alignment would provide better consistency and comparability of 
information between information on fund's Web site and the information 
reported on Form N-MFP. Accordingly, the final amendments to Form N-MFP 
require reporting of fund daily and weekly liquid assets on both a 
dollar and percentage basis.\1486\ Because the percentages are already 
reported on fund Web sites, this information should be readily 
available. The information should help us and others to better 
understand the relative liquidity of fund portfolios.
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    \1481\ See Form N-MFP Item A.14.a and Form N-MFP General 
Instructions, E. Definitions (requiring, as proposed, disclosure of 
the amount of cash held and defining ``cash'' to mean demand 
deposits in insured depository institutions and cash holdings in 
custodial accounts, respectively). We are also amending, as 
proposed, Item 14 of Form N-MFP (total value of other assets) to 
clarify that ``other assets'' excludes the value of assets disclosed 
separately (e.g., cash and the value of portfolio securities). See 
Form N-MFP Item A.14.c. This amendment would ensure that reported 
amounts are not double counted.
    \1482\ See Form N-MFP Item A.13.
    \1483\ Form N-MFP Items C.21-C.22.
    \1484\ See supra note 1448.
    \1485\ Fidelity Comment Letter. Requiring both the total value 
and percentage of total assets of these data points parallels the 
information that is collected for each security in Items C.18 and 
C.19 (dollar value and percentage basis).
    \1486\ Form N-MFP Items A.13.a-A.13.d. As discussed in section 
III.G.2.i, we are not requiring disclosure of liquid assets on fund 
Web sites on a dollar basis because we believe that the most 
relevant information to investors is the percentage of fund assets 
that are liquid.
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    Similarly, we are adopting the proposed amendments to require that 
money market funds disclose the weekly gross subscriptions (including 
dividend reinvestments) and weekly gross redemptions for each share 
class, once each week during the month reported.\1487\ As discussed 
earlier, money market funds would continue to file reports on Form N-
MFP once each month, but certain information (including disclosure of 
daily and weekly liquid assets) would be reported weekly within the 
form. Several commenters objected to the requirement to disclose 
shareholder flow data, arguing that such disclosure could be confusing 
to shareholders, and is not necessarily indicative of stress.\1488\ One 
commenter also suggested that if shareholder flow data was reported, it 
should be on a net rather than gross basis.\1489\
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    \1487\ See Form N-MFP Item B.6. We also are continuing to 
require that money market funds disclose the monthly gross 
subscriptions and monthly gross redemptions for the month reported. 
See current Form N-MFP Item 23.
    \1488\ See, e.g., Legg Mason & Western Asset Comment Letter; 
Dreyfus Comment Letter; Wells Fargo Comment Letter.
    \1489\ SIFMA Comment Letter.
---------------------------------------------------------------------------

    We agree that shareholder flows do not necessarily indicate stress 
in a fund, but they can be informative in monitoring fund activity and 
evaluating the potential risks. We believe gross rather than net flow 
data is more useful for us and investors because it allows more 
transparency into the particular redemption and purchase patterns at a 
fund. We do not believe this additional information would confuse 
investors, because they can compare the gross inflows to the gross 
outflows if they believe that the net data is the relevant information 
in their decision making process. We continue to believe that these 
amendments would provide Commission staff and others with additional 
relevant data to efficiently monitor fund risk (such as monitoring the 
risk that a fund might cross the 10% liquidity-based fee threshold 
under the liquidity fee amendments we are adopting today), and 
correlated risk shifts in liquidity across the industry.\1490\ 
Increased periodic disclosure of the daily and weekly liquid assets on 
Form N-MFP would provide increased transparency into how funds manage 
their liquidity, and it may also impose market discipline on portfolio 
managers. In addition, increased disclosure of weekly gross 
subscriptions and gross redemptions (reported weekly, in addition to 
monthly) would improve the ability of the Commission, investors, and 
others to better understand the significance of other liquidity 
disclosures required by our proposals (e.g., daily and weekly liquid 
assets). It will also allow the Commission to better understand 
patterns of shareholder flows over time and how funds respond to those 
shareholder flows, and compare those flows to funds' liquid assets, and 
we may use them in connection with our examination and regulatory 
efforts. Accordingly, we are adopting the amendments to disclose weekly 
gross subscriptions and weekly gross redemptions as proposed.
---------------------------------------------------------------------------

    \1490\ As discussed in section III.E.9.a, money market funds 
would also be required to disclose each day on its Web site the 
fund's Daily Liquid Assets and Weekly Liquid Assets and shareholder 
flows.
---------------------------------------------------------------------------

e. Fee Waivers
    We are today also adopting the proposed requirement that each fund 
must disclose whether its adviser or a third party paid for or waived 
all or part of its operating expenses or management fees during a given 
reporting period.\1491\

[[Page 47860]]

One commenter objected to this proposed requirement, arguing that fee 
waivers are not necessarily indicative of an adviser's financial 
position, and that such information may confuse investors and leave an 
incorrect impression of the health of the adviser because waivers are 
just one aspect of the financial ability of an adviser to support a 
fund.\1492\
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    \1491\ Form N-MFP Item B.8 (requiring that funds provide the 
name of the person and describe the nature and amount the expense 
payment or fee waiver, or both (reported in dollars)).
    \1492\ Schwab Comment Letter.
---------------------------------------------------------------------------

    We agree that fee waivers are not necessarily dispositive 
information about an adviser's financial position or its willingness to 
potentially support a fund. We do not agree that this information would 
confuse investors, in part because fee waivers are already disclosed in 
the fund's prospectus (as discussed below), and interested investors 
may wish to use this information in their investment decision making 
process, even if it is not the sole or even most dispositive piece of 
information used in evaluating the financial health of the adviser or 
the ability of the adviser to support the fund in times of stress. We 
continue to believe, as stated in the proposal, that information about 
expense waivers is relevant and will help both investors and the 
Commission better evaluate money market fund performance and risk and 
respond accordingly. To the extent that money market funds waive fees 
to boost performance and attract assets, the new disclosure requirement 
should help investors better understand the basis of fund performance 
so they can make more informed investment choices.\1493\ In addition, 
the Commission will be better able to evaluate and respond to financial 
strains on fund advisers. In low interest rate environments, money 
market fund yields can become sufficiently small that advisers must 
waive fees to offer investors positive returns.\1494\ It may also help 
us better monitor the overall financial impact of fee waivers on money 
market fund advisers and the effect of such waivers on the industry as 
a whole. Accordingly, we are adopting the fee waiver reporting 
requirement as proposed.
---------------------------------------------------------------------------

    \1493\ We recognize fee waivers are also required to be 
disclosed in a fund's fee table, but believe it is useful to have 
them reported on Form N-MFP as well, for the same reasons discussed 
in the section on weekly reporting within a monthly filing above, as 
each set of disclosures may reach different audiences who may be 
seeking out the information for different purposes (i.e. an investor 
looking at fee waivers in the fee table may be looking at them for 
purposes of whether fees on their investments may go up later, while 
investors looking in Form N-MFP may be looking to help determine the 
potential impact on the adviser).
    \1494\ In some cases, fee waivers can have similar effects as 
capital support. Since 2009, MMFs have dramatically increased fee 
waivers to keep yields positive in a low interest rate environment. 
In 2011, MMFs waived more fees ($5.2 billion) than they collected 
($4.7 billion). See Investment Company Institute, ``Submission by 
the Investment Company Institute Working Group on Money Market Fund 
Reform Standing Committee on Investment Management International 
Organization of Securities Commissions,'' Feb 7, 2012. Moreover, 
more money was forfeited in fee waivers from 2009-2011 ($13.3 
billion) than was spent during the financial crises from 2007-2009 
by fund advisers on capital support events ($12.0 billion) to 
stabilize the NAVs of the largest 100 (US and European) prime funds. 
See Moody's Sponsor Support Report, supra note 54.
---------------------------------------------------------------------------

f. Percentage of Shares Held by Top 20 Shareholders
    We proposed to amend Form N-MFP to require funds to disclose the 
total percentage of shares outstanding held by the twenty largest 
shareholders of record. At the time, we noted that this information 
could help us (and investors) identify funds with significant potential 
redemption risk stemming from shareholder concentration, and evaluate 
the likelihood that a significant market or credit event might result 
in a run on the fund or the imposition of a liquidity fee or 
gate.\1495\
---------------------------------------------------------------------------

    \1495\ Form N-MFP Item A.19.
---------------------------------------------------------------------------

    A number of commenters objected to this proposed reporting 
requirement, arguing that such data could be confusing to shareholders 
because investments through omnibus accounts would be counted as single 
shareholders of record, potentially portraying a misleading portrait of 
the concentration level of the fund.\1496\ A commenter also suggested 
that the appearance of higher shareholder concentration levels as a 
result of omnibus accounts does not necessarily correlate with higher 
run risk and may mislead the public.\1497\ We recognize this, and agree 
that because of the prevalence of omnibus accounts, the proposed 
shareholder concentration disclosure may not succeed in achieving its 
purpose as the information provided may portray an incorrect and 
misleading picture of the level of shareholder concentration in a fund. 
This disclosure may create confusion if certain funds appear more 
concentrated than they actually are, as a result of those omnibus 
accounts appearing to be a single shareholder. For the same reasons, we 
expect that the information would similarly not be particularly useful 
for us in our monitoring efforts. Accordingly, upon further 
consideration of these concerns, we are not adopting the requirement to 
report the percentage of fund shares held by the top 20 shareholders.
---------------------------------------------------------------------------

    \1496\ See, e.g., Schwab Comment Letter; Federated VIII Comment 
Letter.
    \1497\ Dreyfus Comment Letter.
---------------------------------------------------------------------------

g. Investment Categories
    We are also adopting, with some changes in response to comments, 
certain amendments to Form N-MFP's investment categories for portfolio 
securities. The new investment categories should help Commission staff 
identify particular exposures that otherwise are often reported in 
other less descriptive categories (e.g., reporting sovereign debt as 
``treasury debt'' or reporting asset-backed securities (that are not 
commercial paper) as ``other note'' or ``other instrument'').\1498\ 
Several commenters suggested revisions to the investment categories we 
proposed, noting that these changes would better match investment 
categories that are used more broadly and consistently in the 
industry.\1499\ After reviewing these comments, we have revised the 
final investment categories to better align the categories with typical 
industry categorizations and provide a more precise description of fund 
investments.\1500\ We expect that the revised categories should not 
pose an

[[Page 47861]]

additional burden compared to the categories we proposed, as they are 
very similar, with minor changes to better reflect our understanding of 
common industry practice.
---------------------------------------------------------------------------

    \1498\ Currently N-MFP requires funds to categorize their 
investments from among the following categories: ``Treasury Debt; 
Government Agency Debt; Variable Rate Demand Note; Other Municipal 
Debt; Financial Company Commercial Paper; Asset Backed Commercial 
Paper; Other Commercial Paper; Certificate of Deposit; Structured 
Investment Vehicle Note; Other Note; Treasury Repurchase Agreement; 
Government Agency Repurchase Agreement; Other Repurchase Agreement; 
Insurance Company Funding Agreement; Investment Company; Other 
Instrument. If Other Instrument, include a brief description.'' 
Current Form N-MFP Item 31. We proposed to amend the investment 
categories in proposed Form N-MFP Item C.6 to include new 
categories: ``Non U.S. Sovereign Debt,'' ``Non-U.S. Sub-Sovereign 
Debt,'' ``Other Asset-Backed Security,'' ``Non-Financial Company 
Commercial Paper'' (instead of ``Other Commercial Paper''), and 
``Collateralized Commercial Paper,'' and amend ``U.S. Government 
Agency Debt'' and ``Certificate of Deposit (including Time Deposits 
and Euro Time Deposits).''
    \1499\ See Wells Fargo Comment Letter; Fidelity Comment Letter.
    \1500\ The final rules would amend the amend the investment 
categories in Form N-MFP Item C.6 to include the following 
selections: ``U.S. Treasury Debt; U.S. Government Agency Debt; Non-
U.S. Sovereign, Sub-Sovereign and Supra-National Debt; Certificate 
of Deposit; Non-Negotiable Time Deposit; Variable Rate Demand Note; 
Other Municipal Security; Asset Backed Commercial Paper; Other Asset 
Backed Securities; U.S. Treasury Repurchase Agreement, if 
collateralized only by U.S. Treasuries (including Strips) and cash; 
U.S. Government Agency Repurchase Agreement, collateralized only by 
U.S. Government Agency securities, U.S. Treasuries, and cash; Other 
Repurchase Agreement, if any collateral falls outside Treasury, 
Government Agency and cash; Insurance Company Funding Agreement; 
Investment Company; Financial Company Commercial Paper; Non-
Financial Company Commercial Paper; or Tender Option Bond. If Other 
Instrument, include a brief description.''
---------------------------------------------------------------------------

h. Other Amendments
    In addition, we are adopting, as we proposed, the amendments that 
would require funds to report the maturity date for each portfolio 
security using the maturity date used to calculate the dollar-weighted 
average life maturity (``WAL'') (i.e., without reference to the 
exceptions in rule 2a-7(i) regarding interest rate 
readjustments).\1501\ As we discussed in our proposal, this information 
will assist the Commission in monitoring and evaluating this risk, at 
the security level, as well as help evaluate compliance with rule 2a-
7's maturity provisions.\1502\ In addition, our amendments would make 
clear that funds must disclose for each security all three maturity 
calculations as required under rule 2a-7: WAM, WAL, and the legal 
maturity date.\1503\
---------------------------------------------------------------------------

    \1501\ Form N-MFP Item C.12.
    \1502\ We are also newly clarifying that the maturity date 
required to be reported in current Form N-MFP Item 35 is the 
maturity date used to calculate WAM under rule 2a-7(d)(1)(ii) (see 
Form N-MFP Item C.11) and the maturity date required to be reported 
in current Form N-MFP Item 36 is the ultimate legal maturity date, 
i.e., the date on which, in accordance with the terms of the 
security without regard to any interest rate readjustment or demand 
feature, the principal amount must unconditionally be paid (see Form 
N-MFP Item C.13). The ultimate legal maturity date, as clarified, 
will help us distinguish between debt securities that are issued by 
the same issuer.
    \1503\ Form N-MFP Items C.11, C.12 and C.13. In a modification 
from the proposal, we have changed the term ``final legal maturity 
date'' in Item C.13 of Form N-MFP to ``ultimate legal maturity 
date'' to clarify the reporting date for securities that may have 
varying maturity dates.
---------------------------------------------------------------------------

    We are also adopting, as proposed, a requirement that a fund 
disclose the number of shares outstanding, to the nearest hundredth, at 
both the series level and class level.\1504\ This information would 
permit us to verify or detect errors in information provided on Form N-
MFP, such as NAV. We are also adopting, as proposed, a requirement that 
a fund disclose, where applicable, the period remaining until the 
principal amount of a security may be recovered through a demand 
feature and whether a security demand feature is conditional.\1505\ As 
we discussed in the proposal, these amendments will improve the 
Commission's and (investors') ability to evaluate and monitor a 
security's credit and default risk. We did not receive comment on these 
other amendments and are adopting them as proposed.
---------------------------------------------------------------------------

    \1504\ Form N-MFP Items A.17 and B.4.
    \1505\ Form N-MFP Items C.14.e and C.14.f.
---------------------------------------------------------------------------

i. Economic Analysis
    As detailed above and discussed in the proposal, these new 
reporting requirements are intended to address gaps in the reporting 
regime that Commission staff has identified through our experience with 
Form N-MFP and to enhance the ability of the Commission and investors 
to monitor funds. Although the benefits are difficult to quantify, they 
will improve the ability of the Commission and investors to identify 
and analyze a fund's portfolio securities (e.g., by requiring 
disclosure of LEIs and an additional security identifier, if available, 
already required). In addition, many of our new reporting requirements 
will enhance the ability of the Commission and investors to evaluate a 
fund's risk characteristics (by requiring that funds disclose, for 
example, the following data: security categorizations, whether a 
security is valued using level 3 measurements; more detailed 
information about securities at the time of purchase; and liquidity 
metrics). We believe that the additional information required is 
readily available to funds as a matter of general business practice and 
therefore will not impose costs on money market funds other than those 
required to modify systems used to aggregate data and file reports on 
Form N-MFP. These costs are discussed in section IV.C.2 below.
    These new reporting requirements will improve informational 
efficiency by improving the transparency of potential risks in money 
market funds and promoting better-informed investment decisions, which, 
in turn, will lead to a better allocation of capital. Similarly, the 
increased transparency may promote competition among funds as fund 
managers are exposed to external market discipline and better-informed 
investors who may be more likely to select an alternative investment if 
they are not comfortable with the risk-return profile of their fund. As 
we discussed in the Proposing Release, the newly disclosed information 
may cause some money market fund investors to move their assets among 
different money market funds, but we do not have the information 
necessary to provide a reasonable estimate of this possibility. In 
addition, some investors may move assets among money market funds and 
alternative investments (e.g., private liquidity funds, separately 
managed accounts, or certificates of deposit) or other segments of the 
short-term financing markets, but we are unable to estimate how 
frequently this will happen with specificity and we do not know how the 
other underlying assets compare with those of money market funds. In 
addition, it is difficult to establish the extent to which any such 
exchanges would be a result of the broader amendments we are making or 
a marginal effect of the amendments we are making to Form N-MFP. In 
addition, no commenters suggested ways for us to quantify these 
exchanges with specificity. Thus, we continue to remain unable to 
estimate the amount of such asset movements with specificity. 
Therefore, we are unable to estimate the overall net effect on capital 
formation or competition. Nevertheless, we believe that the net effect 
will be small, especially during normal market conditions, in part 
because such asset movements would generally be among investment 
alternatives, rather than avoiding investment entirely.
3. Clarifying Amendments
    We are adopting, as proposed, several amendments to clarify current 
instructions and items of Form N-MFP. Revising the form to include 
these clarifications should improve the ability of fund managers to 
complete the form and improve the quality of the data they submit to 
us.\1506\ We believe that many of our clarifying amendments are 
consistent with current filing practices.\1507\
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    \1506\ We are also adopting, as proposed, technical changes to 
the ``General Information'' section of the form that will clarify 
the circumstances under which a money market fund must complete 
certain question sub-parts. See Form N-MFP Items 6 and 7.
    \1507\ As discussed below, the final amendments are consistent 
with written guidance our staff has provided to money market fund 
managers and service providers completing Form N-MFP.
---------------------------------------------------------------------------

    We understand that some fund managers compile their funds' 
portfolio holdings information as of the last calendar day of the 
month, even if that day falls on a weekend or holiday. To provide 
flexibility, we are amending, as proposed, the instructions to Form N-
MFP to clarify that, unless otherwise specified, a fund may report 
information on Form N-MFP as of the last business day or any later 
calendar day of the month.\1508\ We are also revising, as proposed, the 
definition of ``Master-Feeder Fund'' to clarify that the definition of 
``Feeder Fund'' includes unregistered funds (such as offshore

[[Page 47862]]

funds).\1509\ Our final amendments also would clarify, as proposed, 
that funds should calculate the WAM and WAL reported on Form N-MFP 
using the same methods they use for purposes of compliance with rule 
2a-7.\1510\ We also are requiring, as proposed, that funds disclose in 
Part B (Class-Level Information about the Fund) the required 
information for each class of the series, regardless of the number of 
shares outstanding in the class.\1511\
---------------------------------------------------------------------------

    \1508\ See Form N-MFP General Instruction A (Rule as to Use of 
Form N-MFP); rule 30b1-7. Our approach is also consistent with a 
previous interpretation provided by our staff. See Staff Responses 
to Questions about Rule 30b1-7 and Form N-MFP, Question I.B.1 
(revised July 29, 2011), available at http://www.sec.gov/divisions/investment/guidance/formn-mfpqa.htm.
    \1509\ See Form N-MFP General Instruction E (defining ``Master-
Feeder Fund,'' and defining ``Feeder Fund'' to include a registered 
or unregistered pooled investment vehicle). Form N-MFP requires that 
a master fund report the identity of any feeder fund. Our amendment 
is designed to address inconsistencies in reporting of master-feeder 
fund data that we have observed in filings, and will help us 
determine the extent to which feeder funds, wherever located, hold a 
master fund's shares. The change will also reflect how we understand 
data from master-feeder funds is collected by the ICI for its 
statistical reports. We are also making grammatical and conforming 
amendments to Form N-MFP Items A.7 and A.8, as proposed.
    \1510\ See Form N-MFP Items A.11 and A.12 (defining ``WAM'' and 
``WAL'' and cross-referencing the maturity terms to rule 2a-7). We 
are also amending the 7-day gross yield to require that the 
resulting yield figure be carried to (removing the words ``at 
least'') the nearest hundredth of one per cent and clarify that 
master and feeder funds should report the 7-day gross yield (current 
Form N-MFP Item 17) at the master fund level. Form N-MFP Item A.19. 
These amendments are intended to achieve consistency in reporting 
and remove potential ambiguity for feeder funds when reporting the 
7-day gross yield.
    \1511\ See text before Form N-MFP Item B.1. Our staff has found 
that funds inconsistently report fund class information, for 
example, when a fund does not report a fund class registered on Form 
N-1A because the fund class has no shares outstanding. Our amendment 
is intended to clarify a fund's reporting obligations and provide 
Commission staff (and investors) with more complete information 
about each fund's capital structure.
---------------------------------------------------------------------------

    We also are amending, with certain modifications from the proposal 
discussed below, the reporting requirements for repurchase agreements 
by restating the item's requirements as two distinct questions.\1512\ 
The amendment would make clear that information about the securities 
subject to a repurchase agreement must be disclosed regardless of how 
the fund treats the acquisition of the repurchase agreement for 
purposes of rule 2a-7's diversification requirements.\1513\ As part of 
these amendments, we proposed to amend form N-MFP to require reporting 
of a security identifier of collateral securities underlying repurchase 
agreements.\1514\ One commenter objected to this revision, arguing that 
this level of detail would publicly disclose proprietary information 
about broker-dealer inventories, which may negatively affect 
allocations of repurchase agreements to money market funds.\1515\ We 
appreciate this concern and are not adopting the requirement to report 
a security identifier of the collateral securities underlying 
repurchase agreements for that reason.\1516\ In addition, the same 
commenter objected to the revised investment categories we proposed 
regarding this collateral, arguing that we should instead use the 
categories used to report tri-party repurchase agreement information to 
the Federal Reserve Bank of New York (``NY Fed'').\1517\ We agree that 
conforming these categories to those used in other reporting contexts 
will ease reporting burdens and enhance comparability, and accordingly 
have modified the proposed investment categories to conform them to the 
categories used by the NY Fed.\1518\
---------------------------------------------------------------------------

    \1512\ See Form N-MFP Item C.7 (requiring that a fund disclose 
if it is treating the acquisition of a repurchase agreement as the 
acquisition of the underlying securities (i.e., collateral) for 
purposes of portfolio diversification under rule 2a-7). See Form N-
MFP Item C.8. (requiring that a fund describe the securities subject 
to the repurchase agreement). This information should be readily 
available to funds and would enhance the ability of Commission staff 
and others to evaluate the risks (e.g., rollover risk or the 
duration of the lending) presented by investments in repurchase 
agreements. See Form N-MFP Item C.8.a.
    \1513\ We are also making several other non-substantive 
clarifications to other items. See Form N-MFP Item 1 (amending the 
format of reporting date provided by funds); and Form N-MFP Item 
A.10 (modifying, for consistency, the names of money market fund 
categories).
    \1514\ Proposed Form N-MFP Item C.8.c.
    \1515\ Wells Fargo Comment Letter.
    \1516\ See Form N-MFP Item C.8.
    \1517\ Wells Fargo Comment Letter.
    \1518\ See Form N-MFP Item C.8.h.
---------------------------------------------------------------------------

    Finally, we are amending, as proposed, the items in Form N-MFP that 
require information about demand features, guarantors, or enhancement 
providers to make clear that funds should disclose the identity of each 
demand feature issuer, guarantor, or enhancement provider and the 
amount (i.e., percentage) of fractional support provided, which should 
help us monitor funds diversification.\1519\ Our amendments also 
clarify, as proposed, that a fund is not required to provide additional 
information about a security's demand feature(s) or guarantee(s) unless 
the fund is relying on the demand feature or guarantee to determine the 
quality, maturity, or liquidity of the security.\1520\
---------------------------------------------------------------------------

    \1519\ See Form N-MFP Items C.14--C.16.
    \1520\ Form N-MFP already requires that a fund disclose only 
security enhancements on which the fund is relying to determine the 
quality, maturity, or liquidity of the security. See current Form N-
MFP Item 39. Similarly, we are amending, as proposed, current Form 
N-MFP Items 37 (demand features) and 38 (guarantees) to make clear 
that funds are required to disclose information relating to demand 
features and guarantees only when the fund is relying on these 
features to determine the quality, maturity, or liquidity of the 
security. See Form N-MFP Items C.14 and C.15.
---------------------------------------------------------------------------

    As discussed above, and in the proposal, these clarifying 
amendments are intended to improve the quality of the data we receive 
on Form N-MFP by clarifying a number of reporting obligations so that 
all funds report information on Form N-MFP in a consistent manner. 
Accordingly, we do not believe that these clarifying amendments would 
impose any new costs on funds other than those required to modify 
systems used to aggregate data and file reports on Form N-MFP, to the 
extent that funds in the past may have reported this information 
differently. These costs are discussed in section III.G.5 below. 
Because these clarifying amendments will not change funds' current 
reporting obligations, we believe there will be no effect on 
efficiency, competition, or capital formation.
4. Public Availability of Information
    As we proposed, we are today eliminating the 60-day delay on public 
availability of Form N-MFP data.\1521\ Currently, each money market 
fund must file information on Form N-MFP electronically within five 
business days after the end of each month and that information is made 
publicly available 60 days after the end of the month for which it is 
filed.
---------------------------------------------------------------------------

    \1521\ See rule 30b1-7 (eliminating subsection (b), public 
availability).
---------------------------------------------------------------------------

    Several commenters objected to our proposed elimination of the 60-
day delay, particularly considering the sensitivity of the new lot 
level security reporting that we had proposed (but, as discussed above, 
are not adopting).\1522\ Other commenters supported shortening the 
delay to five or ten days (primarily to permit amendments to fix 
problems in the data if needed),\1523\ or eliminating it 
entirely.\1524\
---------------------------------------------------------------------------

    \1522\ See, e.g., BlackRock II Comment Letter; Legg Mason & 
Western Asset Comment Letter.
    \1523\ See, e.g., ICI Comment Letter; Federated II Comment 
Letter; Vanguard Comment Letter.
    \1524\ See U.S. Bancorp Comment Letter (``We are in full support 
of immediate release of a monthly Form N-MFP. . .'').
---------------------------------------------------------------------------

    This delay, which we instituted when we adopted the form in 2010, 
responded to commenters' concerns regarding potential reactions of 
investors to the extent of the additional disclosure of funds' 
portfolio information and shadow NAVs in the form.\1525\ Although we 
expected that, over time, investors and analysts would become more 
accustomed to the information disclosed about fund portfolios and thus 
there may be less need in the future to keep

[[Page 47863]]

the portfolio information private for 60 days, we believed then that 
the shadow price data should not be made public immediately, at least 
initially.\1526\ However, with experience, we now believe that the 
immediate release of the shadow price data and other money market fund 
portfolio security data would not be harmful and that investors may 
benefit from more timely access to the data. This is based, in part, on 
our understanding that many money market funds now disclose their 
shadow prices every business day on their Web sites, and frequently 
provide lists of holdings and information about liquidity to the public 
as well.
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    \1525\ See 2010 Adopting Release, supra note 17, at section 
II.E.2 (noting that there may be less need in the future to require 
a 60-day delay).
    \1526\ See 2010 Adopting Release, supra note 17, at text 
accompanying nn.329-343.
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    Several commenters requested that if we eliminated the public 
availability delay that we lengthen the 5-day filing time period in 
light of the increased reporting requirements under the amended form, 
in order to provide additional time to fix any potential errors.\1527\ 
As discussed above, we are not adopting some of the more extensive 
reporting requirements that we proposed (such as lot level security 
reporting) and we have streamlined and revised other requirements to 
better ease the filing burden. In addition, the longer the filing 
period provided, the more it increases the risk of staleness in the 
reported data and thereby reduces its usefulness to the Commission and 
to the public. We do not believe providing a filing period of longer 
than 5 days is necessary, in part because we are not adopting some of 
the more onerous reporting requirements we proposed, and in part 
because in our experience, less than 0.5% of money market funds have 
needed to make amendments to Form N-MFP filings after the reporting 
deadline to fix reporting issues in their filings. This leads us to 
believe that the value of immediate public access to the data justifies 
the risk of needing to make amendments. Accordingly, we are not 
changing the current 5-day reporting period at this time.
---------------------------------------------------------------------------

    \1527\ See, e.g., ICI Comment Letter; Dechert Comment Letter; 
Schwab Comment Letter.
---------------------------------------------------------------------------

    Eliminating the 60-day delay will provide more timely information 
to the public and greater transparency of money market fund 
information, which could promote efficiency. This disclosure could also 
make the monthly disclosure on Form N-MFP more relevant to investors, 
financial analysts, and others by improving their ability to more 
timely assess potential risks and make informed investment decisions. 
In other words, investors may be more likely to use the reported 
information because it is more timely and informative. Because, as 
discussed above, shadow prices (which were a primary reason why we 
adopted the 60-day delay in making filings public) have been disclosed 
by a number of money market funds since February 2013 apparently 
without incident, we do not believe that eliminating the 60-day delay 
would affect capital formation.
5. Operational Implications of the N-MFP Amendments
    We anticipate that fund managers would incur costs relating to 
reporting the new items of information we are requiring on Form N-MFP. 
To reduce costs, we have decided to make needed improvements to the 
form at the same time we are making amendments necessitated by the 
amendments to rule 2a-7 we are adopting.\1528\ We note that the 
clarifying amendments should not affect, or should only minimally 
affect, current filing obligations or the information content of the 
filings.
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    \1528\ One commenter noted the benefit of consolidating changes 
to the form at a single time, noting that each time they have to 
amend their systems to report new information to the Commission on 
Form N-MFP they incur significant technology related costs. See 
Dreyfus Comment Letter.
---------------------------------------------------------------------------

    As we discussed in the proposal, we expect that the operational 
costs to money market funds to report the information required in 
proposed Form N-MFP would be the same costs we discuss in the Paperwork 
Reduction Act analysis in section IV of the Release, below, and we 
requested comment on that belief.\1529\ No commenters provided specific 
data or estimates regarding the cost estimates we provided in the 
Proposing Release for the amendments to Form N-MFP, although some 
suggested that the costs of some amendments could be significant.\1530\ 
As discussed above, we have revised the final amendments from our 
proposal in a number of ways in order to reduce costs to the extent 
feasible and still achieve our goals of enhancing and improving the 
monitoring of money market fund risks. Accordingly, we continue to 
expect that the operational costs to money market funds to report the 
information required in Form N-MFP would be the same costs we discuss 
in the Paperwork Reduction Act analysis in section IV.C.3 of the 
Release, below, which have been reduced to account for the changes we 
are making from the proposal, as discussed in that section. As 
discussed in more detail in that section, we estimate that our 
amendments to Form N-MFP will result in first-year aggregate additional 
47,515 burden hours at a total time cost of $12.3 million plus $356,256 
in total external costs for all funds, and 33,540 burden hours at a 
total time cost of $8.7 million plus $356,256 in total external costs 
for all funds each year hereafter.\1531\
---------------------------------------------------------------------------

    \1529\ See Proposing Release supra note 25, at section III.H.6.
    \1530\ See, e.g., Fidelity Comment Letter.
    \1531\ See infra section IV.C.3.
---------------------------------------------------------------------------

H. Amendments to Form PF Reporting Requirements

    Today the Commission is also amending Form PF, the form that 
certain investment advisers registered with the Commission use to 
report information regarding the private funds they manage. Among other 
things, Form PF requires advisers to report certain information about 
the ``liquidity funds'' they manage, which are private funds that seek 
to maintain a stable NAV (or minimize fluctuations in their NAVs) and 
thus can resemble money market funds.\1532\ In the proposal, we noted a 
concern that some of the proposed reforms could result in assets 
shifting from registered money market funds to unregistered products 
such as liquidity funds, and we proposed amendments to Form PF to, in 
part, help the Commission and FSOC track any such potential shift in 
assets and better understand the risks associated with it.\1533\
---------------------------------------------------------------------------

    \1532\ For purposes of Form PF, a ``liquidity fund'' is any 
private fund that seeks to generate income by investing in a 
portfolio of short term obligations in order to maintain a stable 
net asset value per unit or minimize principal volatility for 
investors. See Form PF: Glossary of Terms.
    \1533\ See Proposing Release, supra note 25, at section I.
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    Most commenters who addressed the proposed PF amendments supported 
them, agreeing that they would help track such a potential shift,\1534\ 
and one commenter objected, urging the Commission to consider the 
significant costs, and questioning the potential benefits.\1535\ As 
discussed in greater detail below, we have considered the costs of 
filing this information with us, and believe that they are justified by 
the significant benefits to the Commission and FSOC in better enabling 
us to track and respond to potential shifts in assets from registered 
money market funds into unregistered alternatives. Accordingly, today 
we are adopting the Form PF amendments largely as proposed, with some 
revisions to respond to comments and correspond the reporting as much 
as possible to the

[[Page 47864]]

amendments we are making to Form N-MFP.
---------------------------------------------------------------------------

    \1534\ See, e.g., Goldman Sachs Comment Letter; ICI Comment 
Letter; Oppenheimer Comment Letter.
    \1535\ See SSGA Comment Letter.
---------------------------------------------------------------------------

    We adopted Form PF, as required by the Dodd-Frank Act,\1536\ to 
assist in the monitoring and assessment of systemic risk; to provide 
information for FSOC's use in determining whether and how to deploy its 
regulatory tools; and to collect data for use in our own regulatory 
program.\1537\ As discussed in more detail below, the Commission and 
FSOC have recognized the potentially increased significance of cash 
management products other than money market funds, including liquidity 
funds, after the money market fund reforms we are adopting today are 
effective.\1538\ Therefore, to enhance the ability to monitor and 
assess the short-term financing markets and to facilitate our oversight 
of those markets and their participants, we are today requiring large 
liquidity fund advisers--registered advisers with $1 billion or more in 
combined money market fund and liquidity fund assets--to file virtually 
the same information with respect to their liquidity funds' portfolio 
holdings on Form PF as money market funds are required to file on Form 
N-MFP.\1539\
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    \1536\ See Reporting by Investment Advisers to Private Funds and 
Certain Commodity Pool Operators and Commodity Trading Advisors on 
Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011) 
[76 FR 71128 (Nov. 16, 2011)] (``Form PF Adopting Release'') at 
section I. Form PF is a joint form between the Commission and the 
CFTC only with respect to sections 1 and 2 of the Form; section 3, 
which we are amending today, and section 4 were adopted only by the 
Commission. Id.
    \1537\ Although Form PF is primarily intended to assist FSOC in 
its monitoring obligations under the Dodd-Frank Act, we also may use 
information collected on Form PF in our regulatory program, 
including examinations, investigations, and investor protection 
efforts relating to private fund advisers. See Form PF Adopting 
Release, supra note 1536, at sections II and VI.A.
    \1538\ See infra note 1565 and accompanying text.
    \1539\ As we proposed, we are incorporating in a new Question 63 
in section 3 of Form PF the substance of virtually all of the 
questions on Part C of Form N-MFP as amended, except that we have 
modified the questions where appropriate to reflect that liquidity 
funds are not subject to rule 2a-7 (although some liquidity funds 
have a policy of complying with rule 2a-7's risk-limiting 
conditions) and have not added questions that would parallel Items 
C.7 and C.9 of amended Form N-MFP. As we proposed, we are not 
including a question that would parallel Item C.7 because that item 
relates to whether a money market fund is treating the acquisition 
of a repurchase agreement as the acquisition of the collateral for 
purposes of rule 2a-7's diversification testing; liquidity funds, in 
contrast, are not subject to rule 2a-7's diversification 
limitations, and the information on repurchase agreement collateral 
we are collecting through new Question 63(g) on Form PF would allow 
us to better understand liquidity funds' use of repurchase 
agreements and their collateral. Item C.9 asks whether a portfolio 
security is a rated first tier security, rated second tier security, 
or no longer an eligible security. As we proposed, we are not 
including a parallel question in Form PF because these concepts 
would not necessarily apply to liquidity funds, and we believe the 
additional questions on Form PF would provide sufficient information 
about a portfolio security's credit quality and the large liquidity 
fund adviser's use of credit ratings.
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    As discussed in the Proposing Release, we share the concern 
expressed by some commenters that, if the money market fund reforms we 
are adopting today cause investors to seek alternatives to money market 
funds, including private funds that seek to maintain a stable NAV but 
that are not registered with the Commission, this shift could increase 
risk by reducing transparency of the potential purchasers of short-term 
debt instruments.\1540\ We discuss in detail the potential for money 
market fund investors to reallocate their assets to alternative 
investments in section III.A.1.c.iv above.
---------------------------------------------------------------------------

    \1540\ See Proposing Release, supra note 25, n.803.
---------------------------------------------------------------------------

    The amendments that we are adopting to Form PF today are designed 
to achieve two primary goals. First, they are designed to ensure to the 
extent possible that any further money market fund reforms do not 
decrease transparency in the short-term financing markets, which will 
better enable FSOC to monitor and address any related systemic risks 
and better enable us to develop effective regulatory policy responses 
to any shift in investor assets. Second, the amendments to Form PF are 
designed to enable more effective administration of relevant regulatory 
programs even if investors do not shift their assets as a result the 
amendments we are adopting today, as the increased transparency 
concerning liquidity funds, combined with information we already 
collect on Form N-MFP, will provide a more complete picture of the 
short-term financing markets in which liquidity funds and money market 
funds both invest.
1. Overview of Proposed Amendments to Form PF
    Our Form PF amendments apply only to large liquidity fund advisers, 
which generally are SEC-registered investment advisers that advise at 
least one liquidity fund and manage, collectively with their related 
persons, at least $1 billion in combined liquidity fund and money 
market fund assets.\1541\ Large liquidity fund advisers today are 
required to file information on Form PF quarterly, including certain 
information about each liquidity fund they manage.\1542\ Under our 
final amendments, for each liquidity fund it manages, a large liquidity 
fund adviser would be required to provide, quarterly and with respect 
to each portfolio security, the following information for each month of 
the reporting period:\1543\
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    \1541\ An adviser is a large liquidity fund adviser if it has at 
least $1 billion combined liquidity fund and money market fund 
assets under management as of the last day of any month in the 
fiscal quarter immediately preceding its most recently completed 
fiscal quarter. See Form PF: Instruction 3 and Section 3. This $1 
billion threshold includes assets managed by the adviser's related 
persons, except that an adviser is not required to include the 
assets managed by a related person that is separately operated from 
the adviser. Id. An adviser's related persons include persons 
directly or indirectly controlling, controlled by, or under common 
control with the investment adviser. See Form PF: Glossary of Terms 
(defining the term ``related person'' by reference to Form ADV). 
Generally, a person is separately operated from an investment 
adviser if the adviser: (1) Has no business dealings with the 
related person in connection with advisory services the adviser 
provides to its clients; (2) does not conduct shared operations with 
the related person; (3) does not refer clients or business to the 
related person, and the related person does not refer prospective 
clients or business to the adviser; (4) does not share supervised 
persons or premises with the related person; and (5) has no reason 
to believe that its relationship with the related person otherwise 
creates a conflict of interest with the adviser's clients. See Form 
PF: Glossary of Terms (defining the term by reference to Form ADV).
    \1542\ See Form PF Instruction 3 and section 3. This in contrast 
to Form N-MFP, which is filed on a monthly basis. As discussed 
below, we currently believe that quarterly filing of this 
information most appropriately balances our need for this 
information with the burdens of filing the data, especially 
considering that large liquidity fund advisers file information 
quarterly already about the funds they advise, but do not currently 
file portfolio information about those funds.
    \1543\ See Form PF Question 63. Advisers will be required to 
file this information with their quarterly liquidity fund filings 
with data for the quarter broken down by month. Advisers will not be 
required to file information on Form PF more frequently as a result 
of today's proposal because large liquidity fund advisers already 
are required to file information each quarter on Form PF. See Form 
PF Instruction 9.
---------------------------------------------------------------------------

     The name of the issuer;
     the title of the issue;
     certain security identifiers;
     the category of investment \1544\ (e.g., Treasury debt, 
U.S. government agency debt, asset-backed commercial paper, certificate 
of deposit, repurchase agreement \1545\);
---------------------------------------------------------------------------

    \1544\ As under amended Form N-MFP, we are revising the 
investment categories form the proposal in the same way to more 
accurately reflect the investment categories commonly used today. 
See supra section III.G.2.g.
    \1545\ For repurchase agreements we are also requiring large 
liquidity fund advisers to provide additional information regarding 
the underlying collateral and whether the repurchase agreement is 
``open'' (i.e., whether the repurchase agreement has no specified 
end date and, by its terms, will be extended or ``rolled'' each 
business day (or at another specified period) unless the investor 
chooses to terminate it). As under amended Form N-MFP, we are not 
adopting the proposed CUSIP reporting requirement, and we are 
amending the proposed repurchase agreement collateral investment 
categories to better align with the categories used by the NY Fed. 
See supra section III.G.3.
---------------------------------------------------------------------------

     if the rating assigned by a credit rating agency played a 
substantial role in the liquidity fund's (or its adviser's)

[[Page 47865]]

evaluation of the quality, maturity or liquidity of the security, the 
name of each credit rating agency and the rating each credit rating 
agency assigned to the security;
     the maturity date used to calculate weighted average 
maturity;
     the maturity date used to calculate weighted average life;
     the ultimate legal maturity date; \1546\
---------------------------------------------------------------------------

    \1546\ We are changing this from ``final'' as proposed to 
``ultimate'' for the same reasons we are making this change in Form 
N-MFP. See supra note 1503.
---------------------------------------------------------------------------

     whether the instrument is subject to a demand feature, 
guarantee, or other enhancements, and information about any of these 
features and their providers;
     the value of the fund's position in the security and, if 
the fund uses the amortized cost method of valuation, the amortized 
cost value, in both cases with and without any sponsor support;
     the percentage of the liquidity fund's assets invested in 
the security;
     whether the security is categorized as a level 3 asset or 
liability on Form PF; \1547\
---------------------------------------------------------------------------

    \1547\ See Form PF Question 14. See also infra notes 1466-1470 
and accompanying and following text.
---------------------------------------------------------------------------

     whether the security is an illiquid security, a daily 
liquid asset, and/or a weekly liquid asset, as defined in rule 2a-7; 
and
     any explanatory notes.\1548\
---------------------------------------------------------------------------

    \1548\ We are also defining the following terms in Form PF, as 
proposed: conditional demand feature; credit rating agency; demand 
feature; guarantee; guarantor; and illiquid security. See Form PF: 
Glossary of Terms.
---------------------------------------------------------------------------

    These amended reporting requirements are largely the same as the 
reporting requirements for registered money market funds under amended 
Form N-MFP, with some modifications to better tailor the reporting to 
private liquidity funds. As we proposed, the final amendments will also 
remove current Questions 56 and 57 on Form PF. These questions 
generally require large liquidity fund advisers to provide information 
about their liquidity funds' portfolio holdings broken out by asset 
class (rather than security by security). We will be able to derive the 
information currently reported in response to those questions from the 
new portfolio holdings information we propose to require advisers to 
provide. The amendments will also require, as proposed, large liquidity 
fund advisers to identify any money market fund advised by the adviser 
or its related persons that pursues substantially the same investment 
objective and strategy and invests side by side in substantially the 
same positions as a liquidity fund the adviser reports on Form 
PF.\1549\
---------------------------------------------------------------------------

    \1549\ See Form PF Question 64. This question is based on the 
current definition of a ``parallel fund structure'' in Form PF. See 
Form PF: Glossary of Terms (defining a ``parallel fund structure'' 
as ``[a] structure in which one or more private funds (each, a 
`parallel fund') pursues substantially the same investment objective 
and strategy and invests side by side in substantially the same 
positions as another private fund'').
---------------------------------------------------------------------------

    After considering the comments received and the importance and 
utility of the information that would be reported on amended Form PF 
(as discussed further below), we are today adopting the Form PF 
amendments substantially as proposed. As noted above, most commenters 
who discussed the Form PF amendments generally supported them,\1550\ 
although one commenter objected, suggesting that the costs of 
compliance would outweigh the benefits.\1551\ We have made a number of 
modifications to the Form PF reporting requirement, such as removing 
lot level purchase and sale reporting, that should help minimize costs 
and ease the burden. Nonetheless, we recognize that there are costs to 
filing this information with us which are discussed in detail below, 
and believe that they are justified by the significant benefits to FSOC 
and the Commission in better enabling tracking and responding to 
potential shifts in assets from registered money market funds into 
unregistered alternatives.
---------------------------------------------------------------------------

    \1550\ See, e.g., Goldman Sachs Comment Letter; ICI Comment 
Letter; Oppenheimer Comment Letter.
    \1551\ SSGA Comment Letter.
---------------------------------------------------------------------------

    Another commenter suggested that we reorganize and consolidate the 
questions in the proposed form amendments to minimize the system 
changes necessary to file the form.\1552\ We agree with this commenter 
and the final amendments have been organized to minimize system changes 
and costs as much as possible.\1553\
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    \1552\ Comment Letter of Axiom SL (Aug. 28, 2013) (``Axiom 
Comment Letter'').
    \1553\ By eliminating lot level sale data reporting (proposed 
question 64 of Form PF) and accordingly renumbering proposed 
question 65 (parallel funds) as question 64, we have restructured 
the amendments to Form PF so that the amendments keep the same 
numbering range as the current form like the commenter suggested. 
See Form PF Question 64.
---------------------------------------------------------------------------

    Consistent with our proposed amendments to Form N-MFP, we proposed 
to require large liquidity fund advisers to provide lot level 
information about any securities purchased or sold by their liquidity 
funds during the reporting period, including sale and purchase 
prices.\1554\ As discussed in section III.G.2.c above, we have been 
persuaded by commenters that the costs of such reporting do not justify 
the potential benefits at this time, and that the data may be better 
collected on a more systematic market wide basis. Accordingly, we are 
not today adopting the proposed lot level reporting for Form PF.\1555\
---------------------------------------------------------------------------

    \1554\ See proposed Form PF Question 64. See also supra notes 
1474-1475 and accompanying text.
    \1555\ See supra note 1476 and accompanying text. Although as 
discussed above, we are not adopting the lot level reporting 
requirements generally, we are adopting a requirement to report the 
coupon or yield of the security as of the reporting date. We 
proposed to include this reporting requirement with the other lot 
level reporting questions. See proposed Form PF Question 63(o). 
Reporting this information would not require the use of lot level 
data, and thus should not pose the same difficulties as the other 
reporting requirements we are not adopting. Much like under the 
final amendments to Form N-MFP, the final Form PF amendments would 
include reporting of the coupon in the title of the issue but 
information about yield would be in a standalone question. See 
proposed Form PF Questions 63(c) and 63(o). As a result of not 
adopting question 64 about lot level sales, we are also renumbering 
proposed question 65 on parallel funds as question 64 and relabeling 
the Item as F rather than Item G. See Form PF Item F, Question 64.
---------------------------------------------------------------------------

    One commenter suggested that Form PF be filed monthly like N-MFP, 
rather than on a quarterly basis, to better align the information in 
the two forms,\1556\ although another comment opposed such a monthly 
filing requirement.\1557\ We are not requiring monthly filing of Form 
PF at this time because we believe the ongoing costs and system changes 
necessary for large liquidity funds to make such a monthly filing would 
not be justified by the utility of more frequent filing, especially in 
light of the fact that these funds currently file Form PF on a 
quarterly basis and these amendments are an enhancement to that filing. 
To require large liquidity advisers to move to a monthly reporting 
schedule would impose significant new costs, over and above the costs 
associated with the Form PF amendments we are adopting today, requiring 
these advisers to change systems and processes designed for quarterly 
reporting to a monthly schedule. As noted above, several reporting 
requirements do ask for information on a monthly basis within the 
quarterly filed Form PF, which should allow an effective comparison of 
the data to the information collected on Form N-MFP and will allow for 
effective oversight of investment activities of large liquidity 
advisers.
---------------------------------------------------------------------------

    \1556\ ICI Comment Letter.
    \1557\ Oppenheimer Comment Letter.
---------------------------------------------------------------------------

    Another commenter asked that we exempt unregistered money market 
funds from filing the Form PF amendments if the unregistered money 
market fund is exclusively owned by registered funds investing in an 
unregistered fund pursuant to rule 12d1-1 under the Investment Company

[[Page 47866]]

Act.\1558\ Rule 12d1-1 permits a registered fund to invest in an 
unregistered money market fund in excess of the limits of section 
12(d)(1) of the Act, provided, among other things, that the 
unregistered fund operates in compliance with rule 2a-7 of the Act. The 
commenter argued that because these funds are exclusively owned by 
registered funds, any shift in assets to these unregistered money 
market funds would not represent the kind of shift that the Form PF 
amendments are designed to monitor, and thus such 12d1-1 funds should 
not be required to bear the burdens of filing the Form PF amendments. 
Our amendments to Form PF are designed, in part, to allow better 
monitoring of risks associated with investments in money market 
instruments and to generally track and monitor money market asset 
flows. Exempting such funds from filing amended Form PF would not be 
consistent with this goal, and could leave a significant gap in our 
ability to monitor and track money market instrument holdings. In the 
absence of the Form PF portfolio security reporting requirements, if 
there was a shift in assets from registered money market funds that 
file portfolio holdings reports under Form N-MFP to unregistered 12d1-1 
funds that do not file such information about their holdings, we and 
FSOC would lose significant transparency and monitoring ability. 
Accordingly, we are not adopting such an exemption.
---------------------------------------------------------------------------

    \1558\ See Wells Fargo Comment Letter.
---------------------------------------------------------------------------

2. Utility of New Information, Including Benefits, Costs, and Economic 
Implications
    As discussed in the 2013 Proposing Release, the information that 
advisers must report on Form PF (both currently and under the final 
amendments) concerning their liquidity funds is designed to assist FSOC 
in assessing the risks undertaken by liquidity funds, their 
susceptibility to runs, and how their investments might pose systemic 
risks either among liquidity funds or through contagion to registered 
money market funds.\1559\ The information that advisers must report is 
intended to aid FSOC in its determination of whether and how address 
issues related to systemic risk.\1560\ Finally, the information that 
advisers must report is designed to assist FSOC and the Commission in 
assessing the extent to which a liquidity fund is being managed 
consistent with restrictions imposed on registered money market funds 
that might mitigate their likelihood of posing systemic risk.
---------------------------------------------------------------------------

    \1559\ See Form PF Adopting Release, supra note 1536, at section 
II.C.3.
    \1560\ Id.
---------------------------------------------------------------------------

    We believe, based on our staff's consultations with staff 
representing the members of FSOC, that the additional information we 
are requiring advisers to report on Form PF will assist FSOC in 
carrying out these responsibilities. Several commenters agreed that the 
Form PF amendments will assist FSOC and the Commission in these 
responsibilities.\1561\ FSOC and the Commission have recognized the 
risks that may be posed by cash management products other than money 
market funds, including liquidity funds, and the potentially increased 
significance of such products after we adopt the money market fund 
reforms we are making today.\1562\ FSOC has also stated that it and its 
members ``intend to use their authorities, where appropriate and within 
their jurisdictions, to address any risks to financial stability that 
may arise from various products within the cash management industry in 
a consistent manner,'' as ``[s]uch consistency would be designed to 
reduce or eliminate any regulatory gaps that could result in risks to 
financial stability if cash management products with similar risks are 
subject to dissimilar standards.''\1563\ We expect, therefore, that 
requiring advisers to provide additional information on Form PF will 
enhance the ability to monitor and assess risk in the short-term 
financing markets.
---------------------------------------------------------------------------

    \1561\ See Goldman Sachs Comment Letter (the PF amendments will 
``. . . assist the Financial Stability Oversight Council in 
fulfilling its responsibilities and better enable the Commission to 
develop effective regulatory policy responses to any shift in 
investor assets from money funds to private liquidity funds.''); ICI 
Comment Letter.
    \1562\ See Proposed Recommendations Regarding Money Market 
Mutual Fund Reform, Financial Stability Oversight Council [77 FR 
69455 (Nov. 19, 2012)] (the ``FSOC Proposed Recommendations''), at 7 
(``The Council recognizes that regulated and unregulated or less-
regulated cash management products (such as unregistered private 
liquidity funds) other than MMFs may pose risks that are similar to 
those posed by MMFs, and that further MMF reforms could increase 
demand for non-MMF cash management products. The Council seeks 
comment on other possible reforms that would address risks that 
might arise from a migration to non-MMF cash management products.'') 
We, too, have recognized that ``[l]iquidity funds and registered 
money market funds often pursue similar strategies, invest in the 
same securities and present similar risks.'' See Form PF Adopting 
Release, supra note 1536, at section II.A.4. See also Reporting by 
Investment Advisers to Private Funds and Certain Commodity Pool 
Operators and Commodity Trading Advisors on Form PF, Investment 
Advisers Act Release No. 3145 (Jan. 26, 2011) [76 FR 8068 (Feb. 11, 
2011)] (``Form PF Proposing Release''), at note 68 and accompanying 
text (explaining that, ``[d]uring the financial crisis, several 
sponsors of `enhanced cash funds,' a type of liquidity fund, 
committed capital to those funds to prevent investors from realizing 
losses in the funds,'' and noting that ``[t]he fact that sponsors of 
certain liquidity funds felt the need to support the stable value of 
those funds suggests that they may be susceptible to runs like 
registered money market funds'').
    \1563\ See FSOC Proposed Recommendations, supra note 1562, at 7. 
The President's Working Group on Financial Markets reached a similar 
conclusion, noting that because vehicles such as liquidity funds 
``can take on more risks than MMFs, but such risks are not 
necessarily transparent to investors . . ., unregistered funds may 
pose even greater systemic risks than MMFs, particularly if new 
restrictions on MMFs prompt substantial growth in unregistered 
funds.'' See PWG Report, supra note 506, at 21. The potentially 
increased risks posed by liquidity funds were of further concern 
because these risks ``are difficult to monitor, since [unregistered 
cash management products like liquidity funds] provide far less 
market transparency than MMFs.'' Id. at 35.
---------------------------------------------------------------------------

    We are requiring only large liquidity fund advisers to report this 
additional information for the same reason that we previously 
determined to require only larger private fund advisers to provide more 
comprehensive information on their respective industries on Form PF: 
because a relatively small group of advisers represents a substantial 
portion of the assets.\1564\ Based on information filed on Form PF and 
Form ADV, as of the end of 2013, we estimate that there were 
approximately 24 large liquidity fund advisers (out of 43 total 
advisers that advise at least one liquidity fund), with their aggregate 
liquidity fund assets under management representing approximately 91% 
of liquidity fund assets managed by all advisers registered with the 
Commission.
---------------------------------------------------------------------------

    \1564\ See Form PF Adopting Release, supra note 1536, at n.88 
and accompanying text.
---------------------------------------------------------------------------

    This threshold also should minimize the costs of our amendments 
because large liquidity fund advisers already are required to make 
quarterly reports on Form PF and, as of the end of 2013, virtually all 
either advise a money market fund or have a related person that advises 
a money market fund. Requiring large liquidity fund advisers to provide 
substantially the same information required by Form N-MFP therefore may 
reduce the burdens associated with our amendments, which we discuss 
below, because large liquidity fund advisers generally already have (or 
may be able to readily obtain access to) the systems, service 
providers, and/or staff necessary to capture and report the same types 
of information for reporting on Form N-MFP. These same systems, service 
providers, and/or staff may allow large liquidity fund advisers to 
comply with our changes to Form PF more efficiently and at a reduced 
cost than if we were to require advisers to report information that 
differed materially from that which the advisers must file on Form N-
MFP.

[[Page 47867]]

    In addition to our concerns about the ability to assess risks 
associated with money market fund investments, we also are concerned 
about losing transparency regarding money market fund investments that 
may shift into liquidity funds as a result of the other reforms we are 
adopting today and our ability effectively to formulate policy 
responses to such a shift in investor assets.\1565\ We noted in the 
proposal that a run on liquidity funds could spread to money market 
funds because, for example, both types of funds often invest in the 
same securities as noted above.\1566\ Our ability to formulate a policy 
response to address this risk could be diminished if we had less 
transparency concerning the portfolio holdings of liquidity funds as 
compared to money market funds, and thus were not able as effectively 
to assess the degree of correlation between various funds or groups of 
funds that invest in the short-term financing markets, or if we were 
unable proactively to identify funds that own distressed securities. 
Several commenters agreed that the Form PF amendments would reduce the 
chance that these reforms will diminish transparency in the short-term 
financing markets.\1567\ Indeed, Form PF, by defining large liquidity 
fund advisers subject to more comprehensive reporting requirements as 
advisers with $1 billion in combined money market fund and liquidity 
fund assets under management today reflects the similarities between 
money market funds and liquidity funds and the need for comprehensive 
information concerning advisers' management of large amounts of short-
term assets through either type of fund. The need for this 
comprehensive data will be heightened if money market fund investors 
shift their assets to liquidity funds in response to the amendments we 
are adopting today.
---------------------------------------------------------------------------

    \1565\ See, e.g., DERA Study, supra note 24, at section 4.C 
(analysis of investment alternatives to money market funds, 
considering, among other issues, the potential for investors to 
shift their assets to money market fund alternatives, including 
liquidity funds, in response to further money market fund reforms 
and certain implications of a shift in investor assets).
    \1566\ Liquidity funds may generally have a higher percentage of 
institutional shareholders than money market funds because liquidity 
funds rely on exclusions from the Investment Company Act's 
definition of ``investment company'' provided by section 3(c)(1) or 
3(c)(7) of that Act. See section 202(a)(29) of the Advisers Act 
(defining the term ``private fund'' to mean an issuer that would be 
an investment company, as defined in section 3, but for section 
3(c)(1) or 3(c)(7) of that Act). Funds relying on those exclusions 
sell their shares in private offerings which in many cases are 
restricted to investors who are ``accredited investors'' as defined 
in rule 501(a) under the Securities Act. Investors in funds relying 
on section 3(c)(7), in addition, generally must be ``qualified 
purchasers'' as defined in section 2(a)(51) of the Investment 
Company Act. Having a larger institutional shareholder base may 
increase the potential for a run to develop at a liquidity fund. As 
discussed in greater detail in section II.C of this Release, 
redemption data from the financial crisis suggest that some 
institutional money market fund investors are likely to redeem from 
distressed money market funds more quickly than other investors and 
to redeem a greater percentage of their holdings. This may be 
indicative of the way institutional investors in liquidity funds 
would behave, particularly liquidity funds that more closely 
resemble money market funds.
    \1567\ See, e.g., Goldman Sachs Comment Letter (``Finally, GSAM 
generally supports the amendments to Form PF, which will ensure that 
further money market fund reforms do not decrease transparency in 
the short-term financing markets . . .'); ICI Comment Letter.
---------------------------------------------------------------------------

    Finally, this increased information on liquidity funds managed by 
large liquidity fund advisers also will be useful even absent a shift 
in money market fund investor assets resulting from these reforms. 
Collecting this information about these liquidity funds will, when 
combined with information collected on Form N-MFP, provides a more 
complete picture of the short-term financing markets, allowing the SEC 
and FSOC to more effectively fulfill our respective statutory mandates. 
For example, we discuss the contagion risk above. But it may be 
difficult to assess this risk fully today without more detailed 
information about the portfolio holdings of the liquidity funds managed 
by advisers who manage substantial amounts of short-term investments 
and the ability to combine that data with the information we collect on 
Form N-MFP.
    For example, if a particular security or issuer were to come under 
stress, without these amendments, our staff would be unable to 
determine which liquidity funds, if any, held that security, much like 
before we adopted Form N-MFP for registered money market funds. This is 
because advisers currently are required only to provide information 
about the types of assets their liquidity funds hold, rather than the 
individual positions.\1568\ Our staff could see the aggregate value of 
all of a liquidity fund's positions in unsecured commercial paper 
issued by non-U.S. financial institutions, for example, but could not 
tell whether the fund owned commercial paper issued by any particular 
non-U.S. financial institution. If a particular institution were to 
come under stress, the aggregated information available today would not 
allow us or our staff to determine the extent to which liquidity funds 
were exposed to the financial institution; lacking this information, 
neither we nor our staff would be able as effectively to assess the 
risks across the liquidity fund industry and, by extension, the short-
term financing markets.
---------------------------------------------------------------------------

    \1568\ See Form PF Question 56 (requiring advisers to provide 
exposures and maturity information, by asset class, for liquidity 
fund assets under management); Form PF Question 57 (requiring 
advisers to provide the asset class and percent of the fund's NAV 
for each open position that represents 5% or more of the fund's 
NAV).
---------------------------------------------------------------------------

    Position level information for liquidity funds managed by large 
liquidity fund advisers also will allow our staff more efficiently and 
effectively to identify longer-term trends in the industry and at 
particular liquidity funds or advisers. The aggregated position 
information that advisers provide today may obscure the level of risk 
in the industry or at particular advisers or liquidity funds that, if 
more fully understood by our staff, could allow the staff to more 
efficiently and effectively target our examinations efforts of these 
advisers, and could better inform the staff's policy recommendations.
    As we discussed in the proposal, our experience with the portfolio 
information money market funds report on Form N-MFP--which was limited 
at the time we adopted Form PF--has proved useful in our regulation of 
money market funds in these and other ways and has informed the 
amendments we are adopting today.\1569\ During the 2011 Eurozone debt 
crisis, for example, we and our staff benefitted from the ability to 
determine which money market funds had exposure to specific financial 
institutions (and other positions) and from the ability to see how 
funds changed their holdings as the crisis unfolded. This information 
was useful in assessing risk across the industry and at particular 
money market funds. Given the similarities between money market funds 
and liquidity funds and the possibility for risk to spread between the 
types of funds, our experience with portfolio information filed on Form 
N-MFP suggests that receiving virtually the same information for 
liquidity funds managed by large liquidity fund advisers will provide 
significant benefits to oversight efforts.
---------------------------------------------------------------------------

    \1569\ Money market funds were required to begin filing 
information on Form N-MFP by December 7, 2010. See 2010 Adopting 
Release, supra note 17 at n.340 and accompanying text. Form PF was 
proposed shortly thereafter on January 26, 2011, and adopted on 
October 31, 2011. See Form PF Proposing Release, supra note 1562; 
Form PF Adopting Release, supra note 1536.
---------------------------------------------------------------------------

    For all of these reasons and as discussed above, we expect that 
requiring large liquidity fund advisers to report their liquidity 
funds' portfolio information on Form PF as we are requiring today will 
provide substantial benefits for us and FSOC, including positive 
effects on efficiency and capital

[[Page 47868]]

formation. As we explained in more detail when we initially adopted 
Form PF, requiring advisers to report on Form PF is intended to 
positively affect efficiency and capital formation, in part by 
enhancing our ability to evaluate and develop regulatory policies and 
to more effectively and efficiently protect investors and maintain 
fair, orderly, and efficient markets.\1570\
---------------------------------------------------------------------------

    \1570\ See generally Form PF Adopting Release, supra note 1536, 
at section V.A (explaining that, in addition to assisting FSOC 
fulfill its mission, ``we expect this information to enhance [our] 
ability to evaluate and develop regulatory policies and improve the 
efficiency and effectiveness of our efforts to protect investors and 
maintain fair, orderly, and efficient markets''). We explained, for 
example, that Form PF data was designed to allow us to more 
efficiently and effectively target our examination programs and, 
with the benefit of Form PF data, to better anticipate regulatory 
problems and the implications of our regulatory actions, and thereby 
to increase investor protection. See id. We also explained that Form 
PF data could have a positive effect on capital formation because, 
as a result of the increased transparency to regulators made 
possible by Form PF, private fund advisers might assess more 
carefully the risks associated with particular investments and, in 
the aggregate, allocate capital to investments with a higher value 
to the economy as a whole. See id. at text accompanying and 
following n.494.
---------------------------------------------------------------------------

    The additional information on Form PF should better inform our 
understanding of the activities of liquidity funds and their advisers 
and the operation of the short-term financing markets, including risks 
that may arise in liquidity funds and harm other participants in those 
markets or those who rely on them--including money market funds and 
their shareholders and the companies and governments that seek 
financing in the short-term financing markets. The additional 
information that advisers will report on Form PF, particularly when 
combined with similar data reported on Form N-MFP, therefore should 
enhance our ability to evaluate and develop regulatory policies and 
enable us to more effectively and efficiently protect investors and 
maintain fair, orderly, and efficient markets.
    As discussed in detail in the proposal, we recognize that large 
liquidity fund advisers may have concerns about reporting information 
about their liquidity funds' portfolio holdings and may regard this as 
commercially sensitive information, but noted that such data may be not 
be as sensitive in this context when compared to other private funds, 
largely because of the types of securities that liquidity funds invest 
in.\1571\ No commenters on the proposed Form PF amendments objected to 
the amendments on the basis of the information being sensitive or 
proprietary. As we discussed in the Form PF Adopting Release, we do not 
intend to make public Form PF information identifiable to any 
particular adviser or private fund, and indeed, the Dodd-Frank Act 
amended the Advisers Act to preclude us from being compelled to reveal 
this information except in very limited circumstances.\1572\
---------------------------------------------------------------------------

    \1571\ See Proposing Release, supra note 25, at Section I.2.
    \1572\ See Form PF Adopting Release, supra note 1536, at section 
II.D.
---------------------------------------------------------------------------

    We note that although the increased transparency to regulators 
provided by our amendments could positively affect capital formation as 
discussed above, increased transparency, as we observed when adopting 
Form PF, also may have a negative effect on capital formation if it 
increases advisers' aversion to risk and, as a result, reduces 
investment in enterprises that may expose the fund to more risk but be 
beneficial to the economy as a whole.\1573\ Nevertheless, the 
information collected generally will be non-public, it should not 
affect large liquidity fund advisers' ability to raise capital. To the 
extent that our amendments were to cause changes in investment 
allocations that lead to reduced economic outcomes in the aggregate, 
our amendments may result in a negative effect on capital available for 
investment.
---------------------------------------------------------------------------

    \1573\ See id. at text accompanying and following n.537.
---------------------------------------------------------------------------

    We also do not believe that our amendments to Form PF will have a 
significant effect on competition because the information that advisers 
report on Form PF, including the new information we are requiring, 
generally will be non-public and similar types of advisers will have 
comparable burdens under the form as we propose to amend it.\1574\ We 
do not believe the amendments' effect on capital formation discussed 
above will be significant, again because the information collected 
generally will be non-public and, therefore, should not affect large 
liquidity fund advisers' ability to raise capital.\1575\
---------------------------------------------------------------------------

    \1574\ See id. at text accompanying and following n.535.
    \1575\ See id.
---------------------------------------------------------------------------

j. Alternatives Considered
    We considered whether we and FSOC would be able as effectively to 
carry out our respective missions as discussed above using the 
information large liquidity fund advisers currently must file on Form 
PF. But as we discuss above, we expect that requiring large liquidity 
funds advisers to provide portfolio holdings information will provide a 
number of benefits and will allow better understanding of the 
activities of large liquidity fund advisers and their liquidity funds 
than would be possible with the higher level, aggregate information 
that advisers file today on Form PF (e.g., the ability to determine 
which liquidity funds own a distressed security).
    For the reasons discussed above we also considered, but ultimately 
chose not to adopt, changes requiring advisers to file portfolio 
information about their liquidity funds that differs from the 
information money market funds are required to file on Form N-MFP. 
Generally, given our experience with Form N-MFP data, we believe that 
not only could different portfolio holdings information be less useful 
than that required by Form N-MFP, it also could be more difficult to 
combine with Form N-MFP data. Requiring advisers to file on Form PF 
virtually the same information money market funds file on Form N-MFP 
also should be more efficient for advisers and reduce the costs of 
reporting from a systems standpoint, because many large liquidity 
advisers also manage money market funds and already have the systems in 
place to report the data.
    Finally, we considered whether to require large liquidity fund 
advisers to provide their liquidity funds' portfolio information more 
frequently than quarterly, but as discussed in greater detail above, 
chose not to adopt this requirement.\1576\ Monthly filings, for 
example, would provide more current data and could facilitate our 
combining the new information with the information money market funds 
file on Form N-MFP (which money market funds file each month). We 
balanced the potential benefits of more frequent reporting against the 
costs it would impose and believe, at this time, that quarterly 
reporting is more appropriate.\1577\
---------------------------------------------------------------------------

    \1576\ See supra note 1556.
    \1577\ Large liquidity fund advisers already are required to 
make quarterly filings on Form PF. See Form PF Instruction 9. 
Requiring large liquidity fund advisers to provide the new portfolio 
holdings information on a quarterly basis should therefore be more 
cost effective for the advisers.
---------------------------------------------------------------------------

k. Operational Costs
    We recognize, however, that our amendments to Form PF, while 
limited to large liquidity fund advisers, will create some costs for 
those advisers, and also could affect competition, efficiency, and 
capital formation. We continue to expect that the operational costs to 
advisers to report the new information will be the same costs we 
discuss in the Paperwork Reduction Act analysis in section IV.H.3 
below, as reduced by the lower costs associated with the changes

[[Page 47869]]

we are making from the proposal discussed in that section. As discussed 
in more detail in that section, we estimate that our amendments to Form 
PF would result in an annual aggregate additional burden per large 
liquidity fund adviser of 298 burden hours, at a total time cost of 
$79,566, and external costs of $17,104. This will result in increased 
aggregate burden hours across all large liquidity fund advisers of 
8,344 burden hours,\1578\ at a time cost of $2,227,848, and $478,912 in 
external costs.\1579\
---------------------------------------------------------------------------

    \1578\ This estimate is based on the following calculation: 298 
estimated additional burden hours per large liquidity fund adviser x 
28 large liquidity fund advisers = 8,344.
    \1579\ See infra section IV.H.3.
---------------------------------------------------------------------------

    These estimates are based on our estimates of the paperwork burdens 
associated with our final amendments to Form N-MFP because advisers 
will be required to file on Form PF virtually the same information 
about their large liquidity funds as money market funds will be 
required to file on Form N-MFP as we are amending it. We therefore 
expect that the paperwork burdens associated with Form N-MFP (as we are 
amending it) are representative of the costs that large liquidity fund 
advisers will incur as a result of our amendments to Form PF. We note, 
however, that this is a conservative approach for several reasons. 
Large liquidity fund advisers may experience economies of scale 
because, as discussed above, virtually all of them advise a money 
market fund or have a related person that advises a money market fund. 
Large liquidity fund advisers therefore likely will pay a combined 
licensing fee or fee to retain the services of a third party that 
covers filings on both Forms PF and Form N-MFP. We expect that this 
combined fee likely will be less than the combined estimated Paperwork 
Reduction Act costs associated with Forms PF and Form N-MFP.

I. Diversification

    We are amending the rule 2a-7 diversification provisions as 
proposed, with certain modifications as discussed below. Under the 
current rule, money market funds generally must limit their investments 
in: (i) The securities of any one issuer of a first tier security 
(other than with respect to government securities and securities 
subject to a guarantee issued by a non-controlled person) to no more 
than 5% of fund assets; and (ii) securities subject to a demand feature 
or a guarantee to no more than 10% of fund assets from any one 
provider.\1580\ Under our diversification amendments, we are requiring 
that money market funds treat certain entities that are affiliated with 
each other as single issuers when applying rule 2a-7's 5% issuer 
diversification limit.\1581\ As discussed further below, the amended 
diversification provisions exclude certain majority equity owners of 
asset-backed commercial paper (``ABCP'') conduits from the requirement 
to aggregate affiliates for purposes of the 5% issuer diversification 
limit. The diversification provisions that we are adopting today also 
require that a money market fund treat the sponsors of asset-backed 
securities (``ABS'') as guarantors subject to rule 2a-7's 10% 
diversification limit applicable to guarantees and demand features, 
unless the fund's board makes certain findings.\1582\ Lastly, we have 
decided to adopt (i) as proposed, the removal of the twenty-five 
percent basket, under which as much as 25% of the value of securities 
held in a money market fund's portfolio may be subject to guarantees or 
demand features from a single institution for money market funds other 
than tax-exempt money market funds, and (ii) the reduction to 15%, 
rather than the elimination of, the twenty-five percent basket for tax-
exempt money market funds, including single state money market funds. 
Under our amendments, up to 15% (as compared to 10%, which was 
proposed) of the value of securities held in a tax-exempt money market 
fund's portfolio may be subject to guarantees or demand features from a 
single institution.\1583\
---------------------------------------------------------------------------

    \1580\ See current rules 2a-7(c)(4)(i) and (c)(4)(iii). The 
current rule also provides a ``twenty-five percent basket,'' under 
which as much as 25% of the value of securities held in a fund's 
portfolio may be subject to guarantees or demand features from a 
single institution. See current rule 2a-7(c)(4)(iii). A money market 
fund may currently use a twenty-five percent basket to invest in 
demand features or guarantees that are first tier securities issued 
by non-controlled persons. See id.
    \1581\ See rule 2a-7(d)(3)(ii)(F).
    \1582\ See rule 2a-7(a)(18)(ii) (definition of guarantee).
    \1583\ See rule 2a-7(d)(3)(iii)(B). We note that amended rule 
2a-7(d)(3)(iii)(B), which provides a basket for tax-exempt money 
market funds, has been revised from current rule 2a-7(c)(4)(iii). 
The revised rule text is intended to be a clarifying change from the 
current rule text and is not designed to have any substantive effect 
other than to reduce the twenty-five percent basket to a fifteen 
percent basket for tax-exempt funds.
---------------------------------------------------------------------------

1. Treatment of Certain Affiliates for Purposes of Rule 2a-7's Five 
Percent Issuer Diversification Requirement
    As noted above, today we are amending rule 2a-7's diversification 
provisions to provide that money market funds limit their exposure to 
affiliated groups, rather than to discrete issuers.\1584\ As discussed 
in the Proposing Release, financial distress at an issuer can quickly 
spread to affiliates and the valuations and creditworthiness of the 
issuer may depend, in large part, on the financial well-being of other 
firms within the same corporate family.\1585\ By requiring 
diversification of exposure to entities that are affiliated with each 
other, the rule mitigates credit risk to a money market fund by 
limiting the fund from assuming a concentrated amount of risk in a 
single economic enterprise. Commenters generally supported the proposal 
to treat certain entities that are affiliated with each other as single 
issuers when applying rule 2a-7's 5% issuer diversification 
limit.\1586\ Commenters also confirmed our understanding that money 
market funds today generally attempt to identify and measure their 
exposure to entities that are affiliated with each other as part of 
their risk management processes.\1587\ Based on the comments we 
received, we continue to believe that requiring diversification of 
exposure to affiliated entities will mitigate a money market fund's 
credit risk.
---------------------------------------------------------------------------

    \1584\ As discussed below, entities are ``affiliated'' with one 
another if one controls the other entity or is controlled by it or 
is under common control with it. ``Control'' for this purpose, is 
defined to mean ownership of more than 50% of an entity's voting 
securities. Rule 2a-7(d)(3)(ii)(F)(1). We note that we are not 
amending rule 2a-7's diversification requirements to require that 
money market funds treat affiliates as a single entity for purposes 
of the 10% diversification limit on investments in securities 
subject to a demand feature or guarantee.
    \1585\ See Proposing Release supra note 25, at section III.J.1.
    \1586\ See, e.g., ICI Comment Letter; U.S. Bancorp Comment 
Letter; Goldman Sachs Comment Letter; Dreyfus Comment Letter; Wells 
Fargo Comment Letter; Vanguard Comment Letter.
    \1587\ See, e.g., ICI Comment Letter; U.S. Bancorp Comment 
Letter; Goldman Sachs Comment Letter; Dreyfus Comment Letter; 
Vanguard Comment Letter; Federated II Comment Letter.
---------------------------------------------------------------------------

a. Definition of Control
    We are adopting as proposed that, for purposes of applying the 
amended rule, entities are affiliated with one another if one controls 
the other entity or is controlled by it or is under common control with 
it.\1588\ For this purpose only, control is defined to mean ownership 
of more than 50% of an entity's voting securities.\1589\ By using a 
more than 50% test (i.e., majority ownership), we continue to believe 
the alignment of economic interests and risks of the affiliated 
entities is sufficient to justify aggregating their

[[Page 47870]]

exposures for purposes of rule 2a-7's 5% issuer diversification limit. 
As discussed in the Proposing Release, we considered several 
alternative approaches to delineating a group of affiliates. We 
requested comment as to whether we should use any of these alternative 
approaches or whether there are other approaches we should consider. A 
number of commenters supported the proposed majority ownership 
test.\1590\ Some commenters also agreed with us that other approaches 
to defining control could limit a money market fund's investment 
flexibility unnecessarily.\1591\ One commenter noted that while the 
proposed definition of control would not generally limit money market 
funds' investment flexibility or be difficult to apply, incorporating 
the definition of a ``majority-owned subsidiary'' from section 2(a)(24) 
of the Investment Company Act, rather than introducing a new definition 
of control, would be more desirable.\1592\ Under the section 2(a)(24) 
definition, a ``majority-owned subsidiary'' of a person means a company 
50% or more of the outstanding voting securities of which are owned by 
such person, or by a company which is a majority-owned subsidiary of 
such person.\1593\ We note however, that the section 2(a)(24) 
definition is not in itself a definition of control and only includes 
the circumstances in which an entity is a majority-owned subsidiary of 
another entity. Although we requested comment as to whether we should 
incorporate the section 2(a)(24) definition of majority-owned 
subsidiaries into our definition of control, we believe that a more 
than 50% test is indicative of circumstances in which an entity 
controls another entity or is controlled by it as opposed to 
circumstances in which an entity owns half of another entity's voting 
securities. The definition of control we are adopting today is used to 
define entities that are required to be consolidated for purposes of 
our diversification requirements. Therefore, we believe it is 
appropriate to look at the circumstances in which entities generally 
are required to be consolidated because they represent exposure to a 
single economic entity. We continue to believe that the approach we are 
adopting today is preferable because it is consistent with various 
circumstances under which affiliated entities must be consolidated on 
financial statements prepared in accordance with GAAP, under which a 
parent generally must consolidate its majority-owned 
subsidiaries.\1594\ These majority-owned subsidiaries generally must be 
consolidated under GAAP because the operations of the group are 
sufficiently related such that they are presented under GAAP as if they 
``were a single economic entity.''
---------------------------------------------------------------------------

    \1588\ See rule 2a-7(d)(3)(ii)(F).
    \1589\ See id. We note that the definition of control we are 
adopting today with respect to the treatment of affiliates for 
purposes of issuer diversification under rule 2a-7 is not the same 
as the definition of control in section 2(a)(9) of the Investment 
Company Act.
    \1590\ See, e.g., ABA Business Law Section Comment Letter; Wells 
Fargo Comment Letter.
    \1591\ See ICI Comment Letter (stating that a definition of 
control that would include more attenuated relationships or lower 
ownership levels could limit a money market fund's investment 
opportunities to issuers whose risks are not necessarily correlated 
to the issuer's parents). See also Wells Fargo Comment Letter 
(supporting the decision to not require money market funds to treat 
as affiliates all entities that must be consolidated on a balance 
sheet).
    \1592\ See ICI Comment Letter.
    \1593\ See Section 2(a)(24).
    \1594\ See, e.g., FASB ASC, supra note 425, at paragraph 810-10-
15-8 (``The usual condition for a controlling financial interest is 
ownership of a majority voting interest, and, therefore, as a 
general rule ownership by one reporting entity, directly or 
indirectly, of more than 50 percent of the outstanding voting shares 
of another entity is a condition pointing toward consolidation.'').
---------------------------------------------------------------------------

b. Majority Equity Owners of Asset-Backed Commercial Paper Conduits
    We requested comment as to whether the exposures to risks of 
issuers that would be treated as affiliated under our proposal would be 
highly correlated and whether our proposed approach to delineating 
affiliates was too broad or too narrow.\1595\ After further 
consideration, based on the comments we received in response to our 
proposal, we recognize that the majority ownership definition of 
control that we proposed may encompass certain affiliated parties that 
are not part of the same economic enterprise and therefore should be 
excluded from the definition. Accordingly, as discussed further below, 
the majority ownership definition of control that we are adopting today 
excludes certain equity owners of ABCP conduits from the requirement to 
aggregate affiliates for purposes of the 5% issuer diversification 
limit.\1596\
---------------------------------------------------------------------------

    \1595\ See Proposing Release, supra note 25, at section III.J.1.
    \1596\ One commenter suggested that we also exclude TOBs from 
the amended rule, noting that under certain circumstances liquidity 
providers may own more than 50 percent of the securities issued by a 
TOB but may not be part of the same corporate family. See SIFMA 
Comment Letter. We believe that excluding TOBs from the amended rule 
is unnecessary in light of the fact that an owner of TOB-issued 
securities would not likely have voting rights in a TOB trust and 
therefore would not fall under the definition of affiliate for 
purposes of the 5% issuer diversification limit. We note that the 
Volcker Rule may likely have an impact on TOB program structures.
---------------------------------------------------------------------------

    Without an exclusion from the amended rule, money market funds 
would be required to aggregate their exposure to the ABCP conduits and 
to the equity owners of ABCP conduits for purposes of the 5% issuer 
diversification limit. One commenter argued that we should exclude 
equity owners of ABCP conduits from the proposed affiliate aggregation 
rule to allow money market funds to treat each special purpose entity 
(``SPE'') issuing ABCP as a separate issuer for purposes of issuer 
diversification, even if the same entity or affiliate group controls 
the voting equity of multiple ABCP conduits.\1597\ This commenter noted 
that voting equity of an ABCP conduit is typically almost entirely 
owned by an otherwise unaffiliated third party that is in the business 
of owning such entities and providing management and administrative 
services, and not by the ABCP conduit sponsor, and that requiring money 
market funds to aggregate conduits on the basis of common equity 
ownership would unnecessarily restrict the amount of ABCP available for 
purchase by money market funds.\1598\ We agree that if certain 
independent equity owners are simply providing services in a management 
and administrative capacity and are concentrated in the ABCP industry, 
failure to provide an exception to those equity owners could 
unnecessarily limit ABCP investment or reduce economies of scale in 
ABCP administration with no diversification benefit to money market 
funds.
---------------------------------------------------------------------------

    \1597\ Comment Letter of Structured Finance Industry Group 
(Sept. 17, 2013) (``SFIG Comment Letter'').
    \1598\ Id.
---------------------------------------------------------------------------

    The purpose of treating affiliated parties as a single issuer when 
applying the diversification limit is to mitigate risk to a money 
market fund by limiting the fund from assuming a concentrated amount of 
risk in a single economic enterprise, not to limit the exposure to 
entities that might fall under the definition of ``affiliated'' but are 
otherwise independent and not part of the same economic enterprise. In 
light of these considerations, we have decided to provide an exception 
from the amended rule for certain independent equity owners of ABCP 
conduits. The commenter that argued we should exclude equity owners of 
ABCP conduits recommended that we provide that money market funds need 
not aggregate an ABCP conduit and its independent equity owners if 
owning equity interests in SPEs is a primary line of business of such 
owner.\1599\ This commenter also noted that the voting equity of an 
ABCP conduit is typically owned by an unaffiliated third party that 
provides certain management services to the ABCP conduit. In

[[Page 47871]]

addition, this commenter suggested limiting the exception to those 
equity owners that are not originating qualifying assets to the ABCP 
conduits.\1600\ We agree with the commenter's statements above and we 
are providing an exception, which we expect addresses the concerns 
regarding the current marketplace organization of ABCP conduits. 
Accordingly, under the exception, money market funds will be subject to 
the 5% issuer diversification limit on the ABCP conduit and any ten 
percent obligors,\1601\ but need not aggregate an ABCP conduit and its 
independent equity owners for purposes of the 5% issuer diversification 
limit provided that a primary line of business of those independent 
equity owners is owning equity interests in SPEs and providing services 
to SPEs, the independent equity owners' activities with respect to the 
SPEs are limited to providing management or administrative services, 
and no qualifying assets of the ABCP conduit were originated by the 
equity owners.\1602\ Subject to the exception for certain majority 
equity owners of ABCP conduits, we continue to believe that the 
majority ownership test appropriately requires a money market fund to 
limit its exposure to particular economic enterprises without 
unnecessarily limiting a fund's investments.
---------------------------------------------------------------------------

    \1599\ Id.
    \1600\ Id.
    \1601\ See infra note 1603 (definition of ten percent obligor).
    \1602\ See rule 2a-7(d)(3)(ii)(F)(2).
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c. Treatment of Affiliates for Ten Percent Obligor Determinations
    One commenter expressed concern regarding the impact of the 
proposed diversification amendments on the treatment of ten percent 
obligors \1603\ for ABS.\1604\ The commenter noted that currently each 
ABS issued by a separate entity is analyzed separately, and an ABCP 
conduit typically represents to money market funds that it does not 
intend to purchase any ABS which would result in a ten percent 
obligor.\1605\ The commenter expressed concern that, if the proposed 
treatment of affiliates is made applicable to the ten percent obligor, 
it is likely that some of the ABS held by an ABCP conduit will need to 
be aggregated, resulting in ten percent obligors.\1606\ This commenter 
argued that such a result may create legal and practical issues for 
sponsors, given confidentiality restrictions that may prevent funds 
from determining which obligors are affiliated, and may not reflect 
actual risks if such obligors are not part of the same economic 
enterprise.\1607\ In addition, this commenter noted that conduits may 
restructure their programs to avoid having consolidated affiliate ten 
percent obligors, which would potentially reduce funding capacity to 
those obligors.\1608\
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    \1603\ Generally, ABS acquired by a money market fund (``primary 
ABS'') are deemed to be issued by the SPE that issued the ABS (e.g., 
the trust, corporation, entity organized for sole purpose of issuing 
the ABS). See rule 2a-7(d)(3)(ii)(D)(1). However, if obligations of 
any issuer constitute 10% or more of the qualifying assets of the 
primary ABS, that issuer will be deemed to be the issuer of that 
portion of the primary ABS that is comprised of its obligations 
(``ten percent obligor''). See rule 2a-7(d)(3)(ii)(D)(1)(i).
    \1604\ See SFIG Comment Letter. See also Memorandum from the 
Division of Investment Management regarding a September 10, 2013 
meeting with representatives of the Structured Finance Industry 
Group.
    \1605\ Id.
    \1606\ Id.
    \1607\ Id.
    \1608\ Id.
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    We acknowledge that the application of our diversification 
amendments on the treatment of ten percent obligors may cause certain 
sponsors to conduct additional due diligence and also may mean that 
some conduits would have to restructure their programs, which could 
result in reduced funding capacity from money market funds. However, we 
understand that these affiliated obligors generally represent exposure 
to the same economic enterprise. Therefore, after further 
consideration, we continue to believe that requiring aggregation of 
obligors in determining whether an obligor is a ten percent obligor 
reflects our objective.\1609\ We continue to believe that by using a 
more than 50% test, the alignment of economic interests and risks of 
affiliated obligors is sufficient to justify aggregating their 
exposures for purposes of applying rule 2a-7's 5% issuer 
diversification limit. Requiring aggregation of obligors in determining 
ten percent obligors will require diversification of exposure to 
obligors that are affiliated with each other, thereby mitigating the 
credit risk to a money market fund when taking a highly concentrated 
position in ABS with affiliated obligors.
---------------------------------------------------------------------------

    \1609\ See rule 2a-7(d)(3)(ii)(F)(3).
---------------------------------------------------------------------------

d. Issuers of Securities Subject to a Guarantee Issued by a Non-
Controlled Person
    Under current rule 2a-7, a money market fund is not required to be 
diversified with respect to issuers of securities that are subject to a 
guarantee issued by a non-controlled person.\1610\ Under our proposed 
rule 2a-7 amendments, non-ABS that are subject to a guarantee by a non-
controlled person would be subject to rule 2a-7's 10% diversification 
limit applicable to guarantees and demand features but would continue 
to have no issuer diversification limit. However, we proposed that a 
presumed guarantee issued by a sponsor of an SPE with respect to ABS 
would no longer qualify as a guarantee issued by a non-controlled 
person, thereby creating a disparity between treatment because ABS and 
non-ABS would be treated differently under the proposal.\1611\ 
Therefore, as proposed, ABS would be subject to both a 5% issuer 
diversification limit on the SPE and any ten percent obligors, and a 
10% limit on the sponsor as the presumed guarantor. One commenter 
mentioned this potential discrepancy and argued that the portion of ABS 
presumed to be guaranteed by the sponsor should not be subject to the 
issuer diversification limitations and thus treated parallel with other 
money market fund portfolio securities subject to a guarantee issued by 
a non-controlled person.\1612\ After further consideration of this 
disparity in treatment, we preliminarily believe that the approach that 
most advances our diversification reform goal of limiting concentrated 
exposure of money market funds to particular economic enterprises is to 
eliminate the exclusion from the 5% issuer diversification requirement 
for both ABS and non-ABS that are subject to a guarantee by a non-
controlled person. Therefore, instead of creating a disparity in 
treatment between ABS and non-ABS by adopting the proposed definition 
of a guarantee issued by a non-controlled person, we are retaining the 
current definition of a guarantee issued by a non-controlled person, 
and we are proposing in our Release issued today regarding removing 
references to credit ratings in rule 2a-7 that the 5% issuer 
diversification limit be imposed on all

[[Page 47872]]

securities with a guarantee by a non-controlled person.\1613\
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    \1610\ Current rule 2a-7(a)(18). A guarantee issued by a non-
controlled person means a guarantee issued by: (i) a person that, 
directly or indirectly, does not control, and is not controlled by 
or under common control with the issuer of the security subject to 
the guarantee (control for these purposes means ``control'' as 
defined in section 2(a)(9); or (ii) a sponsor of an SPE with respect 
to ABS. Current rule 2a-7(a)(18)(i) and (ii).
    \1611\ See proposed (Fees and Gates) rule 2a-7(a)(17). Under the 
proposed rule, ABS that are subject to a guarantee by a non-
controlled person that meets the definition in current rule 2a-
7(a)(18)(i) would continue to have no issuer diversification limit.
    \1612\ Memorandum from the Division of Investment Management 
regarding a September 10, 2013 meeting with representatives of the 
Structured Finance Industry Group.
    \1613\ See Removal of Certain References to Credit Ratings and 
Amendment to the Issuer Diversification Requirement in the Money 
Market Fund Rule, Investment Company Act Release No. ---------- 
(July 23, 2014).
---------------------------------------------------------------------------

e. Additional Economic Analysis
    As discussed in the Proposing Release, these amendments are 
intended to more efficiently achieve the diversification of risk 
contemplated by the rule's current 5% issuer diversification limit. The 
treatment of affiliates for purposes of rule 2a-7's 5% issuer 
diversification limit, and our diversification amendments collectively, 
are designed to diversify the risks to which money market funds may be 
exposed and thereby reduce the impact of any single issuer's (or 
guarantor's or demand feature provider's) financial distress on a fund. 
Except to the extent that money market funds choose to reinvest some or 
all of their excess exposure in securities of higher risk, requiring 
money market funds to more broadly diversify against credit risk should 
reduce the volatility of fund returns (and hence NAVs) and limit the 
impact of an issuer's distress on fund liquidity, which should mitigate 
the risk of heavy shareholder redemptions from money market funds in 
times of financial distress and may promote capital formation by making 
money market funds a more stable source of financing for issuers of 
short-term credit instruments. Reducing money market funds' volatility 
and making their liquidity levels more resilient also could cause money 
market funds to attract further investments, increasing their role as a 
source of capital in the short-term financing markets for issuers. We 
are not able to quantify these benefits (although we do provide 
quantitative information concerning certain impacts), primarily because 
we continue to believe it is impractical, if not impossible, to 
identify with sufficient precision the marginal decrease in risk and 
increase in stability we expect these diversification amendments to 
provide. We received no comments providing quantification of benefits.
    More fundamentally, as discussed in the Proposing Release, these 
amendments are designed to more effectively achieve the diversification 
of risk contemplated by the rule's current 5% issuer diversification 
limit. As discussed in the Proposing Release, we explained that 
``[d]iversification limits investment risk to a fund by spreading the 
risk of loss among a number of securities.'' \1614\ Requiring funds to 
purchase ``a number of securities'' rather than a smaller number of 
concentrated investments will only ``spread . . . the risk of loss'' if 
the performance of those securities is not highly correlated. That is, 
a fund's investments in Issuers A, B and C are no less risky (or only 
marginally so) than a single investment in Issuer A if Issuers A, B, 
and C are likely to experience declines in value simultaneously and to 
approximately the same extent. This may indeed be likely if Issuers A, 
B and C are affiliated with each other. In addition, if Issuers A, B 
and C are affiliated with each other, they likely would share financial 
resources in the event of a crisis, which would make it more likely 
that they would experience declines in value simultaneously and to 
approximately the same extent. Prime money market funds' concentrated 
exposures to financial institutions increase these concerns because 
prime money market funds' portfolios already appear correlated to some 
extent.\1615\
---------------------------------------------------------------------------

    \1614\ See Proposing Release, supra note 25, at section III.J.1.
    \1615\ See Proposing Release, supra note 25, nn.66-67 and 
accompanying text.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we recognize, however, that 
the amendments could impose costs on money market funds and could 
affect competition, efficiency, and capital formation. We expect that 
the requirement to aggregate affiliates for purposes of the 5% issuer 
diversification limit will increase the diversification of at least 
some money market funds.\1616\ A money market fund that had invested 
more than 5% of its assets in a parent or corporate group would, when 
those investments matured, have to reinvest some of the proceeds in a 
different parent or corporate group (or in unrelated issuers).\1617\ We 
requested comment on how the amendment would affect competition, 
efficiency and capital formation, and the ways in which money market 
funds may invest in response to the amendment. One commenter stated 
that the requirement to treat affiliates as a single issuer for 
purposes of the 5% issuer diversification limit could impede a money 
market fund's ability to purchase high quality securities, and that, as 
a result, money market funds could be forced to purchase securities of 
issuers with credit ratings lower than those of the affiliated 
issuers.\1618\ As noted above and discussed further below, we believe 
that any effect caused by a money market fund investing in securities 
with higher credit risk will be minimal due to the substantial risk-
limiting provisions of rule 2a-7.\1619\
---------------------------------------------------------------------------

    \1616\ See The Exposure Money Market Funds Have to the Parents 
of Issuers (``DERA Diversification Memo'') (July 10, 2013), 
available at http://www.sec.gov/comments/s7-03-13/s70313-20.pdf. The 
Division of Risk, Strategy, and Financial Innovation (``RSFI'') is 
now known as the Division of Economic and Risk Analysis (``DERA''), 
and accordingly we are no longer referring to this study as the 
``RSFI Diversification Memo'' as we did in the Proposing Release, 
but instead as the ``DERA Diversification Memo.'' The DERA 
Diversification Memo shows, among other things, that some money 
market funds invested more than 5% of their assets in the issuances 
of specific corporate groups, or ``parents'' (as defined in the DERA 
Diversification Memo) between November 2010 and November 2012. For 
example, our staff's analysis shows that 30 money market funds, on 
average, invest at least 5% of their portfolios in the issuances of 
the largest parent. Our staff's analysis also shows that the largest 
fund-level exposure of at least 7% to the issuances of one parent is 
14 while the largest average fund-level exposure of at least 10% of 
the issuances of one parent is 3.
    \1617\ Money market funds will not be required to sell any of 
their portfolio securities as a result of any of our diversification 
amendments because rule 2a-7's diversification limits are measured 
at acquisition.
    \1618\ Schwab Comment Letter. See also Dechert Comment Letter 
(arguing that our diversification amendments, in combination, may 
have the effect of reducing a money market fund's ability to invest 
in high quality securities).
    \1619\ See supra notes 10 and 11 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we acknowledge that the application of our 
diversification amendments on the treatment of ten percent obligors may 
cause certain sponsors to conduct additional due diligence and also may 
mean that some conduits would have to restructure their programs, 
particularly if information regarding the identity of obligors is 
unavailable, which could result in reduced funding capacity from money 
market funds. To the extent ABCP conduits may decide to restructure 
their programs, we expect that the ABCP conduits might incur costs 
associated with the restructuring, although we are unable to quantify 
any such costs as we do not know to what extent ABCP conduits will 
decide to restructure, and we also did not receive any comments 
regarding costs that ABCP conduits may incur.
    We acknowledge that, as a result of our amendments, it is possible 
that some money market funds may purchase securities of issuers with 
lower credit quality, although we note that money market funds will 
continue to be required to meet the minimum credit risk standards set 
forth in rule 2a-7.\1620\ It also seems reasonable to expect that a 
divestment by one money market fund (because its exposure to a 
particular group of affiliates is too great) might become a purchasing 
opportunity

[[Page 47873]]

for another money market fund whose holdings in that affiliated group 
does not constrain it. If the credit qualities of the investments were 
similar, there should be no net effect on fund risk and yield, although 
we discuss below how fund risk and yield may be affected if money 
market funds choose to invest in securities of higher or lower credit 
risk than they do currently. In the Proposing Release we discussed ways 
in which a money market fund may reallocate its investments under our 
amendments to the diversification provisions of rule 2a-7 as well as 
possible ways in which the amendment might affect capital formation. We 
discuss above that requiring money market funds to more broadly 
diversify against credit risk may promote capital formation by making 
money market funds a more stable source of financing for issuers of 
short-term investments. However, the rule amendment could also reduce 
capital formation if money market funds choose to reinvest some or all 
of their excess exposure in securities of higher risk. In these 
instances, a money market fund's portfolio risk would increase, its NAV 
and fund liquidity may become more volatile and yields would rise. 
Money market funds in this scenario could become less stable than they 
are today, investor demand for the funds could fall (to the extent 
increased volatility in money market funds is not outweighed by any 
increase in fund yield), and capital formation could be reduced. 
Alternatively, money market funds might choose to reinvest excess 
exposure in securities of lower risk. In these instances, portfolio 
risk (e.g., credit risk, counterparty risk) would decrease, fund NAVs 
and liquidity would likely become less volatile and yields would fall. 
In this scenario, money market funds would become more stable than they 
are today, investor demand for the funds could rise (to the extent 
increased stability in money market funds is not outweighed by any 
decrease in fund yield), and capital formation might be enhanced.
---------------------------------------------------------------------------

    \1620\ See rule 2a-7(d)(2) (portfolio quality).
---------------------------------------------------------------------------

    As stated in the Proposing Release, we cannot predict how money 
market funds will invest in response to our amendments and we thus do 
not have a basis for determining money market funds' likely 
reinvestment strategies. We also did not receive comment on this issue. 
We note that money market funds' current exposures in excess of what 
our amendments will permit may reflect the overall risk preferences of 
their managers. To the extent that these amendments reduce the 
concentration of issuer risk, fund managers that have particular risk 
tolerances or preferences may shift their funds' remaining portfolio 
assets, within rule 2a-7's minimal credit risk requirements,\1621\ to 
higher risk assets. If so, portfolio risk, although more diversified, 
would increase (or remain constant), and we would expect portfolio 
yields to rise (or to remain constant). If yields were to rise, money 
market funds might be able to compete more favorably with other short-
term investment products (to the extent the increased yield is not 
outweighed by any increased volatility).
---------------------------------------------------------------------------

    \1621\ See id.
---------------------------------------------------------------------------

    We continue to be unable to predict or quantify the precise effects 
this amendment will have on competition, efficiency, or capital 
formation and did not receive comments addressing the precise effects. 
The effects depend on how money market funds, their investors, and 
companies that issue securities to money market funds will adjust on a 
long-term basis to our amendment. The ways in which these groups could 
adjust, and the associated effects, are too complex and interrelated to 
allow us to predict them with specificity or to quantify them. For 
example, if a money market fund must reallocate its investments under 
our amendment, whether that will affect capital formation depends on 
whether there are available alternative investments the money market 
fund could choose and the nature of any alternatives. Assuming there 
are alternative investments, the effects on capital formation will 
depend on the amount of yield the issuers of the alternative 
investments will be required to pay as compared to the amount they 
would have paid absent our amendments. For example, our amendment could 
cause money market funds to seek alternative investments and this 
increased demand could allow their issuers to pay a lower yield than 
they would absent this increase in demand. This would decrease issuers' 
financing costs, enhancing capital formation. But it also could 
decrease the yield the money market fund paid to its shareholders, 
potentially making money market funds less attractive and leading to 
reduced aggregate investments by the money market fund which, in turn, 
could increase financing costs for issuers of short-term debt.
    The availability of alternative investments and the ease with which 
they could be identified could affect efficiency, in that money market 
funds might find their investment process less efficient if they were 
required to expend additional effort identifying alternative 
investments. These same factors could affect competition if more effort 
is required to identify alternative investments under our amendments 
and larger money market funds are better positioned to expend this 
additional effort or to do so at a lower marginal cost than smaller 
money market funds. These factors also could affect capital formation 
in other ways, in that money market funds could choose to invest in 
lower quality securities under our proposal if they are not able to 
identify alternative investments with levels of risk equivalent to the 
funds' current investments.
    As discussed in the Proposing Release, the amendments could require 
money market funds to update the systems they use to monitor their 
compliance with rule 2a-7's 5% issuer diversification limit in order to 
aggregate exposures to affiliates. Although we understand, as discussed 
above, that most money market funds today consider their exposures to 
entities that are affiliated with each other for risk management 
purposes, any systems money market funds currently have in place for 
this purpose may not be suitable for monitoring compliance with a 
diversification requirement, as opposed to a risk management evaluation 
(which may entail less regular or episodic monitoring).
    We requested comment as to whether funds expect that they would 
incur operational costs in addition to, or that differ from the costs 
estimated in the Proposing Release. We did not receive comments 
regarding specific costs, although one commenter stated that it did not 
believe that the amendments would have a significant impact on the 
operations of most money market funds.\1622\ Another commenter stated 
that additional time and data costs may be required to determine issuer 
affiliations, but also stated that it did not see a significant 
increase in costs related to complying with our amended issuer 
diversification requirements.\1623\
---------------------------------------------------------------------------

    \1622\ ICI Comment Letter.
    \1623\ State Street Comment Letter.
---------------------------------------------------------------------------

    Based on the activities typically involved in making systems 
modifications, and recognizing that money market funds' existing 
systems currently have varying degrees of functionality, we estimated 
in the Proposing Release, and continue to estimate, that the one-time 
systems modifications costs (including modifications to related 
procedures and controls) for a money market fund associated with these 
amendments would range from approximately

[[Page 47874]]

$600,000 to $1,200,000.\1624\ As we stated in the Proposing Release, we 
do not expect that money market funds will incur material ongoing costs 
to maintain and modify their systems as a result of this amendment 
because we expect modifications required by this amendment will be 
incremental changes to existing systems that already perform similar 
functions (track exposures for purposes of monitoring compliance with 
rule 2a-7's 5% issuer diversification limit).
---------------------------------------------------------------------------

    \1624\ Staff estimates that these costs will 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 section III.A.5.a.
---------------------------------------------------------------------------

    Although we have estimated the costs that a single money market 
fund could incur as a result of this amendment, we expect that these 
costs will be shared among various money market funds in a complex. As 
discussed in the Proposing Release, we do not expect that money market 
funds will be required to spend additional time determining 
affiliations under our amendments, or if an additional time commitment 
is required, we expect that it would be minimal. We estimated in the 
Proposing Release that the costs of this minimal additional time 
commitment to a money market fund, if it were to occur, will range from 
approximately $5,000 to $105,000 annually.\1625\ We did not receive 
comments on these particular estimates, although we have updated our 
estimates based on more recent data, and now estimate that the costs of 
this minimal additional time commitment to a money market fund, if it 
were to occur, will range from approximately $6,700 to $109,500 
annually.\1626\
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    \1625\ In arriving at this estimate in the Proposing Release, we 
expected that any required additional work generally would be 
conducted each time a money market fund determined whether to add a 
new issuer to the approved list of issuers in which the fund may 
invest. The frequency with which a money market fund makes these 
determinations would depend on its size and investment strategy. To 
be conservative, and based on Form N-MFP data concerning the number 
of securities held in money market funds' portfolios, we estimated 
that a money market fund could be required to make such a 
determination between 33 and 339 times each year. This was based on 
our staff's review of data filed on Form N-MFP as of February 28, 
2013, which showed that the 10 smallest money market funds by assets 
had an average of 33 investments and the 10 largest money market 
funds by assets had an average of 339 investments. The number of a 
money market fund's investments should be a rough proxy for the 
number of times each year that a money market fund could add an 
issuer to its approved list, although this will overstate the 
frequency of these determinations (e.g., a fund may have a number of 
separate investments in a single issuer). We estimated that the 
additional time commitment imposed by our amendments, if any, would 
be an additional 1-2 hours of an analyst's time each time the fund 
determined whether to add an issuer to its approved list. The 
estimated range of costs, therefore, was calculated as follows: (33 
Evaluations x 1 hour of a junior business analyst's time at $155 per 
hour = $5,115) to (339 evaluations x 2 hours of a junior business 
analyst's time at $155 per hour = $105,090). Finally, we recognize 
that some money market funds do not use an approved list, but 
instead evaluate each investment separately. We believe that the 
number of a money market fund's investments also should be a rough 
proxy for the number of times such a money market fund would 
evaluate each investment. Such funds may be on the higher end of the 
range, however, because the extent to which a fund's average number 
of investments reflects the number of times such a fund purchases 
securities would depend on the rate of the fund's portfolio 
turnover. Whether any additional analysis would be required as a 
result of our amendments for such a fund also would depend on 
whether the fund invested proceeds from maturing securities in 
issuers for which a new credit risk analysis was required or in 
issuers of securities owned by the fund for which the analysis may 
already have been done.
    \1626\ In arriving at this estimate, we expect that any required 
additional work generally will be conducted each time a money market 
fund determined whether to add a new issuer to the approved list of 
issuers in which the fund may invest. The frequency with which a 
money market fund will make these determinations would depend on its 
size and investment strategy. To be conservative, and based on Form 
N-MFP data concerning the number of securities held in money market 
funds' portfolios, we estimate that a money market fund could be 
required to make such a determination between 42 and 342 times each 
year. This is based on our staff's review of data filed on Form N-
MFP as of February 28, 2014, which showed that the 10 smallest money 
market funds (not including government or Treasury funds) by assets 
had an average of 42 investments and the 10 largest money market 
funds (not including government or Treasury funds) by assets had an 
average of 342 investments. The number of a money market fund's 
investments should be a rough proxy for the number of times each 
year that a money market fund could add an issuer to its approved 
list, although this will overstate the frequency of these 
determinations (e.g., a fund may have a number of separate 
investments in a single issuer). We estimate that the additional 
time commitment imposed by our amendments, if any, will be an 
additional 1-2 hours of an analyst's time each time the fund 
determined whether to add an issuer to its approved list. The 
estimated range of costs, therefore, is calculated as follows: (42 
Evaluations x 1 hour of a junior business analyst's time at $160 per 
hour = $6,720) to (342 evaluations x 2 hours of a junior business 
analyst's time at $160 per hour = $109,440). Finally, we recognize 
that some money market funds do not use an approved list, but 
instead evaluate each investment separately. We believe that the 
number of a money market fund's investments also should be a rough 
proxy for the number of times such a money market fund would 
evaluate each investment. Such funds may be on the higher end of the 
range, however, because the extent to which a fund's average number 
of investments reflects the number of times such a fund purchases 
securities would depend on the rate of the fund's portfolio 
turnover. Whether any additional analysis would be required as a 
result of our amendments for such a fund also would depend on 
whether the fund invested proceeds from maturing securities in 
issuers for which a new credit risk analysis was required or in 
issuers of securities owned by the fund for which the analysis may 
already have been done.
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2. ABS--Sponsors Treated as Guarantors
    We are amending rule 2a-7, as proposed, to require that money 
market funds treat the sponsors of ABS as guarantors subject to rule 
2a-7's 10% diversification limit applicable to guarantees and demand 
features, unless the money market fund's board of directors (or its 
delegate) determines that the fund is not relying on the sponsor's 
financial strength or its ability or willingness to provide liquidity, 
credit or other support to determine the ABS's quality or 
liquidity.\1627\ As discussed in the Proposing Release, money market 
funds' reliance on and exposure to sponsors of ABCP, a type of ABS, 
specifically during 2007, suggests that current rule 2a-7 potentially 
permits money market funds to become overexposed to ABCP 
sponsors.\1628\ Our amendments today therefore provide that, subject to 
an exception, money market funds investing in ABS rely on the sponsor's 
financial strength or its ability or willingness to provide liquidity, 
credit, or other support to the ABS, and require diversification 
against such reliance and exposure to ABS sponsors.\1629\
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    \1627\ As a result, subject to an exception, a money market fund 
cannot invest in ABS, if immediately after the investment it would 
have invested more than 10% of its total assets in securities issued 
by or subject to demand features or guarantees from the ABS sponsor. 
See rule 2a-7(a)(18)(ii) and rule 2a-7(d)(3)(iii). Current rule 2a-7 
applies a 10% diversification limitation on demand features and 
guarantees to 75% of money market funds' total assets. As discussed 
in infra section III.I.3, we are amending rule 2a-7 to apply the 10% 
diversification limitation to 85% of a tax-exempt money market 
fund's assets and to 100% of a fund's assets for money market funds 
other than tax-exempt funds.
    \1628\ See Proposing Release, supra note 25, at section III.J.2.
    \1629\ Under the amended rule, the sponsor of an ABS will be 
deemed to guarantee the entire principal amount of those ABS, except 
that the sponsor will not be deemed to have provided such a 
guarantee for purposes of the following paragraphs of rule 2a-7: 
(a)(12)(iii) (Definition of eligible security); (d)(2)(iii) (credit 
substitution); (d)(3)(iv)(A) (fractional guarantees); and (e) 
(guarantees not relied on). We also are adopting a number of 
conforming amendments to other provisions of rule 2a-7 to implement 
the treatment of ABS sponsors as guarantors. See rule 2a-
7(f)(4)(iii) (defining defaults for purposes of rule 2a-7(f)(2) and 
(3) as applied to guarantees issued by ABS sponsors); rule 2a-
7(g)(7) (requiring periodic re-evaluations of any finding that the 
fund is not relying on the sponsor's financial strength or ability 
or willingness to provide support in determining the quality or 
liquidity of ABS); and rule 2a-7(h)(6) (recordkeeping requirements 
for the periodic re-evaluations).
---------------------------------------------------------------------------

    A number of commenters generally supported the requirement to treat 
sponsors of ABS as guarantors.\1630\ For

[[Page 47875]]

example, one commenter noted that ABS sponsors have provided explicit 
as well as implicit credit and liquidity support for the vehicles they 
have sponsored and that it is therefore appropriate that such support 
be presumed for purposes of applying rule 2a-7 diversification 
limitations.\1631\ Several commenters however, generally opposed the 
proposed requirement.\1632\ Some of these commenters argued that the 
requirement to treat sponsors of ABS as guarantors is not consistent 
with the current practice of money market funds.\1633\ For example, one 
commenter stated that while money market funds cannot usually review 
information about the particular assets underlying ABS,\1634\ money 
market funds nevertheless base their credit decisions on a multitude of 
factors other than the sponsor's financial strength.\1635\ Some 
commenters also argued that money market funds look to the legal 
requirement for a sponsor to provide a guarantee rather than relying on 
an implicit guarantee by the sponsor,\1636\ and that partial or 
incidental reliance on the financial strength of an ABS sponsor should 
not require treatment of the sponsor as a 100% guarantor of the 
ABS.\1637\ Another commenter argued that the requirement to treat the 
sponsor of an SPE issuing ABS as a guarantor of ABS would require money 
market funds to expand diversification of ABS sponsors at the same time 
many of these sponsors are exiting the market.\1638\ While we recognize 
that in many cases a money market fund is not basing its investment 
decision solely on the financial strength of the sponsor or on an 
implicit guarantee by the sponsor, we understand, as discussed in the 
Proposing Release, that money market funds often make investment 
decisions based, at least in part, on the presumption that the sponsor 
will take steps to prevent the ABS from defaulting.\1639\ However, 
money market funds are generally not required to diversify against ABS 
sponsors because the support that ABS sponsors provide, implicitly or 
explicitly, which money market funds often rely on, typically does not 
meet the current rule's definition of ``guarantee'' or ``demand 
feature.'' \1640\
---------------------------------------------------------------------------

    \1630\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment 
Letter; U.S. Bancorp Comment Letter; Vanguard Comment Letter; 
BlackRock II Comment Letter; Wells Fargo Comment Letter.
    \1631\ Goldman Sachs Comment Letter.
    \1632\ See, e.g., SSGA Comment Letter; Federated II Comment 
Letter. See also ICI Comment Letter (arguing that the amendment 
could result in a reduction of the supply of securities to money 
market funds without any increase in investor protection).
    \1633\ See, e.g., Federated VIII Comment Letter; SSGA Comment 
Letter; ICI Comment Letter.
    \1634\ See Proposing Release, supra note 25, nn.870-872 and 
accompanying text (discussing that an asset-liability mismatch in 
ABCP conduits causes ABCP investors to analyze the structure of the 
ABCP conduits more so than underlying asset level information).
    \1635\ Federated II Comment Letter (describing information it 
reviews, including pool level information about the underlying 
assets). See also Federated VIII Comment Letter (discussing its 
evaluation of ABCP before investing, noting that only a portion of 
their analysis is based on the sponsor, and that significant 
emphasis is placed on the qualifying assets); SSGA Comment Letter 
(stating that it believes credit analysis with regard to ABS should 
not solely rely upon sponsor support).
    \1636\ See, e.g., Federated II Comment Letter; ICI Comment 
Letter (arguing that because the proposed requirement would treat a 
sponsor as a guarantor of the entire amount of the ABS even when the 
sponsor has no legal obligation to support its ABS, the amendment 
seems to endorse the practice of relying on an ``implicit'' 
guarantee when assessing the credit risk of ABS). See also Federated 
VIII (arguing that the amendment would encourage investors that are 
assessing the credit risk of ABS to rely on an unproven assumption 
that a sponsor will voluntarily assume losses on its financial 
products, and that because such ``implicit guarantees'' are not 
reliable, endorsing this practice would only increase risks to money 
market funds that invest in ABS.)
    \1637\ See, e.g., ICI Comment Letter; Federated VIII Comment 
Letter.
    \1638\ Invesco Comment Letter.
    \1639\ Comment Letter of the American Securitization Forum (Aug. 
2, 2010) (available in File No. S7-08-10) (``ASF August 2010 Comment 
Letter''). (``[T]he liquidity and credit support for the vast 
majority of ABCP conduits are provided by their financial 
institution sponsors.''). But see SFIG Comment Letter (describing 
that a subset of ABCP conduits are administered by entities that are 
not financial institutions and that credit or liquidity support to 
the ABCP conduit is provided by financial institutions that are not 
affiliated with the administrator); ICI Comment Letter (suggesting 
that there is no reason to require diversification against sponsors 
as opposed to other service providers such as servicers and 
liquidity providers). Although persons other than the sponsor, such 
as servicers and liquidity providers, could support ABS, we 
understand that, to the extent ABS have explicit support, it 
typically is provided by the sponsor. We also understand that 
investors in ABS without explicit support may view the sponsor as 
providing implicit support. See, e.g., Goldman Sachs Comment Letter.
    \1640\ See Proposing Release, supra note 25, n.868 and 
accompanying text.
---------------------------------------------------------------------------

    We acknowledge that if sponsor supply were to become limited, it 
may be more difficult for money market funds to obtain ABS. However, 
after further consideration, we continue to believe it is appropriate 
to amend rule 2a-7 to require diversification against such support to 
limit a money market fund's concentration in a single sponsor because a 
fund could seek to rely on liquidity or capital support from that 
sponsor, if necessary. When a money market fund is determining the 
ABS's quality or liquidity based, at least in part, on the ABS 
sponsor's financial strength or its ability or willingness to provide 
liquidity, credit or other support, limiting a money market fund's 
concentration in that sponsor mitigates the risk that a money market 
fund would face in the case where such ABS sponsor would be unable to 
support the value of the fund's investments in times of severe market 
stress because it reduces the amount of a money market fund's 
investments that would be impacted by the inability of the sponsor to 
support the value of those investments.
    As discussed further below, we recognize that in certain cases an 
ABS sponsor should not be deemed to guarantee the ABS. An ABS sponsor 
therefore will not be deemed to guarantee the ABS if the money market 
fund's board of directors (or its delegate) determines that the fund is 
not relying on the ABS sponsor's financial strength or its ability or 
willingness to provide liquidity, credit, or other support to determine 
the ABS's quality or liquidity. We also discuss below that an ABS 
sponsor will not be deemed to guarantee the full amount of ABS in cases 
of fractional guarantees.
    Commenters noted that under current rule 2a-7, if a company 
guarantees or provides a demand feature of a portion of the qualifying 
assets, only that portion of the ABS is counted towards the 
diversification limit.\1641\ These commenters expressed concern that 
amended rule 2a-7 would change this result by treating a company that 
sponsors ABS as a guarantor of the entire amount held by a fund, even 
if the company's guarantee or demand feature is limited to a smaller 
amount.\1642\ As proposed, in cases where a security is subject to a 
fractional demand feature or guarantee by the sponsor, as defined in 
rule 2a-7, a money market fund may count the fractional demand feature 
or guarantee in place of deeming the sponsor as a guarantor of the 
entire principal amount of the ABS.\1643\ However, in cases where a 
money market fund is partially or incidentally relying on the financial 
strength of the ABS sponsor, but such partial or incidental reliance 
does not fall under the definition of a fractional guarantee, the money 
market fund will be required to treat the sponsor as a guarantor of the 
entire principal amount of the ABS. In this case, even though a sponsor 
may not be providing a full guarantee, the fund would not be able

[[Page 47876]]

to readily determine the actual portion of assets for which the 
guarantor is providing structural support. Therefore, except in cases 
of fractional guarantees as discussed above, we continue to believe 
that, unless the board of directors determines that the fund is not 
relying on the financial strength of the sponsor, it is appropriate to 
require diversification against such sponsor with respect to all the 
qualifying assets in order to mitigate the risk that an ABS sponsor 
would be unable to support the value of a money market fund's 
investments in times of severe market stress.
---------------------------------------------------------------------------

    \1641\ See, e.g., ICI Comment Letter; Memorandum from the 
Division of Investment Management regarding a September 10, 2013 
meeting with representatives of the Structured Finance Industry 
Group.
    \1642\ Id.
    \1643\ See rule 2a-7(d)(3)(iv)(A) (calculation of fractional 
demand features or guarantees) and rule 2a-7(a)(18)(ii) (providing 
an exception from the requirement to deem a sponsor of an SPE as 
providing a guarantee with respect to the entire principal amount of 
ABS in the case of fractional guarantees).
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    One commenter suggested that explicit support would not always be 
dispositive in determining the sponsor's identity and that treating 
certain entities as sponsors would not reflect actual economic risks to 
the fund.\1644\ This commenter also recommended that we define the term 
sponsor in our final amendments, noting that otherwise it may be 
difficult for certain money market funds to determine the entity that 
is providing the deemed guarantee.\1645\ Although providing a specific 
definition of ABS sponsor may exclude certain entities that should 
otherwise be treated as a sponsor, and may not allow for future 
flexibility with regards to new types of ABS structures, we understand 
that determining the ABS sponsor in certain cases may present 
difficulties. We recognize that in some cases where the administrator 
of an ABCP conduit, which may otherwise be commonly thought of as the 
sponsor, is not providing liquidity or credit support, the 
administrator would not appropriately be defined as a sponsor for 
purposes of our amended diversification requirements. In this case, 
requiring diversification against entities that do not, or could not, 
provide liquidity, credit or other support to the ABCP conduit would 
not reflect the actual risks of a fund's exposure to such an entity. 
For ABCP, we believe that the sponsor will typically be the financial 
institution that provides explicit liquidity and/or credit support and 
also provides administrative services to the ABCP conduit.\1646\ The 
amended diversification requirements we are adopting today aim to 
diversify against the risks of concentration of exposure to entities 
that a fund may be relying on, whether explicitly or implicitly, in 
determining the ABS's quality or liquidity. Therefore, if a money 
market fund is relying on an entity's financial strength or its ability 
or willingness to provide liquidity, credit, or other types of support 
to determine the ABS's quality or liquidity, such entity would 
appropriately be defined as a sponsor for purposes of our amended 
diversification requirements.
---------------------------------------------------------------------------

    \1644\ SFIG Comment Letter (recommending that we define a 
provider of credit and liquidity support to an ABCP conduit that 
equals or exceeds fifty percent of the outstanding face amount of 
the ABCP of such conduit as the sponsor).
    \1645\ Id.
    \1646\ For TOB programs in which the liquidity provider for the 
TOB program or its affiliate holds the residual interest in the TOB 
trust, we believe the entity that provides both the liquidity 
support and holds the residual interest typically will be the 
sponsor. For TOB programs in which the liquidity provider or its 
affiliate does not also own the residual interest in the TOB trust, 
we believe the financial institution that sets up the TOB program, 
markets and remarkets the TOBs, transfers the municipal security 
into the TOB trust and/or provides liquidity typically will be the 
sponsor.
---------------------------------------------------------------------------

    As proposed, our amended rule requires that, unless the board (or 
its delegate) determines otherwise, all ABS sponsors are deemed to 
guarantee their ABS. We are applying this requirement to all ABS 
sponsors because we are concerned that applying the requirement only to 
sponsors of certain types of ABS could become obsolete as new forms of 
ABS are introduced. Because we recognize that it may not be appropriate 
to require money market funds to treat ABS sponsors as guarantors in 
all cases, under amended rule 2a-7, an ABS sponsor would not be deemed 
to guarantee the ABS if the money market fund's board of directors (or 
its delegate) determines that the fund is not relying on the ABS 
sponsor's financial strength or its ability or willingness to provide 
liquidity, credit, or other support to determine the ABS's quality or 
liquidity.\1647\ In determining whether a money market fund is relying 
on the ABS sponsor's financial strength or its ability or willingness 
to provide liquidity, credit, or other support, the money market fund 
board of directors may want to consider, among other things, whether 
the fund considers the ABS sponsor's financial strength or its ability 
or willingness to provide liquidity, credit, or other support as a 
factor when determining the ABS's quality or liquidity.
---------------------------------------------------------------------------

    \1647\ Rule 2a-7(a)(18)(ii). This determination must be 
documented and retained by the money market fund. See rule 2a-
7(g)(7) and rule 2a-7(h)(6).
---------------------------------------------------------------------------

    While one commenter specifically supported the exception to the ABS 
sponsor designation through money market fund board of directors (or 
delegate) action,\1648\ other commenters expressed concern that 
overseeing determinations that a money market fund is not relying on 
ABS sponsors would impose further burdens on money market fund 
directors.\1649\ However, a board can, and likely will, delegate this 
responsibility.\1650\ While we recognize that a board will, at a 
minimum, need to provide oversight and establish procedures \1651\ if 
it delegates its responsibility, we believe that any incremental burden 
to make a determination (by the board or its delegate) regarding 
reliance on an ABS sponsor should be minimal, as the money market fund 
would already have analyzed the security's credit quality and liquidity 
when assessing whether the security posed minimal credit risks and 
whether the fund could purchase the security consistent with rule 2a-
7's limits on investments in ``illiquid securities.'' \1652\ One 
commenter supported a board exception that applied when a money market 
fund board (or its delegate) determines that a sponsor's financial 
strength or its ability or willingness to provide liquidity, credit or 
other support did not play a substantial role in the money market 
fund's assessment of the ABS's quality or liquidity.\1653\ On balance 
however, we believe that even when a money market fund board of 
directors (or its delegate) determines that a sponsor's financial 
strength or its ability or willingness to provide liquidity, credit or 
other support plays a less than substantial role in the money market 
fund's assessment of the ABS's quality or liquidity, it is beneficial 
to require diversification against such sponsor because it limits a 
money market fund's concentration in a single sponsor on which the fund 
could still seek to rely. In addition, requiring diversification 
against such sponsor also mitigates the possible effect of an ABS 
sponsor being unable to support the value of the ABS because a money 
market fund will be required to diversify against its investments in 
ABS with such sponsor. We are therefore adopting the board exception as 
proposed.
---------------------------------------------------------------------------

    \1648\ Goldman Sachs Comment Letter.
    \1649\ Federated VIII Comment Letter; ICI Comment Letter; 
Fidelity Comment Letter.
    \1650\ See rule 2a-7(j) (providing a money market fund's board 
of directors the ability to delegate to the fund's adviser or 
officers the responsibility to make certain determinations required 
to be made by the board of directors under rule 2a-7).
    \1651\ See rule 2a-7(j)(1) and (2).
    \1652\ Rule 2a-7(a)(12) (definition of ``eligible security'') 
and rule 2a-7(d)(4) (portfolio liquidity).
    \1653\ Invesco Comment Letter.
---------------------------------------------------------------------------

    Several commenters argued that a board should not have to make a 
finding in certain situations where the ABS is fully supported by a 
guarantee or demand feature provided by a third party.\1654\ One of 
these commenters argued that if an issuance of ABS has a

[[Page 47877]]

contractual guarantee of support by a third party, we should require 
money market funds to count the third-party guarantor, rather than the 
sponsor, for purposes of the diversification limit.\1655\ This 
commenter noted that for ABS that carry contractual guarantees of 
support by third parties, a fund manager often looks to financial 
strength and creditworthiness of the third-party guarantor to evaluate 
the creditworthiness or liquidity of the ABS.\1656\ We recognize that 
in certain cases, ABS may be fully supported by a guarantee or demand 
feature provided by a third party where the board (or its delegate) 
would determine that the money market fund is not relying on the ABS 
sponsor's financial strength or its ability or willingness to provide 
liquidity, credit, or other support to determine the ABS' quality or 
liquidity. However, some money market funds may view the third-party 
guarantee as a ``layered guarantee'' on top of the sponsor's guarantee, 
which today are both subject to a 10% diversification limit under rule 
2a-7. We believe it is appropriate to allow for instances of layered 
guarantees when a third-party guarantor is present, and therefore 
believe that in cases where a money market fund is relying only on the 
third-party guarantor the board (or its delegate) can determine that it 
is not relying on the sponsor, and in cases where a money market fund 
views the third-party guarantor as providing a layered guarantee, the 
amended rule will provide that the money market fund treat the 
guarantee by the sponsor and the guarantee by the third-party guarantor 
as layered guarantees.
---------------------------------------------------------------------------

    \1654\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Wells Fargo Comment Letter.
    \1655\ Wells Fargo Comment Letter.
    \1656\ Id.
---------------------------------------------------------------------------

    Commenters also argued that the board should not have to make the 
required findings for certain types of ABS, such as TOBs. Commenters 
argued that diversification from TOB sponsors is unnecessary because 
TOBs have dedicated liquidity providers and frequently have credit 
enhancement, and the TOB sponsor may not necessarily be the provider of 
either.\1657\ Commenters also stated that tax-exempt money market funds 
in particular would suffer if TOBs were not excluded because the 
amended diversification requirements would further restrict a money 
market fund's ability to hold TOBs.\1658\ One commenter recommended 
excluding sponsors of all types of ABS (other than ABCP) from the 
proposed ABS sponsor rule, noting that sponsors of non-ABCP ABS do not 
typically provide explicit credit or liquidity support.\1659\ We 
recognize that in some cases diversification from non-ABCP ABS 
sponsors, including TOB sponsors may be unnecessary if the fund is not 
relying on the sponsor's financial strength or its ability or 
willingness to provide liquidity, credit or other support to determine 
the ABS's quality or liquidity.
---------------------------------------------------------------------------

    \1657\ See, e.g., Vanguard Comment Letter. See also SIFMA 
Comment Letter.
    \1658\ See, e.g., Fidelity Comment Letter; SIFMA Comment Letter 
(noting that TOBs already have a limited number of sponsors).
    \1659\ SFIG Comment Letter.
---------------------------------------------------------------------------

    Although commenters suggested providing an exclusion from the 
amended rule, we believe that non-ABCP ABS, including TOBs, are more 
appropriately addressed through the board exception to the 
diversification requirement. Because at least in some instances a fund 
may be looking to the sponsor's financial strength or its ability or 
willingness to provide liquidity, credit or other support to determine 
the ABS's quality or liquidity, we have decided to retain the 
presumption for ABS generally. In addition, we believe that it would be 
inefficient to attempt to anticipate every type of ABS sponsor that 
should be excluded now or in the future, and designating particular 
exclusions in the amended rule may not provide for innovation of new 
types of ABS over time. The rebuttable presumption we are adopting 
today however, does allow for flexibility in instances where the fund 
is not looking to the sponsor, irrespective of the actual type of ABS, 
where the board of directors determines that the fund is not relying on 
the sponsor to make determinations about quality or liquidity.
3. The Twenty-Five Percent Basket
    We proposed amending rule 2a-7 to eliminate the ``twenty-five 
percent basket,'' under which as much as 25% of the value of securities 
held in a money market fund's portfolio may be subject to guarantees or 
demand features from a single institution.\1660\ After further 
consideration, and in light of the comments received, our final 
amendments (i) remove the twenty-five percent basket for money market 
funds other than tax-exempt money market funds, and (ii) reduce to 15%, 
rather than eliminate, the twenty-five percent basket for tax-exempt 
money market funds, including single state money market funds.\1661\
---------------------------------------------------------------------------

    \1660\ Current rule 2a-7 applies a 10% diversification limit on 
guarantees and demand features only to 75% of a money market fund's 
total assets. See current rule 2a-7(c)(4)(iii)(A). A money market 
fund, however, may only use the twenty-five percent basket to invest 
in demand features or guarantees that are first tier securities 
issued by non-controlled persons. See rules 2a-7(c)(4)(iii)(B) and 
(C). Although we proposed to delete current rule 2a-7(a)(10) 
(definition of demand feature issued by a non-controlled person) 
because the term is used only in connection with the twenty-five 
percent basket, we are retaining the definition because our 
amendments provide a fifteen percent basket for tax-exempt money 
market funds. See rule 2a-7(a)(10). We also are adopting certain 
amendments to clarify that a fund must comply with this 10% 
diversification limit immediately after it acquires a security 
directly issued by, or subject to guarantees or demand features 
provided by, the institution that issued the security or provided 
the demand feature or guarantee. See rules 2a-7(d)(3)(i) and (iii). 
We believe this amendment reflects funds' current practices and is 
consistent with rule 2a-7's current requirements.
    \1661\ We note that Investment Company Act rule 12d3-1 also 
refers to a twenty-five percent basket. See rule 12d3-1(d)(7)(v). 
That rule generally permits investment companies to purchase certain 
securities issued by companies engaged in securities-related 
activities notwithstanding section 12(d)(3)'s limitations on these 
kinds of transactions. Among other things, rule 12d3-1 provides that 
the acquisition of a demand feature or guarantee as defined in rule 
2a-7 will not be deemed to be an acquisition of the securities of a 
securities-related business provided that ``immediately after the 
acquisition of any Demand Feature or Guarantee, the company will 
not, with respect to 75 percent of the total value of its assets, 
have invested more than 10 percent of the total value of its assets 
in securities underlying Demand Features or Guarantees from the same 
institution.'' We requested comment as to whether we should revise 
rule 12d3-1 to apply this diversification requirement with respect 
to all of an investment company's total assets, rather than just 75% 
of assets, for consistency with the proposed elimination of the 
twenty-five percent basket in rule 2a-7. We received no comments 
regarding rule 12d3-1. At this time we are not amending rule 12d3-1 
to reflect our amendments to rule 2a-7's diversification provisions 
because although rule 12d3-1 provides a twenty-five percent basket 
for purposes of section 12(d)(3) limitations, this twenty-five 
percent basket is not directly associated with the twenty-five 
percent basket in rule 2a-7.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, a number of recent events 
have highlighted the risks to money market funds caused by their 
substantial exposure to providers of demand features and 
guarantees.\1662\ For example, during the financial crisis, many funds 
were heavily exposed to bond insurers and a few major financial 
institutions that served as liquidity providers. This concentration led 
to considerable stress in the municipal markets when some of these bond 
insurers and financial institutions came under pressure during the 
financial crisis. We continue to believe that tightening 
diversification requirements with respect to a money market fund's 
exposure to securities subject to guarantees or demand features from a 
single guarantor or demand feature provider will reduce this risk. 
However, we are concerned that removing the twenty-five percent basket 
entirely for tax-exempt money market funds would inhibit the ability of 
these funds to be

[[Page 47878]]

fully invested in securities subject to guarantees or demand features 
or may force them to invest in securities that have weaker credit than 
the securities they might otherwise purchase, due to the more limited 
availability of guarantors and demand feature providers for tax-exempt 
money market funds as compared to non-tax-exempt money market 
funds.\1663\ Accordingly, under our amendments, as much as 15% of the 
value of securities held in a tax-exempt money market fund's portfolio 
may be subject to guarantees or demand features from a single 
institution.\1664\
---------------------------------------------------------------------------

    \1662\ See Proposing Release, supra note 25, at section III.J.3.
    \1663\ As discussed in more detail below, this concern primarily 
applies to tax-exempt funds, the largest users of the basket, as 
they face a significantly more constrained supply of investable 
securities than other types of money market funds.
    \1664\ See rule 2a-7(d)(3)(iii)(B) and rule 2a-7(a)(28). See 
also supra note 1583.
---------------------------------------------------------------------------

a. Use of Twenty-Five Percent Basket by Money Market Funds
i. Non-Tax-Exempt Money Market Funds
    To help us evaluate the possible effects of removing the twenty-
five percent basket on non-tax-exempt money market funds, DERA staff 
analyzed the exposure that money market funds have to guarantors, as 
described in detail in the DERA Guarantor Diversification Memo.\1665\ 
As demonstrated below, DERA staff found that the majority of money 
market funds do not use the twenty-five percent basket.
---------------------------------------------------------------------------

    \1665\ See Municipal Money Market Funds Exposure to Parents of 
Guarantors (``DERA Guarantor Diversification Memo'') (March 17, 
2014), available at http://www.sec.gov/comments/s7-03-13/s70313-323.pdf. In the DERA Guarantor Diversification Memo, the term 
``guarantors'' is used to refer both to the ultimate parent of 
issuers of guarantees and issuers of demand feature, and the term 
``guarantees'' is used to refer both to guarantees and demand 
features.
---------------------------------------------------------------------------

    As presented in the figure below, DERA staff examined the number of 
money market funds for which guarantors compose more than 10%, 15% and 
20% of their portfolios, respectively.\1666\
---------------------------------------------------------------------------

    \1666\ Id. The DERA Guarantor Diversification Memo also provides 
information regarding tax-exempt money market funds, which we 
discuss below.
[GRAPHIC] [TIFF OMITTED] TR14AU14.001

    As shown in the figure below, DERA staff also examined the percent 
of all money market funds for which guarantors compose more than 10%, 
15%, and 20% of their portfolios, respectively.\1667\
---------------------------------------------------------------------------

    \1667\ Id.

---------------------------------------------------------------------------

[[Page 47879]]

[GRAPHIC] [TIFF OMITTED] TR14AU14.002

    In addition, as illustrated in the figure below, DERA staff 
examined the amount of excess exposure that money market funds have 
above the 10%, 15%, and 20% thresholds, respectively.\1668\
---------------------------------------------------------------------------

    \1668\ Id.
    [GRAPHIC] [TIFF OMITTED] TR14AU14.003
    
    DERA staff also found, as illustrated below, that only a small 
percentage of the entire money market fund industry assets are exposed 
to guarantors in excess of the 10%, 15%, and 20% thresholds.\1669\
---------------------------------------------------------------------------

    \1669\ Id.

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[[Page 47880]]

[GRAPHIC] [TIFF OMITTED] TR14AU14.004

    In addition to showing that the majority of money market funds do 
not use the basket, the data analyzed in the DERA Guarantor 
Diversification Memo also shows that money market funds that do use the 
twenty-five percent basket use the basket to a limited extent for 
purposes of gaining a high level of exposure to any one particular 
guarantor or demand feature provider.\1670\ In fact, commenters noted 
that although a money market fund may use the full twenty-five percent 
basket to gain exposure to one guarantor or demand feature, money 
market funds will often use the twenty-five percent basket to gain a 
smaller amount of exposure to two guarantors or demand feature 
providers above the 10% diversification limit, for a total of up to 
twenty-five percent.\1671\
---------------------------------------------------------------------------

    \1670\ Id. The DERA Guarantor Diversification Memo shows that 
money market funds' exposure in excess of the 15% diversification 
threshold is relatively small, amounting to 0.03% of the assets in 
the entire money market fund industry as of November 2012.
    \1671\ See, e.g., Wells Fargo DERA Comment Letter; Comment 
Letter of Federated Investors, Inc. (Municipal Money Market Funds) 
(Apr. 23, 2014) (``Federated DERA III Comment Letter''); SIFMA DERA 
Comment Letter. For example, money market funds may use the twenty-
five percent basket to obtain exposure for two demand feature 
providers or guarantors above the 10% diversification limit, in 
which case the exposure to any one demand feature provider or 
guarantor would have to be less than 15%, and the average exposure 
to any one demand feature provider or guarantor could not exceed 
12.5%. See Federated DERA III Comment Letter.
---------------------------------------------------------------------------

    As noted by commenters, currently, a money market fund can use the 
twenty-five percent basket in two ways. First, a money market fund can 
apply the basket to one guarantor where the guarantor can account for 
as much as 25% of the portfolio's guarantees. The figures above show 
that $260 million or 0.01% of the industry dollars are above the 20% 
threshold as of November 2012 and $740 million or 0.03% of the industry 
dollars are above the 15% threshold as of November 2012, suggesting 
that few funds are using the basket this way. Second, a money market 
fund can apply the basket to two guarantors where each guarantor has 
between 10% and 15% of the portfolio guarantees and the sum equals 25% 
or less. The difference between the 15% and the 10% threshold amounts 
in the above illustrations represents the usage under this scenario. As 
of November 2012, $6.02 billion or 0.2% of the industry dollars are 
used this way, suggesting that most funds use the twenty-five percent 
basket divided up among two guarantors with exposures up to 15%.\1672\ 
If we assume an even split of 12.5% between two guarantors, then 
instead of having to reduce exposure from 25% to 10% for one guarantor, 
most money market funds will be required to reduce exposure from 12.5% 
to 10% for two guarantors. Thus, because most money market funds are 
not today using the twenty-five percent basket to gain high levels of 
exposure to any one particular guarantor or demand feature provider, we 
believe that any negative effects for these money market funds that 
would be associated with reducing exposure to guarantors would 
generally be minimal.
---------------------------------------------------------------------------

    \1672\ As discussed below, the DERA analysis further shows that 
the usage of the twenty-five percent basket is predominantly used by 
tax-exempt money market funds.
---------------------------------------------------------------------------

    One commenter suggested that the figures we provided in the 
Proposing Release (which were derived from monthly Form N-MFP filings) 
only captured the funds that used the twenty-five percent basket on one 
particular day, but that the basket is regularly relied upon during the 
course of the fund's operations.\1673\ The DERA Guarantor 
Diversification Memo addresses the commenter's concern by reviewing the 
use of the twenty-five percent basket over a period of two years.\1674\ 
After further review, our staff found that the data we provided in the 
Proposing Release is comparable with the use of the twenty-five percent 
basket when we analyze money market funds' use over two years.\1675\ 
Therefore, although commenters suggest that the use of the twenty-five 
percent basket may vary considerably during the course of operation, 
and commenters did not provide any specific data suggesting otherwise, 
our staff found that the use of the twenty-five percent basket over a 
longer period was in fact relatively constant.
---------------------------------------------------------------------------

    \1673\ BlackRock II Comment Letter. See also Federated II 
Comment Letter (stating that tax-exempt money market funds regularly 
rely on the twenty-five percent basket during the course of their 
operations and that three quarters of its tax-exempt money market 
funds and all but two of its 14 single state funds currently hold 
securities in their twenty-five percent basket).
    \1674\ See DERA Guarantor Diversification Memo, supra note 1665.
    \1675\ Id.
---------------------------------------------------------------------------

    The data and figures provided above, which show that most funds 
that are using the basket are using the basket between the 15% and 10% 
thresholds, suggest that eliminating the basket for all money market 
funds (other than tax-exempt money market funds), as opposed to 
providing a fifteen percent basket, most effectively addresses our 
concerns about a money market fund's exposure to a single guarantor or 
demand feature provider because eliminating the basket provides a 
significant mitigation of the risks to money market funds caused by 
their substantial exposure to these providers. After further 
consideration, we continue to believe that removing the twenty-five 
percent basket for money market funds (other than tax-exempt money 
market funds) instead of providing a fifteen percent basket (or other 
size basket),

[[Page 47881]]

more appropriately addresses the risk that a fund faces when it is 
heavily exposed to a single guarantor or demand feature provider.
ii. Tax-Exempt Money Market Funds
    As discussed in greater detail in the DERA Guarantor 
Diversification Memo, and as discussed further below, DERA staff also 
analyzed data and figures regarding the use of the twenty-five percent 
basket by tax-exempt money market funds. DERA staff found that tax-
exempt money market funds in general, and single state money market 
funds in particular, use the twenty-five percent basket to a higher 
degree than money market funds as a whole. As set forth below, DERA 
staff examined the number of other tax-exempt funds and single state 
funds for which guarantors compose more than 10%, 15%, and 20% of their 
portfolios, respectively.\1676\
---------------------------------------------------------------------------

    \1676\ Id. The DERA Guarantor Diversification Memo divides 
municipal money market funds into two categories, consistent with 
the two types of municipal money market funds on Form N-MFP (Item 
10), ``single state funds'' and ``other tax-exempt funds.''
[GRAPHIC] [TIFF OMITTED] TR14AU14.005

    As illustrated below, DERA staff also examined the percent of other 
tax-exempt funds and single state funds for which guarantors compose 
more than 10%, 15%, and 20% of their portfolios, respectively.\1677\
---------------------------------------------------------------------------

    \1677\ Id.
    [GRAPHIC] [TIFF OMITTED] TR14AU14.006
    

[[Page 47882]]


    In addition, DERA staff examined the amount of excess exposure that 
other tax-exempt funds and single state funds have in assets above the 
10%, 15%, and 20% thresholds, respectively.\1678\
---------------------------------------------------------------------------

    \1678\ Id.
    [GRAPHIC] [TIFF OMITTED] TR14AU14.007
    
    Lastly, as illustrated below, DERA staff found that only a small 
percentage of the entire other tax-exempt fund and single state fund 
industry assets are exposed to guarantors in excess of the 10%, 15%, 
and 20% thresholds.\1679\
---------------------------------------------------------------------------

    \1679\ Id.
    [GRAPHIC] [TIFF OMITTED] TR14AU14.008
    
    DERA staff analyzed, among other things: (i) The percentage of tax-
exempt money market fund assets exposed to guarantors above the 10% 
threshold, which shows the percentage of assets that would need to be 
reinvested if we eliminated the twenty-five percent basket, as 
proposed; and (ii) the percentage of tax-exempt money market fund 
assets exposed to guarantors above the 15% threshold, which shows the 
percentage of assets that will need to be reinvested as a result of the 
fifteen percent basket that we are adopting today for tax-exempt money 
market funds. We believe that our staff's analysis of the percentage of 
assets invested in securities subject to demand features or guarantees 
in excess of the 10% and 15% guarantor diversification limits, 
respectively, provides an accurate reflection of the potential impact 
that elimination or reduction of the twenty-five percent basket would 
have on other tax-exempt funds and single state funds. We also believe 
that looking to the percentage of assets, as

[[Page 47883]]

opposed to the number of funds or excess amount of assets in dollars 
(which only show absolute numbers), most accurately shows the 
corresponding level of assets that will need to be reinvested.
    The above data shows that the percentage of other tax-exempt funds 
and single state fund assets exposed to guarantors above the 10% and 
15% guarantor diversification limits are relatively small when compared 
to other municipal money market funds and the money market fund 
industry as a whole, although the data also shows that other tax-exempt 
funds and single state funds use the basket to a greater extent than 
money market funds generally. In addition to acknowledging that the 
proposed elimination of the basket would have a greater effect on tax-
exempt money market funds because of their higher use of the basket, we 
have also taken into account commenters' concerns, as discussed below, 
regarding the limited availability of guarantor and demand feature 
providers for tax-exempt money market funds as opposed to non-tax-
exempt money market funds.
b. Additional Considerations
i. Non-Tax-Exempt Money Market Funds
    Several commenters generally supported the removal of the twenty-
five percent basket.\1680\ For example, one commenter argued that 
eliminating the twenty-five percent basket for all money market funds 
would be an appropriate step to further reducing concentration risk in 
money market funds.\1681\ Other commenters, however, opposed the 
removal of the twenty-five percent basket.\1682\ Commenters argued that 
the elimination of the twenty-five percent basket would increase money 
market funds' reliance on lower quality investments with higher credit 
risk, particularly due to the limited number of providers of guarantees 
and demand features.\1683\ One commenter argued that since the 
financial crisis, fewer issuers have been providing guarantees and 
other credit support for securities to be purchased by money market 
funds, and that removing the twenty-five percent basket could force 
managers to purchase paper of lower quality issuers that are unable or 
unwilling to obtain third-party demand features.\1684\ Another 
commenter stated that consolidation in the banking industry has 
substantially reduced the pool of high-quality demand feature and 
guarantee providers, and increased regulatory capital requirements will 
likely further reduce the number of available providers in coming 
years.\1685\
---------------------------------------------------------------------------

    \1680\ See, e.g., Barnard Comment Letter; CFA Institute Comment 
Letter. See also U.S. Bancorp Comment Letter (supporting the removal 
of the twenty-five percent basket for all money market funds); Wells 
Fargo Comment Letter (supporting the removal of the twenty-five 
percent basket only for taxable money market funds); Schwab Comment 
Letter (supporting the removal of the twenty-five percent basket, 
but recommending that state-specific municipal money market funds be 
allowed to continue using the basket to some extent).
    \1681\ U.S. Bancorp Comment Letter.
    \1682\ See, e.g., SSGA Comment Letter; ICI Comment Letter; Legg 
Mason & Western Asset Comment Letter. Most of the commenters that 
opposed the removal of the twenty-five percent basket focused 
specifically on the consequences for tax-exempt money market funds. 
We address their particular concerns regarding tax-exempt money 
market funds below.
    \1683\ Goldman Sachs Comment Letter; SIFMA Comment Letter; J.P. 
Morgan Comment Letter; ICI Comment Letter; Legg Mason & Western 
Asset Comment Letter; Vanguard Comment Letter.
    \1684\ Legg Mason & Western Asset Comment Letter. See also ICI 
Comment Letter (expressing concern that eliminating the twenty-five 
percent basket would increase rather than decrease risk by 
increasing a fund's reliance on less creditworthy credit support 
providers, noting that the universe of institutions issuing or 
providing guarantees or liquidity for eligible money market fund 
securities has become limited).
    \1685\ J.P. Morgan Comment Letter.
---------------------------------------------------------------------------

    As discussed below, we do not believe that the removal of the 
twenty-five percent basket for non-tax-exempt money market funds will 
cause money market funds to use lower credit quality guarantors and 
demand feature providers or potentially reduce liquidity and 
flexibility for money market funds, and if any such impact were to 
occur, we expect that it would be limited. As noted above, the data 
analyzed in the DERA Guarantor Diversification Memo shows, among other 
things, that most funds, especially non-tax-exempt money market funds, 
do not use the twenty-five percent basket, and thus we believe that 
most money market funds will likely not be forced to use lower credit 
quality guarantors and demand feature providers.\1686\ Under today's 
amendments, non-tax-exempt money market funds will not be required to 
include more than 10 guarantors or demand feature providers in their 
portfolios if each one maximized the 10% diversification limit. DERA 
staff evaluated the exposure to guarantors and found that the top five 
guarantor parents accounted for a combined total of 43% of the exposure 
across all money market funds. DERA staff measured the credit risk for 
each guarantor by credit default swap (CDS) spreads and composite 
credit ratings (NRSROs) and found that the credit quality of guarantors 
among the top twenty guarantors is similar to that of the top five 
guarantors.\1687\ Thus, we believe that, if today's amendments cause 
non-tax-exempt money market funds to include additional guarantors or 
demand feature providers in the funds' portfolios, there exists a 
supply of guarantors and demand feature providers that have similar 
credit quality as the top five guarantors used by funds. As such, we 
believe that, for non-tax-exempt money market funds that are currently 
using the twenty-five percent basket, it is likely that these money 
market funds would be able to use these additional guarantors and 
demand feature providers and will not be forced to resort to low credit 
quality guarantors or demand feature providers because of the amended 
rule.
---------------------------------------------------------------------------

    \1686\ See DERA Guarantor Diversification Memo, supra note 1665 
and accompanying text.
    \1687\ Id.
---------------------------------------------------------------------------

    A few commenters argued that composite credit ratings from NRSROs 
are not a reliable standalone metric to assess credit quality.\1688\ We 
agree. This is why the DERA memo also assessed credit risk through CDS 
spreads, which are the market's current assessment of a guarantor's 
future financial capacity to provide the necessary support. A few 
commenters also argued that money market funds analyze the credit 
quality of guarantors using a variety of factors other than CDS spreads 
and composite credit ratings.\1689\ While we recognize that money 
market funds' internal analysis of the credit quality of guarantors and 
demand feature providers might be different, we believe that using a 
combination of the objective factors, CDS spreads and composite credit 
ratings, for the purpose of our staff's analysis is an acceptable 
alternative to conducting an individual credit risk analysis of 
guarantors and closely approximates the credit risk of such guarantors 
and demand feature providers. Thus, after further review, we believe 
our staff's findings support the conclusion that, to the limited extent 
a money market fund may need to engage new institutions as providers of 
guarantees and demand features, there will be a sufficient supply of 
first tier guarantors in the market. We therefore believe that, even 
with a 10% guarantor limit for non-tax-exempt money market funds, any 
increase in guarantor diversification should not lead to deterioration 
in credit quality.
---------------------------------------------------------------------------

    \1688\ See, e.g., Wells Fargo DERA Comment Letter.
    \1689\ See, e.g., Wells Fargo DERA Comment Letter; Dreyfus DERA 
Comment Letter.
---------------------------------------------------------------------------

ii. Tax-Exempt Money Market Funds
    Although a number of commenters opposed the removal of the twenty-
five percent basket generally, many

[[Page 47884]]

commenters specifically opposed the removal of the twenty-five percent 
basket for tax-exempt money market funds, and single state money market 
funds in particular.\1690\ Some commenters argued that the twenty-five 
percent basket has not been the reason tax-exempt money market funds 
have experienced credit events in the past.\1691\ For example, one 
commenter argued that the twenty-five percent basket did not have an 
adverse impact on tax-exempt money market funds and their shareholders 
and that significant disruptions should not justify removal of the 
twenty-five percent basket for tax-exempt money market funds.\1692\ 
However, as we discussed in the Proposing Release, in 2008, the 
concentration of tax-exempt money market funds in guarantee and demand 
feature providers led to considerable stress in the municipal 
markets.\1693\ During this time municipal issuers had to quickly find 
substitutes for demand features on which they relied to shorten their 
securities' maturities.\1694\ In addition, at least one provider of 
demand features and guarantees for many municipal securities held by 
money market funds avoided bankruptcy in part due to substantial 
support received from various entities.\1695\ We believe the risk that 
a money market fund faces in cases where the guarantor or demand 
feature provider comes under significant strain is substantial and that 
possible external support is unreliable in cases when guarantors or 
demand feature providers may become stressed. We therefore continue to 
believe that it is appropriate to amend rule 2a-7 to enhance the 
diversification requirements by reducing the twenty-five percent basket 
to a fifteen percent basket, in order to limit a tax-exempt money 
market fund's exposure to any one guarantor or demand feature provider, 
thereby mitigating the risk the fund faces when it heavily relies on a 
single guarantor or demand feature provider.
---------------------------------------------------------------------------

    \1690\ See, e.g., Federated II Comment Letter; Dreyfus Comment 
Letter; Wells Fargo Comment Letter; Schwab Comment Letter; Vanguard 
Comment Letter; BlackRock II Comment Letter.
    \1691\ See, e.g., Vanguard Comment Letter; Federated II Comment 
Letter.
    \1692\ Federated II Comment Letter. See also Federated VII 
Comment Letter (arguing that tax-exempt money market funds weathered 
problems by relying on the credit of the underlying obligor or 
working with the obligor to substitute another guarantor).
    \1693\ See Proposing Release, supra note 25, section III.J.3.
    \1694\ Id.
    \1695\ Id.
---------------------------------------------------------------------------

    As discussed above and in the Proposing Release, when evaluating 
money market funds in the aggregate, most money market funds do not use 
the twenty-five percent basket and those funds that do use the twenty-
five percent basket do not make significant use of it.\1696\ 
Commenters, however, argued that tax-exempt money market funds in 
particular do regularly rely on the twenty-five percent basket.\1697\ 
For example, one commenter stated that as of June 30, 2013, 75% of 
municipal money market funds made use of the twenty-five percent 
basket.\1698\ Another commenter noted that nine of the top 10 largest 
tax-exempt money market funds, which represent approximately 40% of the 
tax-exempt money market fund assets, use the twenty-five percent 
basket.\1699\ As previously discussed, commenters noted that besides 
using a single guarantor in the twenty-five percent basket, money 
market funds may also use two guarantors to fill the twenty-five 
percent basket by having, for example, a 13% exposure to one guarantor 
and a 12% exposure to another.\1700\ The DERA Guarantor Diversification 
Memo found, as shown above, that 10.8% and 2.6% of ``single state 
funds'' and ``other tax-exempt funds'' had at least one guarantor above 
the 20% threshold as of November 2012, respectively.\1701\ The DERA 
Guarantor Diversification Memo also found that 30.6% and 7.7% of single 
state funds and other tax-exempt funds had at least one guarantor above 
the 15% threshold as of November 2012, respectively. In addition, the 
memo shows that 80.2% and 50.0% of single state and other tax-exempt 
funds had at least one guarantor above the 10% threshold as of November 
2012, respectively.\1702\ DERA staff's findings are consistent with the 
data provided by the commenters above, which suggest that tax-exempt 
money market funds use the twenty-five percent basket to a greater 
extent than non-tax-exempt money market funds.
---------------------------------------------------------------------------

    \1696\ See Proposing Release, supra note 25, nn.892-893 and 
accompanying text.
    \1697\ See, e.g., SIFMA Comment Letter; Fidelity Comment Letter.
    \1698\ SIFMA Comment Letter.
    \1699\ Fidelity Comment Letter (noting that only one of those 
nine funds was over 15% and recommending a fifteen percent basket 
for all money market funds).
    \1700\ See, e.g., Comment Letter of Investment Company Institute 
DERA (Apr. 22, 2014) (``ICI DERA Comment Letter'').
    \1701\ See DERA Guarantor Diversification Memo, supra note 1665.
    \1702\ Id.
---------------------------------------------------------------------------

    One commenter argued that although the DERA staff analysis 
demonstrates that most tax-exempt money market funds use the twenty-
five percent basket, the sample period (2010-2012) is not appropriate 
because there were no events during this time period that caused stress 
on money market funds.\1703\ We note, however, that another commenter 
stated that it was beneficial for money market funds to have the 
flexibility of the twenty-five percent basket during the Eurozone 
concerns in 2011,\1704\ which occurred during our sample time period. 
As discussed above, the data analyzed in the DERA Guarantor 
Diversification Memo shows that over the course of two years, the use 
of the twenty-five percent basket remained steady and there was minimal 
variability in the use of the basket over time, even when certain 
events during this time period caused stress on money market 
funds.\1705\
---------------------------------------------------------------------------

    \1703\ See Wells Fargo DERA Comment Letter.
    \1704\ See Fidelity DERA Comment Letter.
    \1705\ See DERA Guarantor Diversification Memo, supra note 1665.
---------------------------------------------------------------------------

    Many commenters expressed concern regarding the impact of the 
proposed removal of the twenty-five percent basket for tax-exempt money 
market funds, and single state money market funds in particular, due to 
the limited availability of demand feature providers and guarantors for 
these types of funds. Commenters argued that the elimination of the 
twenty-five percent basket would limit a tax-exempt money market fund's 
flexibility to obtain greater exposure to strong credit sources in 
times when high credit quality may be scarce.\1706\ A number of 
commenters also argued that the removal of the twenty-five percent 
basket will make it difficult for tax-exempt money market funds to 
acquire sufficient liquid assets.\1707\ Commenters argued that there is 
a relatively narrow group of banks and other financial institutions 
that provide much of the liquidity in the short-term municipal and TOB 
markets,\1708\ and that single state funds in particular have even 
fewer issuers available to them.\1709\
---------------------------------------------------------------------------

    \1706\ Vanguard Comment Letter; Invesco Comment Letter; 
BlackRock II Comment Letter. See also Dreyfus Comment Letter; ICI 
Comment Letter; Legg Mason & Western Asset Comment Letter; Federated 
VII Comment Letter; Federated II Comment Letter.
    \1707\ Wells Fargo Comment Letter; Invesco Comment Letter; 
BlackRock II Comment Letter; SIFMA Comment Letter; Goldman Sachs 
Comment Letter; Federated II Comment Letter. See also Fidelity 
Comment Letter.
    \1708\ Id.
    \1709\ See, e.g., BlackRock II Comment Letter.
---------------------------------------------------------------------------

    One commenter stated that with a constrained supply of securities 
with diverse guarantors, a twenty-five percent basket may actually 
allow a manager to reduce risk by avoiding or reducing exposure to the 
relatively weakest guarantors.\1710\ Some commenters also argued that 
the twenty-five percent basket is an important tool

[[Page 47885]]

that money market funds may use to accommodate the variability and 
unpredictability of supply and demand in the municipal market.\1711\ We 
recognize commenters' concerns regarding the proposed removal of the 
twenty-five percent basket for tax-exempt money market funds, and 
single state money market funds in particular, due to the limited 
availability of demand feature providers and guarantors for these types 
of funds. As noted above, we believe that requiring tax-exempt money 
market funds to limit exposure to any one guarantor or demand feature 
provider while still providing tax-exempt money market funds with a 
fifteen percent basket, will address many of the commenters' concerns 
regarding the limited supply of demand feature providers and guarantors 
for tax-exempt money market funds.
---------------------------------------------------------------------------

    \1710\ Wells Fargo Comment Letter.
    \1711\ See, e.g., Dreyfus Comment Letter; BlackRock II Comment 
Letter. See also Wells Fargo DERA Comment Letter (noting that the 
basket provides a means for money market funds to limit portfolio 
credit risk by concentrating exposure in the highest quality 
guarantor).
---------------------------------------------------------------------------

    Several commenters suggested we reduce the twenty-five percent 
basket to a fifteen percent basket for tax-exempt money market 
funds.\1712\ One commenter stated that, although the twenty-five 
percent basket may not have been heavily used recently by money market 
funds, the availability of a basket would provide useful flexibility to 
money market funds on occasion.\1713\ A second commenter argued that a 
fifteen percent basket would achieve the objective of balancing 
diversification and flexibility, while reducing the potential for 
unintended consequences.\1714\ After further consideration, and in 
light of the data for tax-exempt money market funds and commenters' 
concerns and recommendations regarding the removal of the basket for 
tax-exempt money market funds, we have decided to allow tax-exempt 
money market funds, including single state funds, to rely on a fifteen 
percent basket, under which as much as 15% of the value of securities 
held in a tax-exempt money market fund's portfolio may be subject to 
guarantees or demand features from a single institution. Although 
eliminating the basket for tax-exempt money market funds would reduce 
concentration risk by requiring tax-exempt money market funds to lessen 
their exposure to a single guarantor or demand feature provider, we are 
concerned that eliminating the basket entirely could cause these funds 
to invest in weaker credits. We believe that a reduction of the twenty-
five percent basket to a fifteen percent basket for tax-exempt money 
market funds, which the DERA Guarantor Diversification Memo shows use 
the basket more than non-tax-exempt money market funds, appropriately 
addresses the concerns related to heavy concentration in a single 
guarantor or demand feature provider as well as the concerns that 
eliminating the twenty-five percent basket for tax-exempt money market 
funds could lead to an overall deterioration of credit quality or 
liquidity because tax-exempt funds may have to obtain guarantees or 
demand features from less creditworthy institutions due to a limited 
supply of guarantees and demand features.
---------------------------------------------------------------------------

    \1712\ See, e.g., Goldman Sachs Comment Letter; Fidelity DERA 
Comment Letter. See also Schwab Comment Letter (recommending that 
single state money market funds be allowed to continue using the 
twenty-five percent basket except that within the basket no single 
guarantor or demand feature provider could represent more than 15% 
of the fund's assets). Some commenters suggested we reduce the 
twenty-five percent basket to a fifteen percent basket for all money 
market funds (both tax-exempt funds and non-tax-exempt funds). See 
Goldman Sachs Comment Letter; SIFMA Comment Letter; Fidelity Comment 
Letter. See also J.P. Morgan Comment Letter (recommending that 
instead of eliminating the basket, we mandate a maximum guarantee 
and/or demand feature exposure that can be held within the basket in 
any one entity, such as at a 15% cap).
    \1713\ Goldman Sachs Comment Letter (suggesting that our data is 
limited to a short period of time and arguing that it supports the 
conclusion that a smaller basket would satisfy portfolio managers of 
most funds).
    \1714\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    We believe for several reasons that reducing the twenty-five 
percent basket to a fifteen percent basket should not significantly 
restrict the ability of guarantors to fill the needed capacity as the 
guarantors become more diversified. First, the data analyzed in the 
DERA Guarantor Diversification Memo shows 0.5% and 0.2% of the 
guarantor's dollars are excess dollars above the 15% threshold when 
single state funds and other tax-exempt funds, respectively, are 
considered separately in November 2012, meaning little if any 
additional capacity has to be developed.\1715\ Second, it is reasonable 
to expect that a reduction by one money market fund (because its 
exposure to a particular guarantor is too high) could become a 
purchasing opportunity for another money market fund whose exposure to 
a particular guarantor is below the 15% threshold. Third, should any of 
the top guarantors listed in the DERA Guarantor Diversification Memo 
choose to increase their capacity, this could become a purchasing 
opportunity for a money market fund since the amount of excess dollars 
above the 15% threshold is smaller than the amount needed for the 
remaining funds to reach the 10% or 15% threshold for the same 
guarantor. Lastly, it is also reasonable to expect that if a reduction 
by any of the top guarantors does occur, this could become an 
opportunity for another guarantor to step in. We therefore believe 
that, although other tax-exempt funds and single state funds may 
currently use the twenty-five percent basket to a higher degree than 
money market funds generally and may face greater supply constraints 
than non-tax-exempt funds, because these funds will be permitted to use 
a fifteen percent basket, any increase in guarantor diversification 
should not lead to deterioration in credit quality and any negative 
effects for tax-exempt money market funds that currently use the 
twenty-five percent basket will be minimal.\1716\
---------------------------------------------------------------------------

    \1715\ See DERA Guarantor Diversification Memo, supra note 1665.
    \1716\ See supra note 1665 and accompanying text (discussing 
level of assets and supply of providers).
---------------------------------------------------------------------------

    A couple of commenters argued that VRDNs provide a significant 
source of liquidity for money market funds and that the proposed 
removal of the twenty-five percent basket would therefore have a 
negative impact on a fund's ability to access liquidity through 
VRDNs.\1717\ In addition, one of these commenters argued that the 
combination of regulatory requirements and the diminishing number of 
financial guaranty companies and highly rated banks has significantly 
reduced the number of entities offering credit support for VRDNs,\1718\ 
noting that in late 2012, tax-exempt money market funds had an average 
of 83% of total assets invested in VRDNs.\1719\ As

[[Page 47886]]

discussed in the Proposing Release, and as discussed further below, 
concerns about the creditworthiness of guarantors and demand feature 
providers have reduced the amount of VRDNs outstanding since 
2010.\1720\ We expect that reducing the twenty-five percent basket to a 
fifteen percent basket instead of eliminating the basket will alleviate 
commenters' concerns regarding the availability of VRDNs. In addition, 
because the amount of outstanding VRDNs and other short-term municipal 
debt has decreased 47% between 2008 and 2013, the top guarantors will 
have some additional capacity built in should the overall demand for 
such securities continue to decrease into the future.\1721\ Rule 2a-7 
restricts money market funds to short-term maturities, which in turn 
limits the municipal debt in money market funds to VRDNs and other 
short-term municipal debt.\1722\ In addition, analyzing money market 
fund municipal debt holdings and the availability of acceptable money 
market fund municipal securities (VRDNs and other short-term municipal 
debt) from 2002 to 2013 suggests that the municipal debt market is able 
to adjust to both increasing and decreasing demand for such 
securities.\1723\
---------------------------------------------------------------------------

    \1717\ Legg Mason & Western Asset Comment Letter; Invesco 
Comment Letter. The interest rates on VRDNs are typically reset 
either daily or every seven days. VRDNs include a demand feature 
that provides the investor with the option to put the issue back to 
the trustee at a price of par value plus accrued interest. This 
demand feature is supported by a liquidity facility such as letters 
of credit, lines of credit, or standby purchase agreements provided 
by financial institutions. The interest-rate reset and demand 
features shorten the duration of the security and allow it to 
qualify as an eligible security under Rule 2a-7. See Handbook of 
Fixed Income Securities 237 (Frank J. Fabozzi & Steven V. Mann eds., 
8th ed. 2012) nn.735-36.
    \1718\ Invesco Comment Letter (stating that, while total 
municipal market debt outstanding has held stable for the past five 
years at about $3.7 trillion, VRDNs outstanding have declined 
steadily from $444.9 billion in December 2008 to only $246.8 billion 
in June 2013).
    \1719\ Id. (noting that there has been a marked decline in the 
issuance of credit enhanced securities and that the contraction in 
the availability of these securities hinders the level of 
diversification that managers can achieve in tax-exempt money market 
fund portfolios; also providing data that securities issued with a 
letter of credit, standby purchase agreement or guarantee comprised 
25.6% of total municipal market issuance in 2008 and that in 2012 
these securities made up 9.5% of total issuance).
    \1720\ See Proposing Release, supra note 25, at section III.E.
    \1721\ See infra note 1723.
    \1722\ Our staff's review of portfolio holdings of single state 
funds and other tax-exempt funds from Form N-MFP filings, using 
aggregate amortized values from November 2010 to December 2013, 
found that these funds held approximately 71% in VRDNs and 18% in 
other municipal debt.
    \1723\ The Federal Reserve Board's Flow of Funds of the United 
States provides the amount of municipal securities held by money 
market funds and the overall market. It ranged from about $270 
billion in 2002 to a maximum of $520 billion in 2008 only to decline 
to approximately $305 billion by 2013. The decrease shows that $215 
billion ($520-$305) or 39% exited the money market fund industry 
since the financial crisis. One can closely approximate these money 
market fund holdings by summing the amount of outstanding VRDNs 
(Source: Securities Market and Financial Markets Association Web 
site) with the amount of outstanding short term municipal debt 
(Source: Federal Reserve Board's Flow of Funds of the United 
States), suggesting that money market funds hold nearly all the 
VRDNs and short-term municipal debt. This sum has nearly halved from 
a high of $500 billion in 2008 to $265 billion in 2013. This 
corresponds to a decrease of $235 billion, or 47%, of short term 
municipal debt and VRDNs money market funds holdings. We note, as 
well, that the overall municipal debt market has absorbed these 
large money market fund outflows, and, in fact, the overall 
municipal debt market has grown approximately $200 billion during 
this same time period. See Federal Reserve Board, Flow of Funds of 
the United States, available at http://www.federalreserve.gov/releases/z1 and Securities Market and Financial Market Association 
Reports, available at http://www.sifma.org/research/reports.aspx.
---------------------------------------------------------------------------

c. Additional Economic Analysis
    Our diversification amendments, including (i) the amendment to 
require that money market funds treat the sponsors of ABS as guarantors 
subject to rule 2a-7's 10% diversification limit applicable to 
guarantees and demand features, unless the money market fund's board of 
directors (or its delegate) determines that the fund is not relying on 
the sponsor's financial strength or its ability or willingness to 
provide liquidity, credit or other support to determine the ABS's 
quality or liquidity (``ABS amendment'') and (ii) the amendment to 
remove the twenty-five percent basket for money market funds other than 
tax-exempt money market funds and to reduce to fifteen percent, rather 
than eliminate, the twenty-five percent basket for tax-exempt money 
market funds, including single state money market funds (``twenty-five 
percent basket amendment''),\1724\ are designed to provide a number of 
benefits, as discussed in more detail below. DERA staff's review of 
data suggests that our ABS amendment and twenty-five percent basket 
amendment (treating only ABCP sponsors as guarantors for purposes of 
this analysis) \1725\ would have little impact on the majority of money 
market funds, which do not make use of the twenty-five percent basket, 
and would likely have a minimal impact on those funds that do. Because 
tax-exempt money market funds make greater use of the basket than non-
tax-exempt money market funds and may face greater constraints 
regarding the availability of demand feature providers and guarantors, 
we have provided tax-exempt money market funds with the ability to use 
a fifteen percent basket. DERA staff's review of data suggests that the 
effect of our twenty-five percent basket amendment on tax-exempt money 
market funds would thus also have little impact on the majority of tax-
exempt money market funds.
---------------------------------------------------------------------------

    \1724\ See infra note 1660.
    \1725\ Our staff assumed when reviewing the Form N-MFP data that 
any fully or partially supported ABCP owned by a fund would result 
in the sponsor guaranteeing the ABCP. For this purpose, our staff 
considered an ABCP conduit to be fully supported when the program's 
investors are protected against asset performance deterioration and 
primarily rely on the ABCP sponsor to provide credit, liquidity, or 
some other form of support to ensure full and timely repayment of 
ABCP, and considered an ABCP conduit to be partially supported when 
the ABCP sponsor, although not fully supporting the program, 
provided some form of credit, liquidity, or other form of support. 
See also infra note 1726.
---------------------------------------------------------------------------

    Based on the data analyzed in the DERA Guarantor Diversification 
Memo, our staff found that approximately 131 funds, or 21.9% of all 
funds submitting Form N-MFP for November 2012, reported that they made 
use of the twenty-five percent basket for guarantees and demand 
features, even when we treat sponsors of ABCP as guarantors (and thus 
subject to a 10% diversification limitation). Thus, although a minority 
does use the twenty-five percent basket, the majority of money market 
funds do not. Furthermore, money market funds as of February 28, 2014, 
had invested 16.5% of their assets in ABS and securities subject to 
demand features or guarantees, suggesting that issuers have a ready 
supply of money market fund investors eligible to purchase their 
securities. The 131 funds that used the twenty-five percent basket had, 
on average, $31.4 billion of their assets invested in excess of the 10% 
diversification limitation we are adopting today (i.e., in the twenty-
five percent basket) as of November 2012.\1726\ Furthermore, data as of 
November 2012, shows that 98.9% of total money market fund assets are 
not in funds' twenty-five percent baskets. Thus, because most money 
market funds are not using the twenty-five percent basket to gain high 
levels of exposure to any one particular guarantor or demand feature 
provider and because a very high percentage of money market fund assets 
are not in a twenty-five percent basket, we believe any negative 
effects for these non-tax-exempt money market funds will generally be 
minimal.

[[Page 47887]]

In addition, we believe that, if today's amendments cause non-tax-
exempt money market funds to include additional guarantors or demand 
feature providers in the funds' portfolios, there exists a sufficient 
supply of guarantors and demand feature providers.
---------------------------------------------------------------------------

    \1726\ This estimate likely overstates the number of funds and 
the amount of money market funds' assets that could be affected by 
our ABS amendments for three reasons. First, it assumes that any 
fully or partially supported ABCP owned by a fund would result in 
the sponsor guaranteeing the ABCP. Under our amendments, however, an 
ABCP (or other ABS) sponsor would not be deemed to guarantee the 
ABCP if the board (or its delegate) determines the fund is not 
relying on the sponsor's financial strength or its ability or 
willingness to provide support to determine the ABCP's quality or 
liquidity. We did not assume sponsors of other types of ABS 
guaranteed those ABS because we understand that other forms of ABS 
offered to money market funds either do not typically have sponsor 
support or, if they are supported, the support typically is in the 
form of a guarantee or demand feature, which would already be 
included in our calculation of exposure to providers of demand 
features and guarantees. Second, Form N-MFP data does not 
differentiate between funds that would have had exposure in excess 
of 10% upon the acquisition of a demand feature or guarantee (which 
will not be permitted under our amendments) and those funds that 
were under that level of exposure at the time of acquisition but the 
fund later decreased in size, increasing the fund's exposure above 
the 10% limit (which will be permitted under our amendments). Third, 
where a fund owned securities issued by or subject to demand 
features or guarantees from affiliated institutions, we treated the 
separate affiliated institutions as single institutions for purposes 
of these estimates.
---------------------------------------------------------------------------

    As discussed above, and as addressed by certain commenters, we 
recognize that tax-exempt money market funds, and in particular, single 
state tax-exempt money market funds, use the twenty-five percent basket 
to a greater degree than other types of money market funds. DERA staff 
found that approximately 128 tax-exempt funds, or 67.7% of all tax-
exempt funds submitting Form N-MFP for November 2012, made use of the 
twenty-five percent basket. For single state funds, our staff found 
that approximately 89 single state funds, or 80.2% of single state 
funds submitting Form N-MFP for November 2012 made use of the twenty-
five percent basket. However, tax-exempt money market funds, including 
single state funds, that do use the twenty-five percent basket 
generally do not make significant use of it. The 128 tax-exempt money 
market funds that used the twenty-five percent basket had, on average, 
2.4% of their assets invested in excess of the 10% diversification 
limitation we are adopting today (i.e., in the twenty-five percent 
basket), and the 89 single state money market funds that used the 
twenty-five percent basket had, on average, 0.5% of their assets 
invested in access of the 15% diversification limitation as of November 
2012.\1727\ In addition, the 128 tax-exempt money market funds that 
used the twenty-five percent basket had, on average, 0.3% of their 
assets invested in excess of the 15% diversification limitation we are 
adopting today, and the 89 single state money market funds that used 
the twenty-five percent basket had, on average, 0.5% of their assets 
invested in excess of the 15% diversification limitation as of November 
2012.\1728\
---------------------------------------------------------------------------

    \1727\ Id.
    \1728\ Id.
---------------------------------------------------------------------------

    Although we understand that non-tax-exempt money market funds, and 
tax-exempt money market funds in particular, may have made greater use 
of the twenty-five percent basket in the past (and might do so in the 
future if we fully retained the twenty-five percent basket), we are 
concerned that funds were previously exposed to concentrated risks 
inconsistent with the purposes of rule 2a-7's diversification 
requirements as discussed above. We continue to believe that amending 
rule 2a-7 to tighten diversification limits for securities subject to 
guarantees or demand features from a single institution for both non-
tax-exempt money market funds and tax-exempt money market funds will 
mitigate some of the risk that a money market fund faces by limiting a 
fund's exposure to any one guarantor or demand feature provider.
    The principal effect of the ABS amendment and twenty-five percent 
basket amendment we are adopting today may be to restrain some managers 
of money market funds from being heavily exposed to an individual ABS 
sponsor and from making use of the twenty-five percent basket in the 
future, under perhaps different market conditions.\1729\ Our 
diversification amendments may deny fund managers some flexibility in 
managing fund portfolios and could decrease fund yields. To assess our 
amendment's effect on yield, our staff examined whether the 7-day gross 
yields of funds that use the twenty-five percent basket were higher 
than the 7-day gross yields for those funds that do not.\1730\ Our 
staff found: (i) For other tax-exempt funds, the average yield for 
funds using the twenty-five percent basket was 0.0893% as compared to 
the average yield for other tax-exempt funds that did not use the 
twenty-five percent basket of 0.0987% and the average yield for funds 
using the twenty-five percent basket above the 15% threshold was 
0.0736% as compared to the average yield for other tax-exempt funds 
that either did not use the twenty-five percent basket or used the 
twenty-five percent basket below the 15% threshold of 0.0951%; (ii) for 
single state funds, the average yield for funds using the twenty-five 
percent basket was 0.0886% as compared to the average yield for single 
state funds that did not use the twenty-five percent basket of 0.0754% 
and the average yield for single state funds using the twenty-five 
percent basket above the 15% threshold was 0.1075% as compared to the 
average yield for singe state funds that either did not use the twenty-
five percent basket or used the twenty-five percent basket below the 
15% threshold of 0.0790%; and (iii) for prime money market funds, the 
average yield for funds using the twenty-five percent basket was 
0.1740% as compared to the average yield for prime money market funds 
that did not use the twenty-five percent basket of 0.1875%.\1731\ The 
prime money market fund yield differences may not, of course, be caused 
by the use of the twenty-five percent basket, but may instead reflect 
the overall risk tolerance of fund managers that take advantage of the 
twenty-five percent basket. In addition, we acknowledge that the 
current low interest-rate environment may cause the yield spread in 
each comparison above to be less than if we were measuring the yield 
spreads in a higher interest rate environment.
---------------------------------------------------------------------------

    \1729\ One commenter suggested that compliance with our 
amendments would require it to reallocate or sell its money market 
fund portfolio securities. See Fidelity Comment Letter (also 
suggesting that we extend our nine-month implementation period for 
modifying the twenty-five percent basket due to the need for 
additional time for transactions). However, funds with investments 
in excess of those permitted under the revised rule are not required 
to sell the excess investments to come into compliance. The 
amendments require a fund to calculate its exposure to issuers of 
demand features and guarantees as of the time the fund acquires a 
demand feature or guarantee or a security directly issued by the 
issuer of the demand feature or guarantee. See rules 2a-7(d)(3)(i) 
and (iii).
    \1730\ We assumed that any fully or partially supported ABCP 
owned by a fund would result in the sponsor guaranteeing the ABCP. 
See supra note 1726.
    \1731\ These averages are derived from Form N-MFP data as of 
February 28, 2014, weighted by money market funds' assets under 
management.
---------------------------------------------------------------------------

    We requested comment as to whether there would be a significant 
impact on fund yield, and if so, how significant. Although commenters 
did not address the specific impact on fund yield, one commenter stated 
that our staff's analysis assumed that funds could replace securities 
guaranteed or subject to a demand feature in a twenty-five percent 
basket with the same securities that were held by the funds that do not 
use the twenty-five percent basket, and suggested that the elimination 
of the basket might therefore decrease both yield and liquidity of tax-
exempt funds.\1732\ We recognize that it is possible that one money 
market fund may not be able to obtain the exact securities of another 
money market fund that is not currently relying on the basket. However, 
as discussed above, our staff's analysis shows that there exists a 
sufficient supply of first tier guarantors in the market for funds to 
invest. Therefore, after further consideration, we believe that the 
effect on yield, given the 7-day gross yields of funds that use the 
twenty-five percent basket versus the 7-day gross yields for those 
funds that do not, will be minimal.
---------------------------------------------------------------------------

    \1732\ Federated VII Comment Letter.
---------------------------------------------------------------------------

    Our twenty-five percent basket amendment requires non-tax-exempt 
money market funds that use the twenty-five percent basket, and tax-
exempt money market funds that use the twenty-five percent basket at 
levels above the fifteen percent threshold, or that would use it in the 
future, to either not acquire certain demand features or guarantees (if 
the fund could not assume

[[Page 47888]]

additional exposure to the provider of the demand feature or guarantee) 
or to acquire them from different institutions. Funds that choose the 
latter course could thereby increase demand for providers of demand 
features and guarantees and increase competition among their providers. 
If new entrants do not enter the market for demand features and 
guarantees in response to this increased demand, reducing the twenty-
five percent basket to a fifteen percent basket for tax-exempt money 
market funds, and removing the twenty-five percent basket for all other 
money market funds, could result in money market funds acquiring 
guarantees and demand features from lower quality providers than those 
the funds use today, although, as discussed above, we expect such 
potential effect to be mitigated due to the available supply of first-
tier guarantors and demand feature providers that have similar credit 
quality as the top guarantors that are used by funds. If new entrants 
do enter the market (or if current participants increase their 
participation), the effect on money market funds would depend on 
whether these new entrants (or current participants) are of high or low 
credit quality as compared to the providers money market funds would 
use absent our amendments.
    Our ABS amendment and twenty-five percent basket amendment also may 
increase the costs of monitoring the credit risk of funds' portfolios 
or make that monitoring less efficient, to the extent they are more 
diversified under our amendments and money market fund advisers must 
expend additional effort to monitor the credit risks posed by a greater 
number of guarantors and demand feature providers. Although we cannot 
provide a point estimate of these costs, and commenters did not provide 
us with any data that would assist us with a point estimate, we expect 
that these costs would be included in our broader cost estimates as 
discussed above in section III.I.1. A money market fund that could not 
acquire a particular guarantee or demand feature under our amendments 
could, for example, be able to acquire a guarantee or demand feature 
from another institution in which the fund already was invested, at no 
additional monitoring costs to the fund.
    Issuers also could incur costs if they were required to engage 
different providers of demand features or guarantees under our 
amendments, which could negatively affect capital formation. This could 
occur because an issuer might otherwise have sought a guarantee or 
demand feature from a particular bank, but might choose not to use that 
bank because the money market funds to which the issuer hoped to market 
its securities could not assume additional exposure to the bank. If 
issuers were unable to receive demand features or guarantees from banks 
(or other institutions) to which they would have turned absent our 
amendments, they would have to engage different banks, which could make 
the offering process less efficient and result in higher costs if the 
different banks charged higher rates. Issuers of securities with 
guarantees or demand features (e.g., issuers of longer-term securities 
that can be sold to money market funds only with a demand feature) also 
could be required to broaden their investor base or seek out different 
providers of guarantees or demand features under our amendments, which 
could make their offering process less efficient or more costly.
    As discussed above, some commenters argued that single state funds 
in particular would be negatively affected by the removal of the 
twenty-five percent basket.\1733\ We believe that providing single 
state funds a fifteen percent basket retains much of the flexibility 
for single state funds to invest in securities subject to guarantees or 
demand features while also limiting the extent to which a single state 
fund can become exposed to any one guarantor or demand feature 
provider. Although our amendments reduce the twenty-five percent basket 
for all single state funds, we are not changing the application of rule 
2a-7's 5% issuer limit to single state funds, which today applies only 
to 75% of a single state fund's total assets.\1734\ We historically 
have applied the issuer diversification limitation differently to 
single state funds, recognizing that ``single state funds face a 
limited choice of very high quality issuers in which to invest'' and, 
therefore, that there is a risk that ``too stringent a diversification 
standard could result in a net reduction in safety for certain single 
state funds.'' \1735\ The market for demand features and guarantees, in 
contrast, is national for most single state funds and therefore may not 
be subject to the same supply constraints as is the market for issuers 
in which single state funds may directly invest. However, the market 
for demand features and guarantees for some single state funds is not 
national. For example, the state of California through the California 
State Teachers Retirement System is a guarantor for securities held in 
California municipal money market fund portfolios as reported on Form 
N-MFP. Additional analysis of the data in the DERA Guarantor 
Diversification Memo shows that 74% of the single state fund's excess 
guarantees above the 15% threshold on average come from California 
municipal money market funds (39%), New York municipal money market 
funds (24%), and Massachusetts municipal money market funds (11%). All 
other state municipal money market funds account for 5% or less of the 
excess guarantees dollars above the 15% threshold. As such, we would 
expect that in terms of the amount of assets, California, New York, and 
Massachusetts may be affected more than other states. However, as we 
discussed earlier, we expect the impact to be minimal since the amount 
of excess guarantee dollars above the 15% threshold is less than 0.5% 
of the single state guarantee dollars.\1736\ This may be reduced 
further if other single state funds with guarantees below the 10% and 
15% threshold choose to increase their percent exposures to those 
guarantors with excess exposure in other funds.
---------------------------------------------------------------------------

    \1733\ See, e.g. BlackRock II Comment Letter; Schwab Comment 
Letter; Federated VII Comment Letter; Dreyfus Comment Letter.
    \1734\ See current rule 2a-7(c)(4)(i)(B) and rule 2a-
7(d)(3)(i)(B).
    \1735\ See Revisions to Rules Regulating Money Market Funds, 
Investment Company Act Release No. 21837 (Mar. 21, 1996) [61 FR 
13956 (Mar. 28, 1996)] (``1996 Adopting Release''), at text 
following n.38.
    \1736\ See DERA Guarantor Diversification Memo, supra note 1665.
---------------------------------------------------------------------------

    We do not expect that our ABS and twenty-five percent basket 
diversification amendments will result in operational costs for funds. 
We understand that money market funds generally have systems to monitor 
their exposures to guarantors (among other things) and to monitor the 
funds' compliance with rule 2a-7's current 10% demand feature and 
guarantee diversification limit. We expect that money market funds 
could use those systems to track exposures to ABS sponsors under our 
amendments and could continue to track the funds' compliance with a 10% 
demand feature and guarantee diversification limit. To the extent a 
money market fund did have to modify its systems as a result of our ABS 
and twenty-five percent basket diversification amendments, we expect 
that the money market fund would make those modifications when 
modifying its systems in response to our amendments to require money 
market funds to aggregate exposure to affiliated issuers for purposes 
of rule 2a-7's 5% diversification limit, for which we provide cost 
estimates above.\1737\

[[Page 47889]]

Because the costs estimated above are those associated with activities 
typically involved in making systems modifications, we expect they also 
would cover any systems modifications associated with our ABS and 
twenty-five percent basket diversification amendments.
---------------------------------------------------------------------------

    \1737\ See supra note 1625 and accompanying text.
---------------------------------------------------------------------------

    In the Paperwork Reduction Act analysis in section IV.A.1 below, we 
identified certain initial and ongoing hour burdens and associated time 
costs related to our diversification amendments. Specifically, our ABS 
amendment requires that the board of directors adopt written procedures 
requiring periodic evaluation of any determinations made regarding 
instances in which the fund is not relying on the ABS sponsor's 
financial strength or its ability or willingness to provide quality or 
liquidity. Furthermore, for a period of not less than three years from 
the date when the evaluation was most recently made, the fund must 
preserve and maintain in an easily accessible place a written record of 
the evaluation. These requirements are a collection of information 
under the Paperwork Reduction Act, and are designed to help ensure that 
the objectives of the diversification limitations are achieved. We 
estimate the one-time burden to prepare and adopt these procedures will 
be 1,368 hours at $1,130,880 in total time costs for all money market 
funds and we estimate that the annual burden would be approximately 608 
burden hours and $842,080 in total time costs for all money market 
funds. We also note that a board can delegate its responsibility to 
determine whether the fund is relying on the ABS sponsor's financial 
strength or its ability or willingness to provide quality or liquidity 
pursuant to rule 2a-7.\1738\ To the extent that a board delegates this 
responsibility, it may incur additional costs related to its oversight 
of such a delegate, although we expect that any such additional costs 
would be minimal.
---------------------------------------------------------------------------

    \1738\ See rule 2a-7(j).
---------------------------------------------------------------------------

J. Amendments to Stress Testing Requirements

    We are adopting amendments to the stress testing requirements under 
rule 2a-7, with modifications from the proposal in response to 
comments. Specifically, we are adopting reforms to the current stress 
testing provisions that will require funds periodically to test their 
ability to maintain weekly liquid assets of at least 10% and to 
minimize principal volatility \1739\ in response to specified 
hypothetical events that include (i) increases in the level of short-
term interest rates, (ii) the downgrade or default of particular 
portfolio security positions, each representing various exposures in a 
fund's portfolio, and (iii) the widening of spreads in various sectors 
to which the fund's portfolio is exposed, each in combination with 
various increases in shareholder redemptions.\1740\ The fund adviser 
must report the results of such stress testing to the board, including 
such information as may be reasonably necessary for the board of 
directors to evaluate the stress testing results.\1741\ We discuss 
these requirements and the modifications from the proposal in further 
detail below.
---------------------------------------------------------------------------

    \1739\ Stable NAV funds will continue to be required to test 
their ability to maintain a stable NAV. See rule 2a-7(g)(8)(i). 
Additionally, as discussed below, we recognize that fund advisers 
and boards are more likely to be concerned with, and the 
hypothetical events are focused on, downside volatility.
    \1740\ Id.
    \1741\ See rule 2a-7(g)(8)(ii).
---------------------------------------------------------------------------

1. Overview of Current Stress Testing Requirements and Proposed 
Amendments
    The current stress testing requirements, adopted in 2010, require 
that the fund adopt procedures providing for periodic testing of the 
fund's ability to maintain a stable price per share based on (but not 
limited to) certain hypothetical events. These hypothetical events 
include a change in short-term interest rates, an increase in 
shareholder redemptions, a downgrade of or default on portfolio 
securities, and the 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. As we discussed in the Proposing Release, we have monitored the 
stress testing requirement and how different fund groups have 
approached its implementation in the marketplace. Through our staff's 
examinations of money market fund stress testing procedures, we have 
observed disparities in the quality and comprehensiveness of stress 
tests, the types of hypothetical circumstances tested, and the 
effectiveness of materials produced by fund managers to explain the 
stress testing results to boards. For example, some funds test for 
combinations of events, as well as for correlations between events and 
between portfolio holdings, whereas others do not. As discussed in the 
proposal, we believe that an evaluation of combinations of events and 
correlations among portfolio holdings is an important part of a fund's 
stress testing.\1742\
---------------------------------------------------------------------------

    \1742\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

    We also noted in the proposal that we have had several 
opportunities to assess the effectiveness of the stress testing 
requirements during periods of market stress, including the 2011 
Eurozone debt crisis and the 2011 U.S. debt ceiling impasses. We 
further assessed the role of stress testing in fund boards' assessment 
of fund risks during the 2013 U.S. debt ceiling impasse. Our staff has 
observed that funds that had strong stress testing procedures were able 
to use the results of those tests to better manage their portfolios and 
better understand and minimize the risks associated with these 
events.\1743\
---------------------------------------------------------------------------

    \1743\ Id.
---------------------------------------------------------------------------

    Finally, we also noted that, both with stable NAV and floating NAV 
funds, we believe that stress testing the liquidity of money market 
funds could enhance a fund board's understanding of the risks to the 
fund related to periods of heavy shareholder redemptions and could help 
the fund manage those risks. We also noted that from the staff's review 
of stress testing by funds, some funds already incorporate an analysis 
of their ability to maintain liquidity in their stress tests.\1744\
---------------------------------------------------------------------------

    \1744\ Id.
---------------------------------------------------------------------------

    Considering this information and experience, the Commission 
proposed certain modifications, enhancements, and clarifications to the 
current stress testing requirements in rule 2a-7 to strengthen the 
stress testing requirements. First, we added a proposed requirement for 
each fund to stress test its ability to avoid having its weekly liquid 
assets fall below 15% of all fund assets. Under the floating NAV 
alternative, we also proposed removing the requirement that floating 
NAV funds test their ability to maintain a stable share price. 
Additionally, we proposed certain enhancements and clarifications to 
the list of hypothetical events that funds were required to include in 
their stress testing. Finally, we proposed to modify the requirements 
to report results to the board, proposing an additional requirement 
that the fund adviser include such information as may be reasonably 
necessary for the board of directors to evaluate the stress 
testing.\1745\
---------------------------------------------------------------------------

    \1745\ Id.
---------------------------------------------------------------------------

    Comments on the proposed changes to the stress testing requirement 
were mixed. Some commenters supported the proposed reforms to varying 
degrees.\1746\

[[Page 47890]]

Others opposed them.\1747\ Commenters who supported the reforms 
suggested that they will enable better management of money market fund 
risk and help address run incentives by heightening board awareness of 
how events can affect liquidity and share price.\1748\ Commenters who 
opposed the reforms indicated that they believed the current stress 
testing requirements were sufficient, and that the reforms might be 
costly, difficult to implement, and provide unnecessary information to 
boards.\1749\ Two commenters believed that stress testing should not be 
required for floating NAV funds.\1750\ Other commenters believed that 
stress testing requirements should continue to apply to floating NAV 
funds.\1751\ These comments are discussed in more detail below.
---------------------------------------------------------------------------

    \1746\ See, e.g., TIAA-CREF Comment Letter; BlackRock II Comment 
Letter; MFDF Comment Letter; Comment Letter of Treasurer, State of 
Connecticut (Sept. 17, 2013) (``Conn. Treasurer Comment Letter''); 
Barnard Comment Letter; Santoro Comment Letter.
    \1747\ See, e.g., Federated VIII Comment Letter; ICI Comment 
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment 
Letter; Dreyfus Comment Letter.
    \1748\ See, e.g., BlackRock II Comment Letter (noting that 
stress testing plays a critical role in a board's understanding of 
money market fund risks).
    \1749\ See, e.g., ICI Comment Letter (noting that there are 
limitations to stress testing and of fund directors' capacity to 
review and interpret stress tests, which could lead to diminishing 
returns as the number and complexity of stress tests increase).
    \1750\ See Deutsche Comment Letter; Legg Mason & Western Asset 
Comment Letter.
    \1751\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; MSCI Comment Letter.
---------------------------------------------------------------------------

2. Stress Testing Metrics
a. Liquidity
    As proposed, we are requiring money market funds to test their 
liquidity, but have modified the threshold to require funds to test 
their ability to maintain 10% weekly liquid assets from the 15% 
proposed.\1752\ This change is consistent with the modification from 
the proposal regarding the threshold of weekly liquid assets that will 
trigger a default liquidity fee.\1753\ Several commenters generally 
supported the proposed requirement that funds test their 
liquidity.\1754\ One commenter supported the proposal that funds test 
against the 15% threshold, and added that the commenter already tests 
against multiple liquidity thresholds and will continue to do so.\1755\ 
Another commenter argued that funds should be required to test against 
a more conservative threshold, such as 20%, to allow funds to manage 
liquidity with ``an eye toward a significant buffer'' against the 
liquidity threshold that would trigger fees and gates.\1756\ Finally, 
one commenter, although generally supportive of testing liquidity, 
suggested that rather than requiring funds to test against a specific 
liquidity threshold, funds should analyze the impact of specific 
hypothetical event scenarios on weekly liquidity and the fund's NAV, 
even if such events fall short of triggering a specific liquidity 
threshold.\1757\
---------------------------------------------------------------------------

    \1752\ See rule 2a-7(g)(8)(i).
    \1753\ See rule 2a-7(c)(2(ii).
    \1754\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; MSCI Comment Letter; Dreyfus Comment Letter (but expressing 
objection to the stress tests as proposed as vague, qualitative, and 
onerous).
    \1755\ See BlackRock II Comment Letter.
    \1756\ See MSCI Comment Letter.
    \1757\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Several commenters, however, opposed the proposed requirement to 
have funds stress test their liquidity.\1758\ One commenter noted that 
it believed that testing liquidity would not be particularly meaningful 
for funds, as it is not possible to predict what assets a fund would 
sell to meet redemptions.\1759\ This commenter also believed that 
testing liquidity in floating NAV funds would serve no useful purpose 
because any losses on sales of securities to meet redemptions would be 
reflected in the fund's NAV.\1760\ Several commenters believed that it 
was not feasible for a fund to test ``the magnitude of each 
hypothetical event that would cause'' the fund to cross the liquidity 
threshold,\1761\ as the proposed rule would have required for reporting 
to the board.\1762\ These commenters noted that, unlike stable share 
price, there was not a direct relationship between a fund's liquidity 
levels and the hypothetical events listed in the proposed rule, other 
than shareholder redemptions.\1763\ They believed that conducting such 
stress tests would therefore require funds to make complex assumptions 
about how hypothetical events, such as an interest rate increase, would 
affect the level of shareholder redemptions or a portfolio manager's 
decision to sell securities.\1764\ As an alternative, commenters 
suggested that funds could calculate the level of shareholder 
redemptions that, if satisfied using only weekly liquid assets, would 
reduce the fund's weekly liquid assets to 15%.\1765\ Additionally, one 
commenter, although not objecting to having funds stress test for 
liquidity maintenance generally, believed that the stress tests as 
proposed were vague and qualitative in nature.\1766\
---------------------------------------------------------------------------

    \1758\ See ICI Comment Letter; Federated II Comment Letter; 
Federated VIII Comment Letter; Legg Mason & Western Asset Comment 
Letter; Invesco Comment Letter; IDC Comment Letter.
    \1759\ See Legg Mason & Western Asset Comment Letter.
    \1760\ Id.
    \1761\ See ICI Comment Letter; Federated VIII Comment Letter. 
See also IDC Comment Letter (noting that testing when a hypothetical 
event may impact a fund's ability to maintain weekly liquid assets 
of 15% may not be feasible).
    \1762\ See proposed rule 2a-7(g)(7)(ii) (Floating NAV 
Alternative or Fees and Gates Alternative).
    \1763\ See ICI Comment Letter (arguing that there is no 
practical means of testing when a hypothetical event, other than 
redemptions, would cause a money market fund to cross the 15% 
liquidity threshold); Federated II Comment Letter (same); Federated 
VIII Comment Letter (same). See also Invesco Comment Letter 
(objecting to the testing of scenarios in which a fund falls below 
the 15% liquidity threshold because the only reasonable scenario in 
which this would occur is shareholder redemptions).
    \1764\ See ICI Comment Letter (noting that funds do not have a 
basis for determining the amount of redemptions might indirectly 
result from significant changes in interest rates, spreads or a 
downgrade or default on portfolio securities); Federated VIII 
Comment Letter (arguing that the proposed test on liquidity levels 
would have to be based on a behavioral relationship between changes 
in interest rates and decisions by the fund's portfolio manager to 
sell portfolio securities); Schwab Comment Letter (noting that 
testing liquidity requires estimation of data that is not directly 
observable, such as redemption contagion and security level price 
correlations).
    \1765\ Id.
    \1766\ See Dreyfus Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that funds should assess their liquidity as 
part of the stress testing process. As one commenter noted, investors 
are likely to monitor their funds' liquidity levels, and the 
deterioration of liquidity could spark redemptions.\1767\ We agree. We 
also believe that the benefits to testing liquidity will apply to 
floating NAV funds as well as stable NAV funds. We believe that 
floating NAV funds need to understand what can place stress on 
liquidity, regardless of the fact that losses from the sales of 
securities are reflected in a market-based NAV, particularly in light 
of the potential for triggering a fee or gate.\1768\ It is important 
for boards to understand and be aware of what could cause a fund's 
liquidity to deteriorate below certain thresholds (or below a 
regulatory threshold) as this renders the fund less able to satisfy 
redemptions through internal liquidity and thus increases the 
likelihood that satisfying future redemptions will generate liquidity 
costs.
---------------------------------------------------------------------------

    \1767\ See MSCI Comment Letter.
    \1768\ See Legg Mason & Western Asset Comment Letter.
---------------------------------------------------------------------------

    We disagree with the commenter that indicated that testing 
liquidity would not be meaningful because it is not possible to predict 
what assets would be sold to meet redemptions.\1769\ As discussed 
below, we have made several modifications to the proposed rule in 
response to comments to reduce the number and complexity of assumptions 
that funds will need to make. We

[[Page 47891]]

recognize that funds still need to make certain assumptions in their 
stress testing. In particular, when testing the effect of an increase 
in shareholder redemptions, funds will have to make assumptions 
regarding which assets are sold to meet such redemptions. We believe, 
however, that the stress testing requirements that we are adopting 
today will still be helpful to a board's understanding of a fund's 
liquidity and the events that can make it deteriorate, even when it 
includes some assumptions. In support of this belief that such testing 
can be useful to funds, we note that some commenters indicated that 
they already stress test liquidity, even though it is not currently 
required.\1770\ Additionally, as we discuss below, we believe that a 
disclosure and discussion of the assumptions that fund managers made 
when developing stress testing can increase the board's understanding 
of the stress testing results, and how the results might differ if 
different assumptions are used.
---------------------------------------------------------------------------

    \1769\ Id.
    \1770\ See BlackRock II Comment Letter; Dreyfus Comment Letter.
---------------------------------------------------------------------------

    Regarding the commenters that noted that there was not a direct 
relationship between a fund's liquidity levels and the hypothetical 
events listed in the rule, we recognize that many of the hypothetical 
events in the rule do not have a direct effect on liquidity. We did not 
intend to require funds to make complex assumptions regarding how the 
hypothetical events listed in the proposed rule would affect redemption 
levels and therefore liquidity. In response to the concerns that these 
commenters raised, and as discussed further below, we have modified the 
stress testing requirements so that each hypothetical event listed in 
the amendments is tested assuming varying levels of shareholder 
redemptions. We are not requiring the fund to test, for example, how a 
change in interest rates or credit spreads by itself affects a fund's 
level of weekly liquid assets, but rather how increases in redemptions 
combined with the effect of specific hypothetical events, like a change 
in interest rates or credit spreads, may affect fund liquidity. It 
should also simplify the implementation of the requirement by not 
requiring the fund to make potentially complex or speculative 
assumptions about how an increase in interest rates or deterioration in 
portfolio credit quality will affect shareholder redemptions, and 
thereby affect liquidity, a concern that was raised by 
commenters.\1771\ We believe this measure, in addition to modifications 
to the proposed hypothetical events discussed below, addresses the 
concern of the commenter that did not object to testing liquidity in 
principle but believed that the proposed hypothetical events made the 
stress testing requirements vague and qualitative in nature. Finally, 
as discussed further below, we are eliminating the proposed requirement 
that funds report the ``magnitude of each hypothetical event'' that 
would cause the fund to fall below the liquidity threshold. This change 
from the proposal responds to commenters' concerns that making such a 
determination is not feasible.\1772\
---------------------------------------------------------------------------

    \1771\ See Federated VIII Comment Letter; ICI Comment Letter.
    \1772\ Id.
---------------------------------------------------------------------------

    As noted above, we are requiring funds to test against a 10% weekly 
liquid assets threshold. We have chosen the 10% weekly liquid assets 
threshold because it is the same threshold that will trigger a default 
liquidity fee absent board action under the final amendments. Much like 
the inability to maintain a stable price, the triggering of a default 
fee absent board action under our fees and gates reform may result in 
consequences for a fund and its shareholders. Requiring funds to stress 
test their ability to avoid falling below this threshold should help 
inform boards and fund managers of the circumstances that could cause a 
fund to trigger a default liquidity fee and provide them a tool to help 
avoid doing so. We considered setting the required threshold at a more 
conservative level, in particular 30%, because this threshold is the 
level of weekly liquid assets that funds are required to maintain and 
the level below which fund directors will be permitted to impose a 
discretionary fee or gate. We believe, however, that fund directors 
would benefit most from understanding the events that could place such 
stress on a fund's liquidity that it would trigger a liquidity fee, 
absent board action. Although we believe funds would also benefit from 
testing the ability to maintain higher liquidity thresholds,\1773\ we 
are sensitive to the potential costs of requiring funds to stress test 
against multiple liquidity thresholds, and have therefore chosen to set 
the liquidity threshold for required testing at the lower 10% 
threshold. Nonetheless, we encourage funds to consider testing multiple 
liquidity thresholds, particularly up to and including the 30% 
threshold, and to consider more generally the effects of hypothetical 
events and combinations of those events on liquidity.
---------------------------------------------------------------------------

    \1773\ See BlackRock II Comment Letter (noting that it stress 
tests against other weekly thresholds it deems appropriate); 
Fidelity Comment Letter (noting that testing the effects of events 
on liquidity and share price can be useful to boards even if the 
event ``is not of sufficient magnitude to cause the MFF to violate'' 
a threshold).
---------------------------------------------------------------------------

b. Principal Volatility
    In addition to requiring funds to test their liquidity against, at 
minimum, specified hypothetical events, we are requiring funds to test 
their ability to minimize principal volatility.\1774\ Funds are 
currently required to test their ability to maintain a stable NAV. In 
the Proposing Release, we proposed replacing this requirement for 
floating NAV funds with a requirement to test their ability to maintain 
weekly liquid assets, and proposed requiring stable NAV funds to test 
their ability to maintain both a certain level of liquidity and a 
stable share price.\1775\ In the Proposing Release, however, we 
recognized that there might be other metrics that could be used in 
stress testing. Specifically, we requested comment on whether to 
require floating NAV funds to test their ability to meet an investment 
objective, avoid losses or minimize principal volatility.\1776\
---------------------------------------------------------------------------

    \1774\ See rule 2a-7(g)(8)(i).
    \1775\ See Proposing Release, supra note 25, at section III.L.
    \1776\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

    In response, several commenters argued that floating NAV funds 
should continue to test their NAV stability.\1777\ These commenters 
pointed out investors in floating NAV funds will continue to expect a 
relatively stable NAV.\1778\ Additionally, commenters argued that the 
stress testing requirements should not differ between floating NAV and 
fixed NAV funds.\1779\ As we noted above, two commenters did not 
believe that stress testing requirements should apply to floating NAV 
funds.\1780\ One such commenter argued that testing for floating NAV 
funds was not necessary because a floating NAV already provides optimal 
price transparency.\1781\
---------------------------------------------------------------------------

    \1777\ See BlackRock II Comment Letter (noting that investors in 
floating NAV funds expect a relatively stable NAV); Fidelity Comment 
Letter (same); MSCI Comment Letter (noting that even with a floating 
NAV, there will still be a valuation ``tipping point'').
    \1778\ Id.
    \1779\ See BlackRock II Comment Letter; Fidelity Comment Letter.
    \1780\ See Deutsche Comment Letter; Legg Mason & Western Asset 
Comment Letter (commenting that no stress testing should be required 
for Floating NAV funds, and arguing that having a floating NAV fund 
test for liquidity would serve no useful purpose). The argument 
raised in the Legg Mason & Western Asset Comment Letter is discussed 
above in the discussion regarding the use of liquidity as a metric 
in stress testing.
    \1781\ See Deutsche Comment Letter.

---------------------------------------------------------------------------

[[Page 47892]]

    We agree with commenters that believed floating NAV funds should 
test their NAV stability. We believe that money market funds, 
regardless of whether they have a floating NAV or maintain a stable 
NAV, will continue to strive to minimize principal volatility to 
maintain a stable share price. In times of market stress, funds could 
face challenges in limiting principal volatility, and we believe that 
funds and fund boards would benefit from stress testing to help them 
understand the potential pressures on principal stability, as the 
current requirements do today. We have therefore modified the proposed 
rule to require a fund to test both its ability to maintain liquidity 
and its ability to minimize principal volatility based on specified 
hypothetical events. We have determined not to set specific limitations 
or thresholds against which funds should test principal volatility. 
Unlike stable NAV funds, which have a clear threshold, we do not 
believe that there is single measure of what level of volatility 
investors in floating NAV funds will tolerate. This measure might 
differ among floating NAV funds, depending on, for example, investor 
composition. Accordingly, we believe that funds and fund boards are 
best suited to determining the amount of principal volatility that 
investors in their floating NAV funds will likely tolerate and, 
accordingly, what volatility threshold or thresholds should be used in 
their stress testing.
    We have chosen to use the term ``minimize principal volatility'' 
rather than ``maintain a stable share price'' to clarify this 
requirement applies regardless of whether the fund has a floating or a 
stable NAV, and believe that this metric is consistent with the 
comments submitted.\1782\ We believe, based on comments, that funds 
would generally approach this requirement similar to how they today 
test the ability to maintain a stable share price although, as 
discussed above, funds will need to determine what volatility threshold 
or thresholds they believe are appropriate to test against.\1783\ We 
have chosen to use the metric of minimizing volatility, rather than 
avoiding losses because certain investors in floating NAV funds might 
demand overall price stability, and therefore some floating NAV funds 
might determine that it is appropriate to consider both upward and 
downward price pressures when developing stress tests.\1784\
---------------------------------------------------------------------------

    \1782\ See BlackRock II Comment Letter (noting that it believes 
that investors in a floating NAV fund will expect the fund to have a 
``relatively stable NAV''); MSCI Comment Letter (noting that it is 
unlikely that investors in floating NAV funds will accept NAV 
fluctuations outside of a very small band, and that there will be 
some form of a ``valuation tipping point'').
    \1783\ See State Street Comment Letter (noting that it currently 
offers stress testing to liquidity funds with a floating NAV, 
including the ability for a floating NAV to avoid losses greater 
than 25 or 50 basis points, and that these tests are ``relatively 
simple'' modifications to the stable NAV tests).
    \1784\ Although we recognize that upward price pressures might 
be a relevant metric to stress test for some funds, we also 
recognize that funds will generally be more concerned with downward 
price pressures. Accordingly, we do not interpret the requirement to 
test the ability to minimize principal volatility to require funds, 
as a matter of course, to test against upward price movements. This 
is consistent with staff's clarification of the stress testing rules 
adopted in 2010 that funds did not have to stress test against 
``breaking the buck on the upside.'' See Staff Responses to 
Questions about Money Market Fund Reform, August 7, 2012, available 
at http://www.sec.gov/divisions/investment/guidance/mmfreform-imqa.htm.
---------------------------------------------------------------------------

    We have retained the requirement that stable NAV funds test their 
ability to maintain a stable share price. Although we do not anticipate 
that stable NAV funds would approach this additional requirement in a 
way that differs much, if at all, from a test to minimize principal 
volatility, it clarifies that stable NAV funds are required to test the 
ability of the fund to avoid breaking the buck.
    The Commission believes that requiring funds to test against both 
the level of weekly liquid assets and principal volatility is 
appropriate. Several commenters similarly supported testing both 
liquidity and principal stability.\1785\ Although we recognize that 
requiring testing against both metrics could require more tests than 
requiring testing against one metric, we believe that testing for both 
metrics justifies the additional burden of more tests. As commenters 
pointed out, principal stability and minimizing price volatility are 
two primary objectives of money market funds.\1786\ Additionally, we 
believe that principal stability and liquidity are interrelated. In 
particular, we agree with a commenter that pointed out that, in times 
of market stress, a fund could experience (i) less price stability, 
resulting from a decline in liquidity or in an attempt to maintain 
adequate liquidity, or (ii) less liquidity, resulting from a decline in 
price stability or an attempt to maintain price stability.\1787\ We 
therefore believe boards should understand the range of events that 
could place stress on liquidity, principal stability or both, and that 
stress testing both liquidity and volatility will increase such 
understanding.
---------------------------------------------------------------------------

    \1785\ See BlackRock II Comment Letter; Fidelity Comment Letter; 
MSCI Comment Letter.
    \1786\ Id.
    \1787\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

3. Hypothetical Events Used in Stress Testing
    The Commission is also adopting modifications to the hypothetical 
events that funds use in stress testing. As discussed further below, we 
have modified these events from the Proposing Release to address 
commenter concerns about the potential complexity of testing for some 
of the proposed hypothetical events, while still enhancing stress tests 
to incorporate correlations between securities and combinations of 
events. In response to commenters' concerns, we have modified the rule 
text to clarify the number and extent of tests that the rule requires.
    As discussed above, we proposed improvements to stress testing in 
the Proposing Release because we believed that certain enhancements and 
clarifications to the hypothetical events currently used in stress 
testing were necessary to improve the minimum quality of the stress 
testing by some funds. The proposed enhancements included requiring the 
funds to consider factors such as correlations among securities returns 
and various combinations of events in their stress tests, an assessment 
of how a fund would meet increasing shareholder redemptions (taking 
into consideration assumptions regarding the liquidity and price of 
portfolio securities), and both parallel and non-parallel shifts in the 
yield curve.
    Some commenters generally supported the proposed 
enhancements.\1788\ Several commenters opposed or expressed concerns 
about the proposed enhancements.\1789\ Specifically, some commenters 
argued that the enhancements would not allow funds to retain 
flexibility to tailor stress tests to the fund.\1790\ Some commenters 
expressed concerns that the proposed enhancements would increase the 
burden, expense, and complexity of stress testing.\1791\ Some 
commenters believed that the proposed

[[Page 47893]]

enhancements were too vague.\1792\ Commenters expressed concerns that 
the proposed requirements to test for combinations of events and other 
events made the rule unclear about what events must be tested and the 
extent of testing necessary to comply with the proposed requirements, 
with some commenters arguing that the proposed rule required 
potentially endless numbers of tests.\1793\
---------------------------------------------------------------------------

    \1788\ See, e.g., MSCI Comment Letter; TIAA-CREF Comment Letter.
    \1789\ See, e.g., Dreyfus Comment Letter; ICI Comment Letter; 
Federated VIII Comment Letter; Schwab Comment Letter; Invesco 
Comment Letter.
    \1790\ See Legg Mason & Western Asset Comment Letter; Comment 
Letter of Waddell & Reed Investment Management Company (Sept. 17, 
2013) (``Waddell & Reed Comment Letter''); SIFMA Comment Letter.
    \1791\ See, e.g., Federated II Comment Letter; Dreyfus Comment 
Letter; Invesco Comment Letter; SSGA Comment Letter.
    \1792\ See, e.g., ICI Comment Letter; Federated II Comment 
Letter; Federated VIII Comment Letter; Dreyfus Comment Letter; 
Schwab Comment Letter.
    \1793\ See Federated II Comment Letter (noting that the rule is 
unclear about the type and number of tests required); ICI Comment 
Letter (noting that the requirement to incorporate combinations of 
events causes the number of test results to grow geometrically with 
each permutation of stress events).
---------------------------------------------------------------------------

    In particular, some commenters believed that the proposed 
enhancements would require funds to make unrealistic assessments about 
the liquidity and price of securities that a fund might sell to meet 
redemptions, and assessments about how an adverse event in one 
portfolio security might affect other portfolio securities. Commenters 
argued that these requirements might require significant assumptions 
that would be difficult to make and that could render the results not 
useful to boards.\1794\
---------------------------------------------------------------------------

    \1794\ See, e.g., Schwab Comment Letter; ICI Comment Letter; 
Federated VIII Comment Letter; Dreyfus Comment Letter; Invesco 
Comment Letter.
---------------------------------------------------------------------------

    The Commission disagrees with commenters who argued that 
modifications to hypothetical events will reduce funds' flexibility in 
developing stress tests.\1795\ First, the requirements we are adopting 
today still leave the specific parameters of the hypothetical events to 
the fund's discretion. Furthermore, the hypothetical events specified 
in the rule are not a comprehensive list of the hypothetical events 
that funds may stress test, but a minimum set. As discussed below, the 
rule requires a fund adviser to include additional combinations of 
events that the fund adviser deems relevant.
---------------------------------------------------------------------------

    \1795\ See Legg Mason & Western Asset Comment Letter; Waddell & 
Reed Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    We are, however, persuaded by commenters that some of the proposed 
enhancements might require funds to make complex behavioral assumptions 
that might not be realistic and that might ultimately reduce the 
utility of stress testing to fund boards. We also recognize that, as 
proposed, some of the hypothetical events were vague and might be 
difficult to implement. Finally, we also are sensitive to the potential 
burdens that administering a large number of stress tests with complex 
assumptions can place on funds and their boards, a point raised by 
commenters. To address these concerns, and as discussed below, we have 
modified the proposed enhancements to specify certain minimum 
hypothetical events that funds are required to incorporate in their 
testing. We believe that the proposed requirements reflected four 
primary areas of risk that can place stress on funds. Those are (i) an 
increase in the general level of short-term interest rates, (ii) a 
downgrade or default of a portfolio security position, (iii) a 
correlated increase in the credit spreads for certain portfolio 
securities, and (iv) an increase in shareholder redemptions.\1796\ We 
have therefore modified the hypothetical events that funds must use in 
stress testing so that they focus on these risks and eliminated several 
of the elements in the proposed rule within those areas of risk that 
commenters argued would require the most complex and unrealistic 
assumptions. As discussed further below, each fund is required to test 
each of the first three events in combination with increasing 
shareholder redemptions, which we believe will allow funds to focus on 
the most important combination of events that will provide the most 
meaningful results to boards, while reducing the number of combinations 
of events that the rule requires as a minimum set for stress testing.
---------------------------------------------------------------------------

    \1796\ See ICI Comment Letter (noting that the rule should only 
require tests for spreads in the yield curve; an increase in the 
spread of non-Treasury securities over the yield curve, redemptions, 
and a downgrade or default of a significant issuer and/or provider 
of demand features and guarantees); Fidelity Comment Letter 
(suggesting standardized scenarios with combinations of interest 
rate increases, yield spread shocks across a sector of portfolio 
securities, a credit event of an issuer of a portfolio securities, 
and shareholder redemptions).
---------------------------------------------------------------------------

a. Interest Rate Increases
    Funds are currently required to stress test for a change in short-
term interest rates. We proposed modifying this requirement so that 
funds would only need to test for increases in the general level of 
short-term interest rates, making clear that funds did not have to test 
for decreases in short-term interest rates. We received no comments on 
this aspect of the proposal, and we are adopting the modifications as 
proposed.\1797\
---------------------------------------------------------------------------

    \1797\ See rule 2a-7(g)(8)(i)(A).
---------------------------------------------------------------------------

    Second, we proposed to add a hypothetical event for funds to test, 
namely ``[o]ther movements in interest rates that may affect fund 
portfolio securities, such as parallel and non-parallel shifts in the 
yield curve.'' Commenters expressed concerns with this requirement. 
First, commenters noted that testing for non-parallel shifts in the 
yield curve would be unlikely to yield results that are any more 
informative than carefully chosen parallel shifts in the yield curve, 
yet incorporating this factor into stress testing would require 
significantly more effort. \1798\ Another commenter noted that this 
requirement was vague and open-ended, as there are an infinite number 
of non-parallel interest rate movements.\1799\
---------------------------------------------------------------------------

    \1798\ See ICI Comment Letter; Fidelity Comment Letter.
    \1799\ See ICI Comment Letter.
---------------------------------------------------------------------------

    We are not adopting the proposed requirement to test for ``[o]ther 
movements in interest rates that may affect fund portfolio securities, 
such as parallel and non-parallel shifts in the yield curve.'' We are 
persuaded by commenters' concerns that incorporating non-parallel 
shifts in the yield curve will require funds to expend effort 
determining the types of shifts to test for, with little more benefit 
than testing for parallel shifts in the yield curve, and that testing 
for parallel shifts in the yield curve is encompassed by the 
requirement to test for general increases in the level of short-term 
interest rates.\1800\
---------------------------------------------------------------------------

    \1800\ See ICI Comment Letter (noting that a test for a parallel 
increase in the Treasury yield curve corresponds to test for general 
increases in short-term interest rates).
---------------------------------------------------------------------------

b. Credit Events
    Funds currently are required to test for a downgrade of or default 
on portfolio securities.\1801\ We proposed to enhance this requirement 
by requiring that funds test for a ``downgrade or default of portfolio 
securities and the effects these events could have on other securities 
held by the fund.'' As discussed in the Proposing Release, we had 
proposed this requirement to ensure that funds consider portfolio 
correlations when stress testing. Commenters expressed concerns about 
the proposed enhancement, arguing that the requirement was vague and 
qualitative in nature because the fund would have to make assumptions 
about the event that led to the downgrade or default, resulting in 
stress testing results that might not be meaningful to its board.\1802\ 
We were persuaded by commenters of the potentially

[[Page 47894]]

speculative nature of the proposed requirement and that, as a result, 
the proposed requirement might not provide meaningful information to 
boards about the correlation of portfolio securities, which was the 
intent of the proposed requirement. We have therefore determined not to 
require funds to incorporate in their testing the effect of a downgrade 
or default of one security on the price of other securities in the 
portfolio. We also believe that eliminating this proposed requirement 
will reduce the burden of the stress testing requirements relative to 
the proposed requirements.\1803\
---------------------------------------------------------------------------

    \1801\ See current rule 2a-7(c)(10)(v).
    \1802\ See, e.g., Dreyfus Comment Letter; see also ICI Comment 
Letter (noting that a stress test can assume a downgrade or default 
without making any assumptions about what caused it, but cannot 
assess what other portfolio securities might be correlated to the 
downgrade or default without some basis for assuming the adverse 
event that led to the downgrade or default).
    \1803\ See ICI Comment Letter (noting the time and cost that 
would need to be incurred in developing highly sophisticated stress 
tests that the commenter believed would be required to incorporate 
this requirement).
---------------------------------------------------------------------------

    After reviewing the comments, we have modified the requirement from 
what was proposed. Specifically, we are requiring that funds test for 
``a downgrade or default of particular portfolio security positions, 
each representing various portions of the fund's portfolio (with 
varying assumptions about the resulting loss in the value of the 
security). . . .'' The current rule requires, and the proposed rule 
would have continued to require, that funds stress test for the 
downgrade or default on more than one portfolio security (i.e., they 
are required to test for a downgrade or default of portfolio 
securities). Commenters suggested that the rule could require funds to 
stress test a particular portfolio security, such as the most 
significant individual credit risk to the fund, measured by the size of 
the holding, the likelihood of default or both,\1804\ or the ``median'' 
portfolio security.\1805\
---------------------------------------------------------------------------

    \1804\ Id.
    \1805\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Rather than have the rule define which securities in the portfolio 
to test, we believe that it is appropriate for the adviser to make a 
determination of which security positions, representing different 
portions of the portfolio, would be most informative to the board to 
test for a downgrade or default of an issuer. We believe the most 
appropriate security to test for a hypothetical default will vary among 
funds depending on several factors, including the composition of the 
fund's portfolio and contemporaneous market events. The fund could 
determine that it should test a security that represents the single 
biggest credit risk in the portfolio and a security that represents a 
``median'' exposure, like commenters suggested, or it could include 
securities representing different levels of exposure.
    Although the rule we are adopting gives funds general discretion 
when making the determination of which securities to test, we do 
believe it is appropriate to require funds to select particular 
security positions representing varying, i.e., different, portions of 
the portfolio when making such determinations, so that the fund's 
adviser and its board can better compare the differing results to the 
fund depending on the security that is tested. Tests of the 
hypothetical downgrade or default of a portfolio security representing 
the largest credit risk to the fund and of a portfolio security 
representing a median exposure, for example, allows a board to see how 
the results from these stress tests differ, and therefore better 
understand that a downgrade or default of different securities will 
have different impacts on the fund.
    Finally, although we are not requiring funds to assume that any 
particular event is causing the hypothetical downgrade or default, 
funds may want to consider incorporating in this stress test, as 
appropriate, a deterioration in the credit quality of a guarantor (or 
provider of demand features) of portfolio securities, as suggested by 
one commenter.\1806\ This type of scenario might be particularly 
relevant for funds in which a single entity is a guarantor or provider 
of a demand feature for a high concentration of portfolio securities.
---------------------------------------------------------------------------

    \1806\ See ICI Comment Letter (arguing that funds should be 
required to stress test a ``downgrade or default of a significant 
issuer and/or provider of demand feature and guarantees).
---------------------------------------------------------------------------

    After reviewing the comments, the Commission is also modifying the 
rule to require that funds make varying assumptions about the resulting 
loss in the value of the security when testing for a downgrade or 
default of a portfolio security. The Commission notes that a downgrade 
or default of a portfolio security does not always have a uniform 
effect on the price of a security. In some cases, the downgrade or 
default could cause almost a complete loss on that portfolio 
security.\1807\ In other cases, the loss on the security might be less, 
potentially even substantially less.\1808\
---------------------------------------------------------------------------

    \1807\ For example, according to filings submitted to us 
pursuant to temporary rule 30b1-6T, money market funds' holdings of 
securities issued by Lehman Brothers Holdings Inc. or its affiliates 
were typically valued at approximately 17% of their amortized cost 
value in 2009.
    \1808\ For example, according to filings submitted to us 
pursuant to temporary rule 30b1-6T, money market funds' holdings of 
securities issued by structured investment vehicle were typically 
valued at approximately 50% of their amortized cost value in 2009.
---------------------------------------------------------------------------

    As with the size of the portfolio position of an issuer that has a 
downgrade or default, the impact on a fund of a downgrade or default of 
a portfolio security may vary substantially depending on the size of 
the loss that the downgrade or default causes.\1809\ Accordingly, we 
believe that it is appropriate to require stress testing to include 
varying assumptions on the amount of loss on a security as a result of 
a downgrade or default so that boards better understand how the amount 
of loss of a portfolio security will affect the fund overall.\1810\ It 
can also help boards understand when pricing pressures on certain 
securities are unlikely to have a significant impact on the fund. For 
example, during the debt ceiling impasse of 2013, staff observed 
through discussions with fund advisers that although yields on certain 
Treasury bills increased and some funds holding these Treasury bills 
experienced some increase in redemptions, there was very little effect 
on the shadow price of Treasury or government money market funds. 
Stress testing can illustrate these effects.
---------------------------------------------------------------------------

    \1809\ A comparison of commenters' discussion of stress testing 
a downgrade or default of a portfolio security illustrates that the 
effect of a downgrade or default can differ substantially, and 
thereby have substantially different effects on the fund. Compare 
Dreyfus Comment Letter (``We also know that a single default of a 1% 
position . . . in a MMF can break the buck.'') with Fidelity Comment 
Letter (showing the results of stress testing the effect on a 
hypothetical fund of a credit event resulting in a 10% loss on the 
portfolio security, which does not cause the hypothetical fund's NAV 
per share to drop below $0.9950).
    \1810\ As with the requirement that funds test for a downgrade 
or default of particular portfolio security positions representing 
various portions of the fund's portfolio, we believe it is efficient 
for funds to make the determination of the appropriate magnitudes of 
loss to incorporate in stress testing, as that decision will vary 
depending on several factors, including, for example, historical 
information on losses on similar securities following a downgrade or 
default.
---------------------------------------------------------------------------

c. Credit Spread Increase in Portfolio Sectors
    We proposed requiring that funds test for the ``widening or 
narrowing of spreads among the indexes to which interest rates of 
portfolio securities are tied'' in order to require funds to test for 
changes in spreads that may affect specific asset classes. One 
commenter supported the proposed requirement, noting that testing for 
asset class spreads can provide information about a fund's exposure to 
investor flights that have occurred in the past, such as in asset-
backed commercial paper and European financials.\1811\ One commenter 
suggested that funds be required to test for a change in spreads by 
testing for a parallel increase in the spread of non-Treasury 
securities over the Treasury

[[Page 47895]]

yield curve, assuming a perfect correlation in the price movement, 
regardless of issuer or maturity, which would show the board the 
``worst case scenario'' for yield spread changes.\1812\ Another 
commenter suggested that a test for changes in yield spreads that would 
require the fund to test for a yield spread shift in a ``typical 
portfolio sector,'' which it described as a sector (i.e., a logically 
related subset of holdings) representing the median exposure in the 
portfolio among all defined sectors.\1813\ This commenter also noted 
that its suggested approach would incorporate into stress testing a 
test for correlated price movements among portfolio securities.
---------------------------------------------------------------------------

    \1811\ See MSCI Comment Letter.
    \1812\ See ICI Comment Letter.
    \1813\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    In response to these comments, we are modifying the proposed 
requirement to require funds to test for ``a widening of spreads 
compared to the indexes to which portfolio securities are tied in 
various sectors of a fund portfolio (in which a `sector' is a logically 
related subset of portfolio securities, such as securities of issuers 
in similar or related industries or geographic region, or securities of 
a similar security type).'' \1814\ As discussed above and in the 
Proposing Release, the Commission believes that it is important for 
funds to stress test for potential correlations in the price movements 
of related securities. That is because an event that affects the price 
of one security may also affect the prices of securities of similarly 
situated issuers or asset classes. We believe, as one commenter 
suggested, that testing for a correlated shift in the yield spread 
among logically related securities (i.e., sectors) will illustrate the 
impact on funds of a concurrent price shift among portfolio securities 
representing, for example, a similar industry, similar geographic 
region, or security type.\1815\ We understand that some money market 
funds today use such assumed sectors in their stress testing.
---------------------------------------------------------------------------

    \1814\ See rule 2a-7(g)(8)(i)(C).
    \1815\ See Fidelity Comment Letter (suggesting that the stress 
testing requirements include standardized yield shift spreads of a 
logically related subset of holdings); MSCI Comment Letter 
(supporting stress testing requirements that focus on, among other 
things, stresses on spreads in asset classes, such as asset-backed 
commercial paper or European financials).
---------------------------------------------------------------------------

    To implement this requirement, funds should generally group 
securities into logically related categories, or sectors, such as 
securities of a similar industry, similar geographic region or security 
type (such as asset-backed commercial paper or variable rate demand 
notes), and then test for the impact of yield spread changes on various 
sectors. For example, a fund with concentrations of securities in a 
particular geographic region, such as Europe, could test a correlated 
spread shift among those securities, and perhaps even test a correlated 
shift of securities from a single country or group of countries that 
are experiencing or have experienced stress, such as during the 2011 
Eurozone debt crisis. We also believe that it could be helpful to 
boards to include in the required report, discussed below, a summary of 
the sector composition and the concentration of that sector within the 
portfolio as part of the assessment of stress testing.
    We are not further specifying how funds should define sectors or 
which sectors funds should test for a yield spread change, such as 
requiring funds to test a ``typical'' or ``median'' sector, as 
suggested by one commenter.\1816\ We believe that such determinations 
are appropriate to leave to the fund's discretion because such 
determinations will vary among funds depending on several factors, 
including the composition of the fund's portfolio and contemporaneous 
market events. We are not adopting the suggestion of one commenter that 
funds test for a perfect correlation of spreads in all non-Treasury 
securities to show funds the ``worst case scenario'' of a spread 
shift.\1817\ This suggested test would not provide information about 
potential correlations among similarly situated securities. For 
example, the suggested test would not provide any information about how 
an adverse event in a particular industry in which the fund held 
portfolio securities might affect the fund. We believe that testing a 
spread of different sectors of a portfolio, will help the board better 
understand the composition of the fund portfolio and potential 
correlations among portfolio securities.
---------------------------------------------------------------------------

    \1816\ See Fidelity Comment Letter.
    \1817\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Additionally, in the Proposing Release, we proposed to require 
funds to test for combinations of events that the adviser deemed 
relevant, ``assuming a positive correlation of risk factors . . . and 
taking into consideration the extent to which portfolio securities are 
correlated such that adverse events affecting a given security are 
likely to also affect one or more other securities (e.g., a 
consideration of whether issuers in the same or related industries or 
geographic regions would be affected by adverse events affecting 
issuers in the same industry or geographic region).'' This proposed 
requirement was intended to have stress testing include an evaluation 
of the effect that hypothetical events on issuers that operate in a 
similar industry, are based in a similar geographic region, or have 
other related attributes. Commenters expressed concerns about this 
proposed requirement, arguing that it would be difficult to implement 
because it required complex or speculative assumptions about the 
effects of adverse events.\1818\
---------------------------------------------------------------------------

    \1818\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

    We believe that the requirement that we are adopting of an assumed 
correlated yield shift in specific sectors of portfolio securities 
provides funds and boards information about the effect of correlated 
price movements among similar securities in a simpler and less 
burdensome way than the proposed requirement of taking into 
consideration correlations among securities. Because the requirement 
allows funds to assume a perfectly correlated change in spreads among 
similarly situated securities, funds will not be required to make 
assumptions about how adverse events affect prices of these securities. 
Accordingly, although we are requiring some combinations of events, as 
discussed below, we are not adopting the requirement that fund advisers 
``assum[e] a positive correlation of risk factors . . . and ``tak[e] 
into consideration the extent to which the fund's portfolio securities 
are correlated. . . . '' when considering whether to test for 
additional events.
d. Shareholder Redemptions
    The fourth hypothetical event identified by the Commission and 
commenters that is important to include in stress testing is 
shareholder redemption levels. As noted above, however, rather than 
requiring funds to consider shareholder redemptions in isolation, as is 
currently required and would have been required under the proposed 
rule, we are requiring that funds test for various levels of 
shareholder redemptions in combination with each of the three other 
required hypothetical events, i.e., an increase in interest rates, a 
downgrade or default of various portfolio securities, and a yield 
spread change in various sectors of portfolio securities.
    As discussed in the Proposing Release, the Commission believes that 
testing for combinations of events can help funds better understand 
risks to the fund, and therefore included in the proposed rule a 
requirement that the fund test for combinations of events that the 
adviser deems relevant. Although

[[Page 47896]]

the Commission did not include in the proposed rule any specific 
combinations of events, the Commission requested comment on whether 
specific combinations of events should be required in the rule, noting 
in particular the possibility of combining an increase in shareholder 
redemptions with an increase in interest rates or a downgrade of a 
portfolio security.\1819\
---------------------------------------------------------------------------

    \1819\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

    Generally, redemptions, by themselves, are unlikely to create 
stress on a fund as long as the market for the fund's portfolio 
securities is liquid and interest rates remain unchanged.\1820\ 
Similarly, an increase in interest rates, if no shareholders redeem 
from the fund until the securities affected by the interest rate shift 
mature, should have no price impact on the fund.\1821\ It is the 
combination of events--and particularly an interest rate or credit 
event combined with redemptions--that most typically can create fund 
stress.\1822\ We also believe combinations of events are more likely to 
be realistic scenarios than market events or increases in redemptions 
in isolation (e.g., it is reasonable to expect that a money market fund 
that experiences a significant credit event may also experience a 
subsequent increase in redemptions).\1823\ We are not including in the 
rule the redemption levels that funds must include in stress 
testing.\1824\ We believe that the appropriate level of redemptions to 
test will vary among funds, and will depend, for example, on the 
composition of funds' investor bases and shareholder redemption 
preferences, as well as historical redemption activity in the fund.
---------------------------------------------------------------------------

    \1820\ Prices of fixed income securities typically remain stable 
if interest rates do not change. Thus, shareholder redemptions that 
require funds to sell securities should have no effect on funds' 
NAVs as long as interest rates have not changed. We note that 
redemptions from a stable value money market fund have no impact on 
the fund's market-based NAV per share as long as the NAV per share 
is $1.00.
    \1821\ Prices of fixed income securities typically fall when 
interest rates rise. Thus funds that must sell fixed income 
securities before maturity are likely to realize capital losses if 
interest rates have risen. If instead funds hold securities to 
maturity, they receive securities' par value and should realize no 
losses. Thus, interest rates increases that are not accompanied by 
securities sales to meet redemption requests should not cause funds 
to incur capital losses.
    \1822\ See Fidelity Comment Letter (illustrating the effect on 
liquidity and NAV on increasing shareholder redemptions in 
combination with each of an (i) interest rate increase, (ii) a 
credit event, and (iii) a spread shift).
    \1823\ See State Street Comment Letter (noting that stress 
testing combinations of events is important because stress events do 
not typically happen in isolation, and suggesting the Commission 
consider the combination of shareholder redemptions in combination 
with increases in interest rates, a downgrade or default, and credit 
spreads).
    \1824\ See Fidelity Comment Letter (suggesting standard 
scenarios including redemption levels of 0%, 25%, and 50%).
---------------------------------------------------------------------------

    We also proposed to require that funds incorporate in stress 
testing an assessment of how a fund would meet redemptions, taking into 
consideration factors such as the liquidity and pricing of the fund's 
portfolio securities. One commenter supported this proposed 
requirement, but noted that liquidity data regarding fund portfolio 
securities transactions was scarce.\1825\ Other commenters expressed 
concerns that this requirement was vague and qualitative, and would 
require detailed and sophisticated assumptions.\1826\ We were persuaded 
by commenters' concerns that the proposed requirement could require 
complex assumptions to implement for which data might not be readily 
available, particularly the requirement that the fund take into account 
the liquidity and pricing of the fund's portfolio securities. We have 
therefore not adopted this requirement to simplify, and thereby reduce 
the potential burden of, the stress testing requirements relative to 
the proposal.
---------------------------------------------------------------------------

    \1825\ See MSCI Comment Letter.
    \1826\ See, e.g., ICI Comment Letter (expressing concerns about 
how to fulfill this requirement); Dreyfus Comment Letter (same).
---------------------------------------------------------------------------

    We note, however, that funds need to make some basic assumptions 
about how a fund obtains cash for redemptions to satisfy the new stress 
testing requirements relating to the fund's level of weekly liquid 
assets. In doing so, a fund could use a variety of assumptions. For 
example, some commenters suggested that funds assume that all 
redemptions are satisfied first using weekly liquid assets.\1827\ This 
assumption would provide conservative stress test results given that it 
would have the most dramatic effect on a fund's level of weekly liquid 
assets. On the other hand, some funds may prefer to assume in their 
stress tests other methods of meeting shareholder redemptions (or may 
prefer to show how the stress tests results would differ if this 
assumption were varied). For example, a fund might assume that 
redemptions are met with a combination of weekly liquid assets and 
sales of portfolio securities.\1828\ The rule does not specify what 
assumptions the fund must make, leaving that to the discretion of fund 
advisers because we believe the determination of which assumptions are 
most appropriate will vary among funds, depending on, for example, how 
funds have satisfied redemptions historically, and the composition of 
the fund's portfolio. The rule requires, however, that the fund's 
adviser include a summary of the significant assumptions made when 
performing the stress test. For example, such assumptions may include 
how redemptions are satisfied and the size of any ``haircut'' that the 
fund assumed in the sale of portfolio securities in order to meet 
redemptions.
---------------------------------------------------------------------------

    \1827\ See ICI Comment Letter; Federated VIII Comment Letter.
    \1828\ See Fidelity Letter (illustrating a stress test that 
includes the assumption that sales of non-liquid assets to meet 
redemptions incur a cost); MSCI Comment Letter (noting that to the 
extent that a redemption scenario would require the fund to sell 
securities, then the fund should make some assumption regarding a 
liquidity haircut, but that only simple assumptions can be 
reasonably expected).
---------------------------------------------------------------------------

e. Other Combinations of Events
    The proposed rule would have required funds to test for 
``combinations of these and any other events that the adviser deems 
relevant . . .'' \1829\ We have made clarifying edits to the rule we 
are adopting today in response to some commenters who expressed 
concerns that the proposed rule was open-ended and could be read to 
require that funds test for combinations of every event listed in the 
rule.\1830\ Specifically, we are requiring funds to test for ``[a]ny 
additional combinations of events that the adviser deems relevant.'' We 
believe that the modified language clarifies that the fund is only 
required to test for additional combinations as the fund adviser deems 
relevant, not for combinations of every permutation of the events 
listed in the rule.
---------------------------------------------------------------------------

    \1829\ See proposed rule 2a-7(g)(7)(i)(F) (Floating NAV 
Alternative or Fees and Gates Alternative). The full proposed 
requirement was ``Combinations of these and any other events the 
adviser deems relevant, assuming a positive correlation of risk 
factors (e.g., assuming that a security default likely will be 
followed by increased redemptions) and taking into consideration the 
extent to which the fund's portfolio securities are correlated such 
that adverse events affecting a given security are likely to also 
affect one or more other securities (e.g., a consideration of 
whether issuers in the same or related industries or geographic 
regions would be affected by adverse events affecting issuers in the 
same industry or geographic region).'' We discuss above why we are 
not adopting the proposed requirement that follows the clause 
``Combinations of these any other events the adviser deems 
relevant.''
    \1830\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

    The rule requires that fund advisers test for combinations of 
events that they deem relevant. Although a fund adviser might determine 
that the three combinations of events included in the rule are 
sufficient, there might be circumstances when a fund adviser believes 
it is necessary to incorporate additional scenarios. For example, a 
fund adviser might believe that it would be relevant for the board to 
understand

[[Page 47897]]

the effect of a yield spread increase in a sector, in combination with 
a downgrade of a portfolio security in that sector, particularly if 
that sector, or an issuer within that sector, has historically 
experienced stress.
    One commenter also argued that the requirement could be interpreted 
to mean that all special risk assessments take the form of stress 
tests.\1831\ This is not a requirement of the rule. We agree with the 
commenters that stress tests are not the only method to communicate 
fund risks to the board and that not every risk can be incorporated 
into a stress test.\1832\ The rule does not require the adviser to 
develop a stress test for every risk the fund faces, but requires the 
adviser to consider whether stress testing for combinations of events 
not explicitly listed in the rule might be relevant to the fund's 
board. We believe stress testing should be used to help the board 
understand the principal risks of the particular fund and the risks 
that reasonably foreseeable stress events may place on the fund.
---------------------------------------------------------------------------

    \1831\ See Federated VIII Comment Letter.
    \1832\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

4. Board Reporting Requirements
    Funds are currently required to provide the board with a report of 
the results of stress testing, which must include the dates of testing, 
the magnitude of each hypothetical event that would cause a fund to 
``break the buck,'' and an assessment of the fund's ability to 
withstand events that are reasonably likely to occur within the 
following year. We proposed modifications to these reporting 
requirements. First, we proposed adding a requirement that the fund 
report to the board the magnitude of each hypothetical event that would 
cause the fund to have invested less than 15% of its total assets in 
weekly liquid assets. Second, we proposed requiring funds to include in 
their assessment ``such information as may reasonably be necessary for 
the board of directors to evaluate the stress testing . . . and the 
results of the testing.''
    We are adopting modifications to the proposed reporting 
requirements to boards regarding stress testing in response to comments 
we received on the proposal. Specifically, we are adopting a 
requirement that the board of directors be provided at its next annual 
meeting, or sooner if appropriate, a report that includes the dates on 
which the testing was performed and an assessment of the fund's ability 
to maintain at least 10% in weekly liquid assets and to limit principal 
volatility.\1833\ As discussed above, some commenters had concerns that 
the proposed requirement that funds report to the board the magnitude 
of each hypothetical event that would cause the fund to have invested 
less than 15% in weekly liquid assets was not feasible.\1834\ We 
believe that requiring funds to provide an assessment of the fund's 
ability to maintain liquidity, rather than requiring the funds report a 
specific value for each hypothetical event, addresses such concerns. We 
have also added the requirement for an assessment of the fund's ability 
to minimize principal volatility because, as discussed above, we have 
added this metric to the stress testing requirements in response to 
comments. We believe that requiring funds to provide an assessment of 
their ability to maintain liquidity and minimize principal volatility 
(and in the case of stable NAV funds, to maintain a stable share 
price), rather than the more prescriptive requirements proposed and 
that are in the rule currently, is also appropriate because we have 
modified the rule so that each ``hypothetical event'' is a combination 
of two events. We want to clarify that funds are not required to 
separately test for interest rate increases, a downgrade or default, a 
spread shift, or shareholder redemptions in isolation.\1835\
---------------------------------------------------------------------------

    \1833\ See rule 2a-7(g)(8)(ii).
    \1834\ See, e.g., ICI Comment Letter; Federated II Comment 
Letter; Federated VIII Comment Letter.
    \1835\ See ICI Comment Letter (noting that the stress testing 
requirements adopted in 2010, by requiring funds to report the 
``magnitude of each hypothetical event'' that would cause a fund to 
``break the buck,'' required funds to perform and report stress 
tests of each event in isolation, and noting that changing this 
requirement would make it easier for boards to include combinations 
tests in the fund's procedures).
---------------------------------------------------------------------------

    We understand that under the current requirements, many funds, in 
addition to reporting the magnitude of each event that would cause the 
fund to ``break the buck,'' provide a table showing how the fund's 
shadow NAV is affected by different combinations of events and 
different values. Some funds include information regarding, for 
example, the concentrations of several of the funds' largest portfolio 
holdings, both by individual issuer and by sector, and of historical 
redemptions rates, as points of reference. Several funds also include 
narratives to help explain the results. In some instances, for example, 
fund advisers used the narrative to compare results among funds or to 
explain results that they considered to be unusual. Some narratives 
also assessed the likelihood of the hypothetical events. We are not 
including requirements for any of these specific items in the rule 
because we recognize that there is no one set of factors that will be 
relevant for all funds, but we believe these are examples of items that 
we encourage fund advisers to consider when developing the required 
report assessing stress test results.
    We are adopting as proposed the requirement that a fund's adviser 
provide ``such information as may reasonably be necessary for the board 
of directors to evaluate the stress testing conducted by the adviser 
and the results of the testing.'' One commenter supported this 
requirement, noting that it is a common practice to provide directors 
with information that helps to place stress-testing results in 
context.\1836\ Some commenters opposed this requirement, arguing that 
the provision of additional information could be burdensome for boards 
and would not provide useful information to fund boards.\1837\ We 
disagree. As we noted in the Proposing Release, the staff's examination 
of stress testing reports revealed disparities in the quality of 
information regarding stress testing provided to fund boards. We 
believe that this requirement will allow boards of directors to receive 
information that is useful for understanding and interpreting stress 
testing results. We note that this requirement does not require a fund 
adviser to provide the details and supporting information for every 
stress test that the fund administered. To the contrary, a thoughtful 
summary of stress testing results with sufficient context for 
understanding the results may be preferable to providing details of 
every test. For example, information about historical redemption 
activities, as mentioned above, and the fund's investor base could help 
boards evaluate the potential for shareholder redemptions at the levels 
that are being tested. Additionally, information regarding any 
contemporaneous market stresses to particular portfolio sectors could 
be helpful to a board's consideration of stress testing results.
---------------------------------------------------------------------------

    \1836\ See ICI Comment Letter.
    \1837\ See Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    Finally, after considering comments regarding the assumptions that 
funds will need to make in administering stress tests,\1838\ the 
Commission has

[[Page 47898]]

added a requirement that the adviser include in the report a summary of 
the significant assumptions made when performing the stress tests. As 
discussed above, we have, in response to comments, modified the 
required hypothetical events from the proposal to reduce the number and 
complexity of the assumptions funds are required to make. We recognize, 
however, that funds will need to make some basic assumptions when 
conducting the stress tests. These assumptions would include, for 
example, how the fund would satisfy shareholder redemptions (e.g., 
through weekly liquid assets or by selling certain portfolio 
securities, including any assumption of haircuts such securities can be 
sold at) and the amount of loss in value of a downgraded or defaulted 
portfolio security. We believe that having a summary of such 
assumptions will help the board better understand the stress testing 
results, and particularly the sensitivity of those results to given 
assumptions. We believe this information will allow the board to better 
understand money market fund risk exposures, and thus allow it to 
provide more effective oversight of the fund and its adviser.
---------------------------------------------------------------------------

    \1838\ See, e.g., Fidelity Comment Letter (including in its 
suggested stress testing an assumption regarding the size of the 
loss on the sales of securities to meet redemption and the size of 
the loss on a portfolio security when testing a hypothetical credit 
event); ICI Comment Letter (suggesting funds use an assumption that 
redemptions are satisfied using weekly liquid assets).
---------------------------------------------------------------------------

5. Dodd-Frank Mandated Stress Testing
    In the Proposing Release, we requested comment on certain aspects 
of money market fund stress testing as it relates to our obligation 
under section 165(i)(2) of the Dodd-Frank Act to specify certain stress 
testing requirements for nonbank financial companies that have total 
consolidated assets of more than $10 billion and are regulated by a 
primary federal financial regulatory agency.\1839\ Under this section 
of the Dodd-Frank Act, among other matters, we must establish 
methodologies for the conduct of stress tests that shall provide for at 
least three different sets of conditions, including baseline, adverse, 
and severely adverse.\1840\ Two commenters responded, noting that they 
did not believe that the scenarios currently published by the Federal 
Reserve Board for stress testing under Dodd-Frank Act Section 165(i) 
would be an effective means of stress testing for money market funds, 
because the Federal Reserve's scenarios are focused on long-term 
horizons, which do not have a direct causal link to foreseeable changes 
in money market funds.\1841\ Another commenter, however, expressed some 
support for incorporating macroeconomic factors in money market fund 
stress tests.\1842\ One commenter made recommendations regarding the 
stress testing scenarios required under section 165(i), including 
scenarios involving the four hypothetical events in the stress testing 
rule amendments we are adopting today, and stated that its 
recommendations would be an effective means to evaluate risk in a money 
market fund portfolio.\1843\
---------------------------------------------------------------------------

    \1839\ For a definition of ``nonbank financial companies'' for 
these purposes, see Definition of ``Predominantly Engaged in 
Financial Activities'' and ``Significant'' Nonbank Financial Company 
and Bank Holding Company, Board of Governors of the Federal Reserve 
System, [78 FR 20756 (April 5, 2013)].
    \1840\ Under this section of the Dodd-Frank Act, we also must 
define the term ``stress test'' for purposes of that section, 
establish the form and content of the report to the Federal Reserve 
Board and the Commission regarding such stress testing, and require 
companies subject to this requirement to publish a summary of the 
results of the required stress tests. We note that under this 
section of the Dodd-Frank Act, we must design stress testing not 
just for certain money market funds, but also other types of funds 
and investment advisers that we regulate and that meet the $10 
billion total consolidated assets test.
    \1841\ See Fidelity Comment Letter (noting that the Federal 
Reserve scenarios have at best an indirect causal link to changes in 
a money market fund); MSCI Comment Letter (noting that the horizon 
for the Federal Reserve's stress scenarios is between one and two 
years, while the scenarios that are of concern to money market funds 
are short-term, such as valuation shocks and rapid shareholder 
redemptions).
    \1842\ See Santoro Comment Letter (noting that stress testing 
should align with existing stress testing methodologies, and 
specifically macro market stress scenarios).
    \1843\ Fidelity Comment Letter (noting that the standardized 
scenario that it proposed could serve as the ``severely adverse'' 
conditions required by Section 165(i)(2)(C)(2) of the Dodd-Frank 
Act).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we intend to engage in a 
separate rulemaking to implement the requirements of Section 165(i) of 
the Dodd-Frank Act, including determining appropriate baseline, 
adverse, and severely adverse scenarios for money market funds and 
other funds and advisers with more than $10 billion in consolidated 
assets.\1844\ In proposing such stress testing for money market funds 
subject to these requirements, we expect to consider the efficiencies 
that funds subject to these additional requirements will achieve if the 
scenarios broadly are built off of the parameters set forth today.
---------------------------------------------------------------------------

    \1844\ Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

6. Economic Analysis
    Our baseline for the economic analysis we discuss below is the 
current stress testing requirements for money market funds. The costs 
and benefits, and effects on competition, efficiency, and capital 
formation are measured in increments over the current stress testing 
requirement baseline. The benefits, as well as the costs, of the stress 
test requirements will depend in part on the extent to which funds 
already engage in stress tests that are similar to the requirements. 
For example, although we are now requiring funds to test for increases 
in the general level of short-term interest rates in combination with 
various levels of an increase in shareholder redemptions, we understand 
that many funds already tested for increases in interest rates in 
combination with shareholder redemptions.
    The additional information generated from the amendments to the 
stress testing requirements should provide several qualitative benefits 
to funds. Specifically, they should help fund managers, advisers, and 
boards monitor, evaluate, and manage fund risk, and thus better protect 
the fund and its investors from the adverse consequences that may 
result from falling below the 10% weekly liquid assets threshold or 
failing to minimize principal volatility (or, in the case of stable NAV 
funds, a stable share price). The magnitude of these qualitative 
benefits are not easily quantified and will vary from fund to fund 
based on the extent to which funds are already voluntarily conducting 
stress testing that meet the new requirements, as well as the investor 
base and portfolios of each fund. We received no comments regarding how 
to quantify such benefits.
    In the Proposing Release, we stated that because funds are 
currently required to meet a stress testing requirement, we did not 
anticipate significant additional costs to funds under the proposed 
rule. Several commenters responded that they expected to incur 
increased costs as a result of the changes.\1845\ One commenter noted 
that it believed a majority of funds will need to change their stress 
testing procedures to some degree, specifically with respect to stress 
testing liquidity levels.\1846\ One commenter provided a quantitative 
estimate for some of the proposed changes, estimating that required 
software changes to implement two of the proposed requirements, not 
including costs to load data, run the tests, and analyze the results, 
would

[[Page 47899]]

range from $250,000 to $750,000.\1847\ We note, however, that the 
estimate was based on an evaluation of two of the hypothetical stress 
tests that we proposed, one of which the Commission has determined not 
to adopt and the other which the Commission has modified and simplified 
substantially.
---------------------------------------------------------------------------

    \1845\ See, e.g., SSGA Comment Letter (generally supporting 
stress testing by funds, but asking the Commission to consider the 
benefits of the enhancements against the ``substantial increase in 
costs'' associated with the proposed changes); State Street Comment 
Letter (noting that there will be both a development cost and on-
going operational costs); Schwab Comment Letter (noting that the 
proposal is costly); TIAA-CREF Comment Letter (supporting the 
proposed requirement and acknowledging that they would require 
operational changes that would require time and resources to 
implement).
    \1846\ See State Street Comment Letter.
    \1847\ Federated VIII Comment Letter (noting that it contacted a 
third-party service provider regarding the costs of implementing 
proposed rule 2a-7(g)(7)(i)(E), concerning testing for parallel and 
non-parallel shifts in the yield curve, and rule 2a-7(g)(7)(i)(F), 
concerning testing for ``combinations of these and any other events 
that the adviser deems relevant, assuming a positive correlation of 
risk factors . . . and taking into consideration the extent to which 
the fund's portfolio securities are correlated . . .'').
---------------------------------------------------------------------------

    We stated in the Proposing Release that we expected funds would use 
similar hypothetical events when testing their ability to avoid falling 
below a liquidity threshold to those events they use when stress 
testing their ability to maintain a stable price. We also understand 
many funds already test for their ability to avoid falling below a 15% 
weekly liquid asset threshold as part of their current stress tests. 
One commenter noted that it already tests against the 15% liquidity 
threshold and other liquidity thresholds, and one commenter stated 
generally that it already tests for liquidity maintenance, and neither 
commenter discussed the costs of including liquidity metric in stress 
testing.\1848\ Two commenters indicated that requiring funds to add 
this liquidity metric to the stress testing requirements would impose 
new costs, but did not provide quantitative estimates of the costs of 
adding a liquidity metric to the stress testing requirements.\1849\ One 
commenter, which provides stress testing services to funds, noted that 
it currently provides liquidity-related stress tests, but it did not 
currently provide a stress test that tests a fund's ability to avoid 
falling below a 15% liquidity asset threshold.\1850\
---------------------------------------------------------------------------

    \1848\ See BlackRock Comment Letter; Dreyfus Comment Letter.
    \1849\ See Federated VIII Comment Letter; State Street Comment 
Letter (noting that the new requirement would imposed both a 
development cost and on-going operational costs).
    \1850\ See State Street Comment Letter. See also Federated VIII 
Comment Letter (noting that it contacted a service provider of a 
risk management system, who indicated that the provider's system 
could not test for an ability to maintain weekly liquid assets at or 
above 15% of its total assets).
---------------------------------------------------------------------------

    After reviewing the comments, we believe that the amendments to the 
stress testing requirements will impose some development and ongoing 
costs to funds, particularly the requirement to test against a 
liquidity threshold. We believe that the costs will be lower for funds 
that already include liquidity and combinations of events as part of 
their stress testing, as some funds do. We understand from commenters, 
however, that even funds that currently incorporate liquidity metric in 
their stress testing might need to modify their procedures to test 
against the 10% threshold.\1851\ We also recognize that funds, which 
currently are required to test their ability to maintain a stable share 
price, will now be required to test the ability to minimize principal 
volatility. We believe, based on our review of comments, that the costs 
of modifying stress testing from the metric of maintaining a stable 
share price to the metric of minimizing principal volatility will not 
be substantial.\1852\ We recognize, however, that funds might incur 
some costs in analyzing and determining the appropriate level of 
volatility against which to test.
---------------------------------------------------------------------------

    \1851\ See State Street Comment Letter (noting that it currently 
provides a range of liquidity related stress tests).
    \1852\ See State Street Comment Letter (noting that it currently 
provides stress testing services to floating NAV liquidity funds 
that include testing a fund's ability to avoid losses of greater 
than 25 or 50 basis points, and that this would entail ``relatively 
simple modifications,'' with no associated development costs).
---------------------------------------------------------------------------

    Additionally, we believe there will be costs associated with stress 
testing the effect of the hypothetical events that we are adopting. The 
extent of those costs will depend upon the extent to which a fund 
currently tests for the requirements or would need to modify their 
stress testing procedures and systems to add such tests. We understand 
that many funds already test for events such as interest rate increases 
and credit events in combination with hypothetical increases in 
shareholder redemptions. We also note that we have determined not to 
adopt several of the hypothetical events that commenters indicated 
would require the most estimation or modeling.\1853\ Finally, as the 
rule requires that a fund test for ``any additional combinations of 
events that the adviser deems relevant,'' a fund might incur periodic 
costs for making such an assessment and, if necessary, incorporating 
such additional tests in its stress testing.
---------------------------------------------------------------------------

    \1853\ See, e.g., Fidelity Comment Letter (noting that the 
proposed requirement to test for non-parallel shifts in the yield 
curve would require significantly more effort and analysis than 
testing for non-parallel shifts with little benefit); ICI Comment 
Letter (noting that the proposed requirement to include assumptions 
as to how the fund would sell portfolio securities to meet 
redemptions were sophisticated and complex assumptions).
---------------------------------------------------------------------------

    In the Paperwork Reduction Act analysis in section IV.A.5 below, we 
identified certain initial and ongoing hour burdens and associated time 
costs related to the collection of information requirements for our 
stress testing amendments. As we discuss there in more detail, our 
staff estimates that the amendments to stress testing associated with 
the requirement that money market funds maintain a written copy of 
their stress testing procedures, and any modifications thereto, and 
preserve for a period of not less than six years following the 
replacement of such procedures with new procedures, the first two years 
in an easily accessible place, would involve 51,428 burden hours, at an 
average one-time cost of $24.52 million for all money market funds. In 
addition, our staff estimates that the amendments to stress testing 
associated with the requirement that money market funds have written 
procedures that provide for a report of the stress testing results to 
be presented to the board of directors at its next regularly scheduled 
meeting (or sooner, if appropriate in light of the results) would 
create a total annual burden for all money market funds of an 
additional 25,155 burden hours at a total time cost of approximately 
$7.28 million.
    We believe the new costs for stress testing will be so small as 
compared to the fund's overall operating expenses that any effect on 
competition would be insignificant. Although some commenters believed 
the proposed requirements would impose new costs, commenters did not 
indicate that such costs would have competitive effects. The new stress 
testing requirements may increase allocative efficiency if the 
information it provides to the fund adviser, and board of directors 
improves the fund adviser's ability to manage the fund's risk and the 
board's oversight of fund risk management. Some money market fund 
investors also may view the enhanced stress testing requirements 
positively, which could marginally increase those investors' demand for 
money market funds and correspondingly the level of the funds' 
investment in the short-term financing markets. This in turn positively 
affects capital formation. We do not have the information necessary to 
provide a reasonable estimate of the effects the amendments might have 
on capital formation, because we do not know to what extent these 
changes would result in increases or decreases in investments in money 
market funds or in money market funds' allocation of investments among 
different types of short-term debt securities. No commenters provided 
such information or discussed the potential effects of the proposed 
stress testing rule on efficiency or capital formation.

[[Page 47900]]

K. Certain Macroeconomic Consequences of the New Amendments

    In this section, as well as in sections III.A and III.B above, we 
analyze the macroeconomic consequences of the primary reform amendments 
that require fees and gates for all non-government funds and an 
additional floating NAV requirement for institutional prime funds. We 
also examine, in conjunction with analyses in these preceding sections, 
the effects that the amendments may have on efficiency, competition, 
and capital formation and discuss the potential implications of the 
changes for money market fund investors, funds, and the short-term 
financing markets. We note that we presented extensive economic 
analyses of the specific benefits and costs associated with the amended 
rules in sections III.A.5 and III.B.8 above, as well as examined 
commenters' specific evaluations of the proposed fees and gates and 
floating NAV requirements. As such, we focus here on the specific 
macroeconomic effects of the reforms on current money market funds and 
the impact of the reforms on efficiency, competition, and capital 
formation. It is important to note that although a large number of 
commenters supported our proposed fees and gates requirement for non-
government funds,\1854\ and some commenters supported our floating NAV 
requirement for institutional prime funds,\1855\ many commenters 
opposed the combination of alternatives.\1856\ The baseline for these 
analyses (and all of our economic analysis in this Release) is money 
market fund investment and the short-term financing markets as they 
exist today.
---------------------------------------------------------------------------

    \1854\ See, e.g., Form Letter Type A [1], Type C [2], and Type D 
[2]; Page Comment Letter; Federated V Comment Letter; J.P. Morgan 
Comment Letter; TIAA-CREF Comment Letter; ICI Comment Letter; Reich 
& Tang Comment Letter; Northern Trust Comment Letter.
    \1855\ See, e.g., BlackRock II Comment Letter; Goldman Sachs 
Comment Letter; Schwab Comment Letter; Vanguard Comment Letter; CFA 
Institute Comment Letter; Comm. Cap. Mkt. Reg. Comment Letter.
    \1856\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter; Federated X Comment Letter; Goldman Sachs Comment Letter; 
Vanguard Comment Letter; American Benefits Council Comment Letter.
---------------------------------------------------------------------------

    In earlier sections we discussed the specific benefits and costs 
associated with other reforms adopted today, including the amended 
rules that increase portfolio and guarantor diversification, enhance 
disclosure, and mandate stress testing. We discuss in these sections 
the macroeconomic effects of the amendments, as well as their effects 
on efficiency, competition, and capital formation. The specific 
operational costs of implementing the reforms are discussed in each 
respective section.
    We note that the reforms adopted today will affect the economy in a 
number of ways, many of which are difficult, if not impossible to 
quantify. The effect of the reforms will depend on investors' choices 
among many investment alternatives, funds' and competitors' responses 
to the reforms and to each other's strategies, and many other factors 
in the larger economy. For these reasons, many of the macroeconomic 
effects discussed here are unquantifiable. We provide, however, ranges 
of possible outcomes where we can without being speculative and we 
discuss effects qualitatively, as well. Much of the qualitative 
analysis of the reforms remains similar to that presented in the 
Proposing Release. We note, however, that the magnitude of the 
macroeconomic effects, both positive and negative, may be greater for 
funds that are subject to both a floating NAV and fees and gates than 
the funds subject to just one type of reform. Many commenters noted 
that the combination of reforms would have a greater impact than either 
alternative alone.\1857\
---------------------------------------------------------------------------

    \1857\ See, e.g., Fidelity Comment Letter; Invesco Comment 
Letter; Northern Trust Comment Letter; State Street Comment Letter; 
SunGard Comment Letter; Wells Fargo Comment Letter; Government 
Finance Officers Association, et al. (Sept. 17, 2013) (``GFOA II'').
---------------------------------------------------------------------------

    In the remaining portion of this section, we discuss in detail the 
likely macroeconomic effects of our primary reforms and the effects 
that these amendments may have on efficiency, competition, and capital 
formation. We first examine the effect of our amendments on investors 
in money market funds. We then analyze the effect on the money market 
fund industry and the short-term financing markets.
1. Effect on Current Investors in Money Market Funds
    As of February 28, 2014, money market funds had approximately $3.0 
trillion in assets under management. Of this $3.0 trillion, government 
money market funds had approximately $959 billion in assets under 
management.\1858\ Government money market funds will not be required to 
comply with either fees and gates or floating NAV requirements. Because 
the regulatory landscape for these funds will remain largely unchanged, 
we anticipate current investors will likely remain invested in the 
funds.
---------------------------------------------------------------------------

    \1858\ Based on Form N-MFP data as of February 28, 2014.
---------------------------------------------------------------------------

    Non-government funds, however, will be subject to fees and gates, 
and some investors may shift their assets to government funds or other 
investment alternatives. Non-government funds, which include prime and 
tax-exempt funds, held approximately $2.1 trillion in assets as of 
February 28, 2014. Of this approximately $2.1 trillion, we estimate 
retail prime funds managed approximately 33% of prime fund assets (not 
including tax-exempt funds) or $593 billion, whereas retail tax-exempt 
funds managed 71% of tax-exempt fund assets or $197 billion of assets, 
or $790 billion in total retail fund assets.\1859\ The remaining funds 
are institutional prime funds, which will be subject to an additional 
floating NAV requirement. We estimate that institutional prime funds, 
other than tax-exempt funds, managed approximately 67% of prime fund 
assets (not including tax-exempt fund assets) or $1.2 trillion in 
assets and institutional tax-exempt funds managed 29% of tax-exempt 
funds assets or $82 billion, for a total of $1.269 trillion.\1860\ 
Consistent with these estimates, commenters noted that approximately 
30% of tax-exempt funds currently self-report as institutional 
funds.\1861\
---------------------------------------------------------------------------

    \1859\ Based on data from Form N-MFP and iMoneyNet data as of 
February 28, 2014. To estimate retail and institutional segments for 
non-government funds, we used self-reported fund data from iMoneyNet 
as of February 28, 2014 to estimate percentages for retail and 
institutional segments for each fund type. We then multiplied the 
percentages times the total market size segments, as provided by 
Form N-MFP as of February 28, 2014. We note the retail designation 
is self-reported and omnibus accounts in these funds may include 
both individual and institutional beneficial owners. For these 
reasons, our estimates may underestimate the number of funds with 
retail investors.
    \1860\ Our staff's analysis, based on iMoneyNet data, shows that 
the amount of municipal money market fund assets held by 
institutional investors varied between 25% to 43% between 2001 to 
2013.
    \1861\ See, e.g., BlackRock II Comment Letter; Federated VII 
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment 
Letter.
---------------------------------------------------------------------------

    As noted in the Proposing Release, the Commission recognizes that 
imposing fees and gates on non-government money market funds and an 
additional floating NAV requirement on institutional prime funds will 
likely affect the willingness of investors to commit capital to certain 
money market funds. On the one hand, the fees and gates requirements 
will have little effect on funds and their investors except during 
times of fund distress. During such exceptional times, investors, 
especially investors who are unlikely to redeem shares, may view the 
fees and gates requirements as protecting them from incurring costs 
from heavy shareholder redemptions and improving their funds' ability 
to manage and mitigate potential contagion from such

[[Page 47901]]

redemptions. Likewise, some, but not all, investors in institutional 
prime funds may view the floating NAV requirement as reducing their 
funds' susceptibility to heavy investor redemptions and minimizing 
shareholder dilution. We believe the amendments more generally will 
increase funds' resiliency and treat investors more equitably than the 
rules do today. Further, one commenter pointed out that floating NAV 
money market funds will likely offer higher returns than stable NAV 
government money market funds, and thus will continue to attract 
investment.\1862\ This commenter argued that institutional investors 
are unlikely to reallocate assets from floating NAV institutional prime 
funds because they will continue to be one of the most conservative and 
flexible investment alternatives, even with a floating NAV.\1863\ 
Finally, this commenter contended that investor education may improve 
investor confidence in floating NAV money market funds, which could 
attract capital.\1864\
---------------------------------------------------------------------------

    \1862\ See Thrivent Comment Letter.
    \1863\ Id.
    \1864\ Id.
---------------------------------------------------------------------------

    On the other hand, we recognize many current investors in non-
government funds, especially institutions, may prefer products that 
offer guaranteed liquidity and a stable NAV rather than non-government 
funds that will be subject to fees and gates and a floating NAV 
requirement after the reforms. As we noted in the Proposing Release and 
in this Release, we anticipate these investors will consider the 
tradeoffs involved with continuing to invest in the money market funds 
that are subject to the new requirements. As discussed in section 
III.A.1.c.iv above, several commenters noted and we concur that fees 
and gates might force some investors to either abandon or severely 
restrict investment in affected money market funds.\1865\ Likewise, 
commenters expressed concern that investors would migrate away from 
institutional prime funds because a floating NAV would eliminate the 
stable value feature that currently makes money market funds attractive 
to many shareholders.\1866\ As discussed in detail in section III.B.1 
above, and noted by commenters,\1867\ unlike most investment products, 
money market funds are generally used as cash management tools, and a 
floating NAV may curtail the ability of some investors to use money 
market funds for cash management purposes. Investors also may be 
prohibited by board-approved guidelines, internal policies, or other 
restrictions from investing in products that do not have a stable value 
per share.\1868\ A floating NAV also could drive investors with a more 
limited loss tolerance away from money market funds.\1869\
---------------------------------------------------------------------------

    \1865\ Ky. Inv. Comm'n Comment Letter; Boeing Comment Letter; 
Schwab Comment Letter; American Bankers Ass'n Comment Letter; State 
Street Comment Letter; GFOA II Comment Letter; 42 Members of U.S. 
Congress Comment Letter.
    \1866\ Fidelity Comment Letter; Legg Mason & Western Asset 
Comment Letter; SunGard Comment Letter; U.S. Bancorp Comment Letter; 
Association for Financial Professionals, et al. (Sept. 17, 2013) 
(``Ass'n Fin. Profs. II Comment Letter''); Defined Contribution 
Institutional Investment Association (Sept. 17, 2013) (``Def. 
Contrib. Inst. Inv. Ass'n Comment Letter''); GFOA II Comment Letter.
    \1867\ See, e.g., Form Letter Type E [1]; Federated IV Comment 
Letter; Invesco Comment Letter; State Street Comment Letter; Chamber 
II Comment Letter; GFOA II Comment Letter; National Association of 
State Auditors, Comptrollers and Treasurers (Sept. 17, 2013).
    \1868\ Form Letter Type B [2], Type D [1-2], and Type F [1]; 
Federated IV Comment Letter; J.P. Morgan Comment Letter; American 
Benefits Council Comment Letter; Ass'n Fin. Profs. II Comment 
Letter; National Association of College and University Business 
Officers (Sept. 17, 2013) (``Nat'l Ass'n of College & Univ. Bus. 
Officers Comment Letter''); Chamber II Comment Letter; State 
Treasurer, State of Utah (Aug. 26, 2013) (``Utah Treasurer Comment 
Letter'').
    \1869\ BlackRock II Comment Letter; SunGard Comment Letter; 
Treasury Strategies Comment Letter; American Bankers Ass'n Comment 
Letter; ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    The Commission acknowledges, and many commenters concur,\1870\ 
that, as a result of our reforms, some investors may reallocate assets 
to either government money market funds or other investment 
alternatives. We do not anticipate our reforms will have a substantial 
effect on the total amount of capital invested, although investors may 
reallocate assets among investment alternatives, potentially affecting 
issuers and the short-term financing markets, which we discuss below.
---------------------------------------------------------------------------

    \1870\ See Dreyfus DERA Comment Letter, Federated DERA I Comment 
Letter, Fidelity DERA Comment Letter, Invesco DERA Comment Letter, 
and Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------

    As noted earlier in this section, retail investors owned 
approximately $790 billion of assets in non-government money market 
funds as of February 28, 2014. Under the reforms, money market funds 
that qualify as retail funds may continue to offer a stable value as 
they do today--and facilitate their stable price by use of amortized 
cost valuation and/or penny-rounding pricing of their portfolios. We 
anticipate few investors in retail funds will reallocate assets to 
other investment choices, given that retail funds will continue to 
offer price stability, yield, and liquidity in all but exceptional 
circumstances. We are defining a retail money market fund to mean a 
money market fund that has policies and procedures reasonably designed 
to limit all beneficial owners of the fund to natural persons.\1871\ We 
expect, however, that at least some investors who are natural persons 
that currently are invested in non-government funds that are not 
designated retail may reallocate their assets to retail funds. We 
anticipate these investors will likely move to retail funds that have 
investment objectives that are similar to the objectives of their 
current funds.
---------------------------------------------------------------------------

    \1871\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically 
means having voting and/or investment power. See supra note 679.
---------------------------------------------------------------------------

    Institutions invested approximately $1.27 trillion in non-
government money market funds as of February 28, 2014. Of this $1.27 
trillion, institutional prime funds, other than tax-exempt funds, 
managed approximately $1.19 trillion in assets and institutional tax-
exempt funds managed $82 billion. Under the reforms, these funds will 
be subject not only to fees and gates, but also to an additional 
floating NAV requirement. As such, we believe as much as $1.269 
trillion in assets could be at risk for being reallocated to government 
funds and other investment alternatives.
    But as discussed below, neither the Commission nor most commenters 
believe that all institutional investors in non-government funds will 
reallocate their assets. Institutional prime funds typically offer 
higher yields than government funds, and certain investors receive tax 
advantages from investing in tax-exempt funds. In addition, we have 
been informed that, today, the Treasury Department and the IRS will 
propose new regulations and issue a revenue procedure that we believe 
should remove the most significant tax-related impediments associated 
with our floating NAV reform.\1872\ Additionally, the Commission, which 
has authority to set accounting standards, has clarified that an 
investment in a floating NAV money market fund generally meets the 
definition of a ``cash equivalent.'' \1873\ And according to one 
commenter, more than half of survey respondents indicated the 
likelihood of using a floating NAV money market fund would increase if 
such a fund's shares are considered cash equivalents for accounting 
purposes.\1874\ Thus, we believe these factors and actions taken by the 
Commission and other regulatory agencies should help preserve the

[[Page 47902]]

attractiveness of institutional prime funds to investors, perhaps 
reducing the assets reallocated to alternatives.
---------------------------------------------------------------------------

    \1872\ See supra section III.B.6.
    \1873\ As discussed in detail in section III.B.6.b, many 
investors questioned whether an investment in a floating NAV money 
market fund would meet the definition of a ``cash equivalent.''
    \1874\ See Deutsche Comment Letter.
---------------------------------------------------------------------------

    As noted by several commenters, it is difficult to estimate the 
amount of assets that institutional investors might reallocate from 
non-government funds to either government funds or other investment 
alternatives.\1875\ One commenter estimated that 64% or $806 billion 
could shift from prime funds to government funds,\1876\ whereas another 
commenter estimated that 25% of assets in its institutional prime funds 
would transfer permanently into government funds.\1877\ A third 
commenter estimated a shift in assets of between $500 billion and $1 
trillion.\1878\ In an earlier letter, this commenter cited a survey of 
institutional investors that estimates investors may withdraw between 
$660 and $750 billion from money market funds if the Commission adopts 
a floating NAV requirement because they cannot tolerate principal 
volatility.\1879\ As with much of the survey evidence provided by 
commenters,\1880\ however, we note that this survey was administered 
before the Proposing Release and before the tax and accounting relief 
that we are discussing today was known. For example, the survey, which 
was administered between February 13, 2012 and March 6, 2012, did not 
consider that government funds might not be subject to the fees, gates, 
and floating NAV requirements,\1881\ and retail money market funds 
might continue to maintain a stable price. Similarly, the survey 
designers did not present to survey participants the possibility that 
the Treasury Department and IRS would propose new regulations and issue 
a revenue procedure that we believe will remove the most significant 
tax-related impediments associated with a floating NAV reform.\1882\ 
Moreover, survey designers were not able to anticipate that the 
Commission, which has authority to set accounting standards, would 
clarify that an investment in a floating NAV money market fund would 
meet the definition of a ``cash equivalent.'' For these and other 
reasons herein, we believe that the survey data submitted by commenters 
reflecting that certain investors expect to reduce or eliminate their 
money market fund investments under the floating NAV alternative may 
overstate how investors are likely to actually behave under the final 
amendments that we are adopting today.\1883\
---------------------------------------------------------------------------

    \1875\ See Federated DERA I Comment Letter; Invesco DERA Comment 
Letter.
    \1876\ See Fidelity DERA Comment Letter.
    \1877\ See Dreyfus DERA Comment Letter; Federated DERA I Comment 
Letter. The commenter did not provide a basis for the estimate in 
this letter. We note, however, the commenter presented similar 
estimates using survey data in a previous letter. See Federated X 
Comment Letter.
    \1878\ See Federated DERA I Comment Letter.
    \1879\ See Federated X Comment Letter and Treasury Strategies, 
Money Market Fund Regulations: The Voice of the Treasurer (Apr. 19, 
2012) http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf, 
which is cited in Federated X Comment Letter. Federated concludes, 
``. . . at a minimum, $660 to $750 billion would be driven from 
institutional prime funds . . .'' We note, however, the cited survey 
queries institutional respondents about money market funds generally 
and does not reflect that government funds are not be subject to the 
floating NAV requirement. In addition, the survey did not address 
fees and gates.
    \1880\ A number of commenters cited survey data indicating that 
organizations would reduce their use of money market funds under 
either our floating NAV or liquidity fees and gates reform. See, 
e.g., ICI Comment Letter (citing the 2013 AFP Liquidity Survey, 
Association of Financial Professionals, 2013 AFP Liquidity Survey: 
Report of Survey Results (June 2013)); Wells Fargo Comment Letter; 
Northern Trust Comment Letter; Invesco Comment Letter; BlackRock II 
Comment Letter; Sungard Comment Letter.
    \1881\ See Treasury Strategies, Money Market Fund Regulations: 
The Voice of the Treasurer (Apr. 19, 2012), available at http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf.
    \1882\ See supra section III.B.6.a.
    \1883\ See, e.g., Better Markets FSOC Comment Letter, supra note 
59 (in response to industry survey data reflecting intolerance for 
the floating NAV, stating that ``it is difficult to predict the 
level of contraction that would actually result from instituting a 
floating NAV. [. . . .] The move to a floating NAV does not alter 
the fundamental attributes of money market funds with respect to the 
type, quality, and liquidity of the investments in the fund. [. . . 
.] It is therefore unrealistic to think that money market funds . . 
. will become extinct solely as a result of a move to a more 
accurate and transparent valuation methodology.''); Comment Letter 
of John M. Winters (Dec. 18, 2012) (available in File No. FSOC-2012-
0003) (``[T]he feared migration to unregulated funds has not been 
quantified and is probably overstated.'').
---------------------------------------------------------------------------

    The Commission recognizes, however, that some assets will likely 
flow out of non-government funds as a result of the reforms, and that 
the greatest effect will likely be on institutional prime funds. 
Commenters specifically noted that a combination of proposals would 
force most money market fund sponsors to exit the prime space,\1884\ 
and would cause many investors to invest their cash assets in 
government money market funds, direct investments, bank deposits, or 
other investment alternatives.\1885\ As discussed in the DERA 
Study,\1886\ the Proposing Release,\1887\ and below, there are a range 
of investment alternatives that currently compete with money market 
funds. Each of these choices involves different tradeoffs, and money 
market fund investors that are unwilling or unable to invest in their 
current option under the reforms would need to analyze the various 
tradeoffs associated with each alternative. Specifically, investors 
could choose from among at least the following alternatives: Direct 
investments in money market instruments; money market funds that are 
not subject to the reforms; bank deposit accounts; bank certificates of 
deposit; bank collective trust funds; LGIPs; U.S. private funds; 
offshore money market funds; short-term investment funds (``STIFs''); 
separately managed accounts; ultra-short bond funds; and short-duration 
exchange-traded funds (``ETFs'').\1888\ The following table, taken from 
the DERA Study and Proposing Release, outlines the principal features 
of various cash alternatives to money market funds that exist today.
---------------------------------------------------------------------------

    \1884\ See, e.g., Dreyfus Comment Letter; Invesco Comment 
Letter; PFM Asset Mgmt. Comment Letter; ICI Comment Letter; SIFMA 
Comment Letter.
    \1885\ See, e.g., Blackrock II Comment Letter; Dreyfus Comment 
Letter; Legg Mason & Western Asset Comment Letter; Northern Trust 
Comment Letter; PFM Asset Mgmt. Comment Letter; SunGard Comment 
Letter.
    \1886\ See DERA Study, supra note 24, Table 6.
    \1887\ See Proposing Release, supra note 25, Table 2.
    \1888\ See, e.g., Comment Letter of Investment Company Institute 
(Feb. 16, 2012) (available in File No 4-619.) (``ICI Feb 2012 PWG 
Comment Letter''); Comment Letter of the Association for Financial 
Professionals et al. (Apr. 4, 2012) (available in File No. 4-619) 
(``AFP Comment Letter'').

                                                          Table 1--Cash Investment Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Investment risks       Redemption                                                Restrictions on
             Product                   Valuation              \A\            restrictions          Yield \B\           Regulated         investor base
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bank demand deposits............  Stable............  Below benchmark up  No................  Below benchmark...  Yes...............  No.
                                                       to depository
                                                       insurance
                                                       (``DI'') limit;
                                                       above benchmark
                                                       above DI limit
                                                       \C\.

[[Page 47903]]

 
Time deposits (CDs).............  Stable............  Bank counterparty   Yes \D\...........  Below benchmark...  Yes...............  No.
                                                       risk above DI
                                                       limit.
Offshore money funds (European    Stable or Floating  Comparable to       Some \F\..........  Comparable to       Yes...............  Yes.\G\
 short-term MMFs) \E\.             NAV.                benchmark.                              benchmark.
Offshore money funds (European    Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  Yes.
 MMFs) \H\.
Enhanced cash funds (private      Stable NAV          Above benchmark...  By contract.......  Above benchmark...  No \I\............  Yes.\J\
 funds).                           (generally).
Ultra-short bond funds..........  Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  No.
Collective investment funds \K\.  Not stable........  Above benchmark...  No................  Above benchmark...  Yes...............  Tax-exempt bank
                                                                                                                                       clients.\L\
Short-term investment funds       Stable............  Above benchmark...  No................  Above benchmark...  Yes \M\...........  Tax-exempt bank
 (``STIFs'').                                                                                                                          clients.
Local government investment       Stable (generally)  Benchmark.........  No................  Benchmark.........  Yes...............  Local government
 pools (``LGIPs'').                \N\.                                                                                                and public
                                                                                                                                       entities.
Short-duration ETFs.............  Floating NAV;       Above benchmark...  No................  Above benchmark...  Yes...............  No.
                                   Market price \O\.
Separately managed accounts       Not stable........  Above benchmark...  No................  Above benchmark...  No................  Investment
 (including wrap accounts).                                                                                                            minimum.\P\
Direct investment in MMF          Not stable........  Comparable to       No................  Comparable to       No................  Some.\R\
 instruments.                                          benchmark but may                       benchmark but may
                                                       vary depending on                       vary depending on
                                                       investment mix                          investment mix.
                                                       \Q\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\A\ For purposes of this table, investment risks include exposure to interest rate and credit risks. The column also indicates the general level of
  investment risk for the product compared with the baseline of prime money market funds and is generally a premium above the risk-free or Treasury
  rate.
\B\ The table entries reflect average yields in a normal interest rate environment. Certain cash management products, such as certificates of deposits
  (``CDs'') and demand deposits, may be able to offer rates above the baseline in a low interest rate environment.
\C\ The current DI limit is $250,000 per owner for interest-bearing accounts. See Deposit Insurance Summary, Federal Deposit Insurance Corporation
  (``FDIC''), available at http://www.fdic.gov/deposit/deposits/.
\D\ Time deposits, or CDs, are subject to minimum early withdrawal penalties if funds are withdrawn within six days of the date of deposit or within six
  days of the immediately preceding partial withdrawal. See 12 CFR 204.2(c)(1)(i). Many CDs are also subject to early withdrawal penalties if withdrawn
  before maturity, although market forces, rather than federal regulation, impose such penalties. CDs generally have specific fixed terms (e.g., one-,
  three-, or six-month terms), although some banks offer customized CDs (e.g., with terms of seven days).
\E\ The vast majority of money market fund assets are held in U.S. and European money market funds. See Consultation Report of the IOSCO Standing
  Committee 5 (Apr. 27, 2012) (``IOSCO SC5 Report''), at App. B, Sec.  Sec.   2.1-2.36 (in 2011, of the assets invested in money market funds in IOSCO
  countries, approximately 61% were invested in U.S. money market funds and 32% were invested in European money market funds). Consequently, dollar-
  denominated European money market funds may provide a limited offshore money market fund alternative to U.S. money market funds. Most European stable
  value money market funds are a member of the Institutional Money Market Funds Association (``IMMFA''). According to IMMFA, as of March 1, 2013, there
  were approximately $286 billion U.S. dollar-denominated IMMFA money market funds. See www.immfa.org (this figure excludes accumulating NAV U.S. dollar-
  denominated money market funds). Like U.S. money market funds, European short-term money market funds must have a dollar-weighted average maturity of
  no more than 60 days and a dollar-weighted average life maturity of no more than 120 days, and their portfolio securities must hold one of the two
  highest short-term credit ratings and have a maturity of no more than 397 days. However, unlike U.S. money market funds, European short-term money
  market funds may either have a floating or fixed NAV. Compare Common Definition of European Money Market Funds (Ref. CESR/10-049) with rule 2a-7.
\F\ Most European money market funds are subject to legislation governing Undertakings for Collective Investment in Transferable Securities (``UCITS''),
  which also covers other collective investments. See, e.g., UCITS IV Directive, Article 84 (permitting a UCITS to, in accordance with applicable
  national law and its instruments of incorporation, temporarily suspend redemption of its units); Articles L. 214-19 and L. 214-30 of the French
  Monetary and Financial Code (providing that under exceptional circumstances and if the interests of the UCITS units holders so demand, UCITs may
  temporarily suspend redemptions).
\G\ Section 7(d) of the Investment Company Act requires that any non-U.S. investment company that wishes to register as an investment company in order
  to publicly offer its securities in the U.S. must first obtain an order from the SEC. To issue such an order, the SEC must find that ``by reason of
  special circumstances or arrangements, it is both legally and practically feasible to enforce the provisions of [the Act against the non-U.S. fund,]
  and that the issuance of [the] order is otherwise consistent with the public interest and the protection of investors.'' No European money market fund
  has received such an order. European money market funds could be offered to U.S. investors privately on a very limited basis subject to certain
  exclusions from investment company regulation under the Investment Company Act and certain exemptions from registration under the Securities Act. U.S.
  investors purchasing non-U.S. funds in private offerings, however, may be subject to potentially significant adverse tax implications. See, e.g.,
  Internal Revenue Code of 1986 Sec.  Sec.   1291 through 1297. Moreover, as a practical matter, and in view of the severe consequences of violating the
  Securities Act registration and offering requirements, most European money market funds currently prohibit investment by U.S. Persons.
\H\ European money market funds may have a dollar-weighted average portfolio maturity of up to six months and a dollar-weighted average life maturity of
  up to 12 months that are significantly greater than are permitted for U.S. money market funds. Compare Common Definition of European Money Market
  Funds (Ref. CESR/10-049) with rule 2a-7.

[[Page 47904]]

 
\I\ Private funds generally rely on one of two exclusions from investment company regulation by the Commission. Section 3(c)(1) of the Investment
  Company Act, in general, excludes from the definition of ``investment company'' funds whose shares are beneficially owned by not more than 100 persons
  where the issuer does not make or propose to make a public offering. Section 3(c)(7) of the Act places no limit on the number of holders of
  securities, as long as each is a ``qualified purchaser'' (as that term is defined in section 2(a)(51) of the Act) when the securities are acquired and
  the issuer does not make or propose to make a public offering. Most retail investors would not fall within the definition of ``qualified purchaser.''
  Moreover, such private funds also generally rely on the private offering exemption in section 4(2) of the Securities Act or Securities Act rule 506 to
  avoid the registration and prospectus delivery requirements of Section 5 of the Securities Act. Rule 506 establishes ``safe harbor'' criteria to meet
  the private offering exemption. The provision most often relied upon by private funds under rule 506 exempts offerings made exclusively to
  ``accredited investors'' (as that term is defined in rule 501(a) under the Securities Act). Most retail investors would not fall within the definition
  of ``accredited investor.'' Offshore private funds also generally rely on one of the two non-exclusive safe harbors of Regulation S, an issuer safe
  harbor and an offshore resale safe harbor. If one of the two is satisfied, an offshore private fund will not have to register the offer and sale of
  its securities under the Securities Act. Specifically, rules 903(a) and 904(a) of Regulation S provide that offers and sales must be made in
  ``offshore transactions'' and rule 902(h) provides that an offer or sale is made in an ``offshore transaction'' if, among other conditions, the offer
  is not made to a person in the United States. Regulation S is not available to offers and sales of securities issued by investment companies required
  to be registered, but not registered, under the Investment Company Act. See Regulation S Preliminary Notes 3 and 4.
\J\ See id.
\K\ Collective investment funds include collective trust funds and common trust funds managed by banks or their trust departments, both of which are a
  subset of short-term investment funds. For purposes of this table, short-term investment funds are separately addressed.
\L\ Collective trust funds are generally limited to tax-qualified plans and government plans, while common trust funds are generally limited to tax-
  qualified personal trusts and estates and trusts established by institutions.
\M\ STIFs are generally regulated by 12 CFR 9.18. The Office of the Comptroller of the Currency recently reformed the rules governing STIFs subject to
  their jurisdiction to impose similar requirements to those governing money market funds. See Office of the Comptroller of Currency, Treasury, Short-
  Term Investment Funds [77 FR 61229 (Oct. 9, 2012)].
\N\ Regarding all items in this row of the table, LGIPs generally are structured to meet a particular investment objective. In most cases, they are
  designed to serve as short-term investments for funds that may be needed by participants on a day-to-day or near-term basis. These local government
  investment pools tend to emulate typical money market mutual funds in many respects, particularly by maintaining a stable net asset value of $1.00
  through investments in short-term securities. A few local government investment pools are designed to provide the potential for greater returns
  through investment in longer-term securities for participants' funds that may not be needed on a near-term basis. The value of shares in these local
  government investment pools fluctuates depending upon the value of the underlying investments. Local government investment pools limit the nature of
  underlying investments to those in which its participants are permitted to invest under applicable state law. See http://www.msrb.org/Municipal-Bond-Market/About-Municipal-Securities/Local-Government-Investment-Pools.aspx. Investors in local government investment pools may include counties, cities,
  public schools, and similar public entities. See, e.g., The South Carolina Local Government Investment Pool Participant Procedures Manual, available
  at http://www.treasurer.sc.gov/media/4755/The-South-Carolina-Local-Government-Investment-Pool-Participant-Procedures-Manual.pdf.
\O\ Although the performance of an ETF is measured by its NAV, the price of an ETF for most shareholders is not determined solely by its NAV, but by
  buyers and sellers on the open market, who may take into account the ETF's NAV as well as other factors.
\P\ Many separately managed accounts have investment minimums of $100,000 or more.
\Q\ Depending on the nature and scope of their investments, these investors may also face risks stemming from a lack of portfolio diversification.
\R\ Some money market fund instruments are only sold in large denominations or are only available to qualified institutional buyers. See generally rule
  144A under the Securities Act (17 CFR 230.144A(7)(a)(1)).

    These investment options offer different combinations of price 
stability, risk exposure, return, investor protections, and disclosure. 
For example, some current money market fund investors, in particular 
bank trust departments and corporate trusts, may choose to manage their 
cash themselves and, based on our understanding of institutional 
investor cash management practices, many of these investors will invest 
directly in securities similar to those held by money market funds 
today. According to one commenter, however, this strategy may create 
additional burdens and risks for these investors, including having to 
acquire, retain, and monitor the maturity of short-term 
investments.\1889\ Any desire to self-manage cash will likely be 
tempered by the expertise required to invest in a diversified portfolio 
of money market securities directly and the costs of investing in those 
securities given the economies of scale that will be lost when each 
investor has to conduct credit analysis itself for each investment (in 
contrast to money market funds which are able to spread their credit 
analysis costs for each security across their entire shareholder 
base).\1890\ As such, we anticipate that direct investment in 
securities similar to those held by money market funds today will be 
limited to investors with large cash management requirements and active 
Treasury functions.
---------------------------------------------------------------------------

    \1889\ See, e.g., M&T Bank Comment Letter.
    \1890\ See, e.g., Comment Letter of U.S. Chamber (Jan. 23, 2013) 
(available in File No. FSOC-2012-0003) (``U.S. Chamber FSOC Comment 
Letter'') (``Quite simply, it is more efficient and economical to 
pay the management fee for a money market funds than to hire the 
internal staff to manage the investment of cash.'').
---------------------------------------------------------------------------

    Alternatively, commenters suggested that some investors, especially 
investors in institutional prime funds, will reallocate assets to 
government funds.\1891\ Investors that shift their assets from 
institutional prime funds to government money market funds will likely 
sacrifice yield,\1892\ but they will retain the principal stability and 
liquidity of their assets. To the extent that assets under management 
in government funds increase, we anticipate investors will have more 
government funds from which to choose than they do today. This expected 
increase in the number government funds could be because complexes that 
currently offer government funds will offer additional government funds 
or because other complexes will offer new government funds. In either 
case, competition among government funds should increase although the 
impact on competition likely should, at the margin, be larger if new 
complexes enter the government fund market.
---------------------------------------------------------------------------

    \1891\ Federated IV Comment Letter; TRACS Financial Comment 
Letter; Wells Fargo Comment Letter; Boeing Comment Letter; American 
Bankers Ass'n Comment Letter; Def. Contrib. Inst. Inv. Ass'n Comment 
Letter; ICI Comment Letter; see also supra section III.C.
    \1892\ See, e.g., Federated X Comment Letter; Angel Comment 
Letter. Commenters noted that investors that shift assets from prime 
funds to government funds will earn lower rates on their investments 
because government funds are less risky and offer lower yields than 
prime funds.
---------------------------------------------------------------------------

    In addition, a reallocation of assets to government funds could 
lower the yields received by both investors in government funds and 
direct purchasers of government securities. If an increase in demand 
for government funds, which must largely invest in eligible government 
securities, subsequently increases the demand for these 
securities,\1893\ the rates on eligible

[[Page 47905]]

government securities and hence yields on government funds might 
fall.\1894\ Several commenters argued that absorbing assets from non-
government funds into government funds could reduce yields on eligible 
government securities in what is already a low yield environment.\1895\ 
The extent to which asset reallocation affects yields on government 
funds, however, will depend on the amount of capital that shifts into 
government funds and on the supply of eligible government securities to 
meet heightened demand for these securities by government funds. We 
discuss these issues in further detail below.
---------------------------------------------------------------------------

    \1893\ Government money market funds must invest at least 99.5 
percent of their portfolio in cash, ``government securities'' as 
defined in section 2(a)(16) of the Act, and repurchase agreements 
collateralized with government securities. See rule 2a-7(a)(16). 
Allowable securities 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. It excludes, however, 
securities issued by state and municipal governments, which do not 
generally share the same credit and liquidity traits as U.S. 
government securities.
    \1894\ See, e.g., Federated X Comment Letter.
    \1895\ See Dreyfus DERA Comment Letter; Federated DERA I Comment 
Letter; Invesco DERA Comment Letter; Wells Fargo DERA Comment 
Letter.
---------------------------------------------------------------------------

    As noted above, commenters indicated that some investors that 
currently invest in non-government funds may shift assets into demand 
deposits or short-maturity certificates of deposit. FDIC insurance that 
covers deposit accounts (which include checking and savings accounts, 
money market deposit accounts, and certificates of deposit) guarantees 
principal stability within the insurance limits and in certain 
instances liquidity irrespective of market conditions.\1896\ We noted 
in the Proposing Release that some institutions may be deterred from 
moving their investments from money market funds to banks, because 
their assets in many cases may be above the current depository 
insurance limits; assets above the limits would be exposed to 
counterparty and sector-specific risks that are different and less 
attractive than the risk profiles of diversified non-government money 
market funds today.\1897\ Nevertheless, these investors may gain full 
insurance coverage if they are willing and able to break their cash 
holdings into sufficiently small pieces and spread them across banks, 
but doing so may impose an administrative burden on investors.\1898\
---------------------------------------------------------------------------

    \1896\ FDIC insurance covers all deposit accounts, including 
checking and savings accounts, money market deposit accounts and 
certificates of deposit. FDIC insurance does not cover other 
financial products and services that banks may offer, such as 
stocks, bonds, mutual fund shares, life insurance policies, 
annuities, or securities. The standard insurance amount is $250,000 
per depositor, per insured bank, for each account ownership 
category. See http://www.fdic.gov/deposit/deposits/.
    \1897\ See, e.g., Comment Letter of Crawford and Company (Jan. 
14, 2013) (available in File No. FSOC-2012-0003) (``Bank demand 
deposits . . . lack the diversification of money market funds and 
carry inherent counterparty risk.''); Comment Letter of Investment 
Company Institute (Jan. 10, 2011) (available in File No 4-619) 
(``The Report suggests that requiring money market funds to float 
their NAVs could encourage investors to shift their liquid balances 
to bank deposits. We believe that this effect is overstated, 
particularly for institutional investors. Corporate cash managers 
and other institutional investors would 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. Such investors would continue to seek out diversified 
investment pools, which may or may not include bank time 
deposits.''). See also Federated X Comment Letter.
    \1898\ Certain third party service providers offer such 
services. See, e.g., Nathaniel Popper and Jessica Silver-Greenberg, 
Big Depositors Seek New Safety Net, N.Y. Times (Dec. 30, 2012).
---------------------------------------------------------------------------

    It is important to note that investors will likely earn lower 
yields on deposit accounts than what they currently receive on non-
government funds.\1899\ One commenter even suggested flows of capital 
into banks may create additional downward pressure on the yields paid 
to depositors, further lowering investor returns.\1900\ If the 
additional capital that flows from non-government funds is more than 
banks can profitably lend, then banks might reduce the interest rates 
that they pay to depositors. If, however, banks have sufficient 
opportunities to invest the additional capital, interest rates would 
likely not fall.
---------------------------------------------------------------------------

    \1899\ See, e.g., Federated X Comment Letter; Angel Comment 
Letter.
    \1900\ See Angel Comment Letter.
---------------------------------------------------------------------------

    In addition, as discussed above, investors in non-government funds 
may not reallocate assets in a significant way, and if they do, may not 
reallocate large amounts of capital to banks. Given that deposit 
accounts held over $8 trillion as of February 28, 2014,\1901\ we do not 
anticipate that additional flows from non-government funds will have a 
sufficient impact to materially push down interest rates at banks. Even 
if investors reallocate capital to demand deposits, recent history 
indicates demand deposits can successfully absorb large flows of 
capital from investors. As discussed in the DERA Study, individual and 
business holdings in checking deposits and currency have significantly 
increased in recent years relative to their holdings of money market 
fund shares.\1902\ The 2012 AFP Liquidity Survey of corporate 
treasurers indicates that bank deposits accounted for 51% of the 
surveyed organizations' short-term investments in 2012, which is up 
from 25% in 2008.\1903\ Money market funds accounted for 19% of these 
organizations' short-term investments in 2012, down from 30% just a 
year earlier, and down from almost 40% in 2008.\1904\
---------------------------------------------------------------------------

    \1901\ From Board of Governors, Federal Reserve System, as of 
February 28, 2014. Demand deposits at domestically chartered 
commercial banks, U.S. branches, and agencies of foreign banks, and 
Edge Act corporations (excluding those amounts held by depository 
institutions, the U.S. government, and foreign banks and official 
institutions) less cash items in the process of collection and 
Federal Reserve float held $1.069 trillion. Savings deposits, which 
include money market deposit accounts, totaled $7.221 trillion. See 
http://www.federalreserve.gov/Releases/h6/current/default.htm.
    \1902\ See DERA Study, supra note 24, at figure 18.
    \1903\ See 2012 AFP Liquidity Survey, supra note 64.
    \1904\ See id., 2008 AFP Liquidity Survey, supra note 64.
---------------------------------------------------------------------------

    We discussed in the Proposing Release and commenters who addressed 
this issue agreed that one practical constraint for many money market 
fund investors is that they may be precluded from investing in certain 
alternatives outside of funds regulated under rule 2a-7, such as STIFs, 
offshore money market funds, LGIPs, separately managed accounts, and 
direct investments in money market instruments, due to significant 
restrictions on participation.\1905\ For example, STIFs are only 
available to accounts for personal trusts, estates, and employee 
benefit plans that are exempt from taxation under the U.S. Internal 
Revenue Code.\1906\ STIFs subject to regulation by the Office of the 
Comptroller of the Currency also are subject to less stringent 
regulatory restrictions than rule 2a-7 imposes, and STIFs under the 
jurisdiction of other banking regulators may be subject to no 
restrictions at all equivalent to rule 2a-7.\1907\ Similarly, European 
money market funds can take on more risk than U.S. money market funds 
because they are not currently subject to regulatory restrictions as 
stringent as rule 2a-7 on their credit quality, liquidity, maturity, 
and diversification.\1908\ If investment

[[Page 47906]]

alternatives are less stringently regulated than non-government funds, 
then they could pose greater risk than money market funds and thus may 
not be viable or attractive alternatives to investors that highly value 
principal stability. Offshore money market funds, which are investment 
pools domiciled and authorized outside the United States, generally 
sell shares to U.S. investors only in private offerings, limiting their 
availability to investors at large.\1909\ Further, few offshore money 
market funds offer their shares to U.S. investors in part because doing 
so could create adverse tax consequences.\1910\
---------------------------------------------------------------------------

    \1905\ See, e.g., Form Letter Type B [2], Type D [1-2], and Type 
F [1]; Federated IV Comment Letter; J.P. Morgan Comment Letter; 
Treasury Strategies Comment Letter; American Benefits Council 
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Nat'l Ass'n of 
College & Univ. Bus. Officers Comment Letter.
    \1906\ See, e.g., American Bankers Ass'n Comment Letter. See 
Testimony of Paul Schott Stevens, President and CEO of the 
Investment Company Institute, before the Committee on Banking, 
Housing, and Urban Affairs, United States Senate, on ``Perspectives 
on Money Market Mutual Fund Reforms,'' June 21, 2012, available at 
http://www.ici.org/pdf/12_senate_pss_mmf_written.pdf.
    \1907\ For a discussion of the regulation of STIFs by the Office 
of the Comptroller of the Currency (OCC), see Proposing Release, 
supra note 25, Table 2, explanatory n.M. The OCC's rule 9.18 governs 
STIFs managed by national banks and federal savings associations. 
Other types of banks may or may not follow the requirements of OCC 
rule 9.18, depending, for example, on state law requirements and 
federal tax laws. See Office of the Comptroller of Currency, 
Treasury, Short-Term Investment Funds, at n.6 and accompanying text 
[77 FR 61229 (Oct. 9, 2012)].
    \1908\ For a discussion of the regulation of European money 
market funds, see Proposing Release, supra note 25, Table 2, 
explanatory nn.E and H; Common Definition of European Money Market 
Funds (Ref. CESR/10-049). See also supra section II.B.3.
    \1909\ See Proposing Release, supra note 25, Table 2, 
explanatory n.I.
    \1910\ See Proposing Release, supra note 25, Table 2, 
explanatory n.G.
---------------------------------------------------------------------------

    In the Proposing Release and sections III.A and III.B of this 
Release, we recognize, and commenters concurred,\1911\ that some 
current money market fund investors may have self-imposed restrictions 
or fiduciary duties that limit the risks they can assume or that 
preclude them from investing in certain alternatives. They may be 
prohibited from investing in, for example, enhanced cash funds that are 
privately offered to institutions, wealthy clients, and certain types 
of trusts due to greater investment risk, limitations on investor base, 
or the lack of disclosure and legal protections of the type afforded 
them by U.S. securities regulations.\1912\ Likewise, we recognized in 
the Proposing Release that money market fund investors that can only 
invest in SEC-registered investment vehicles could not invest in LGIPs, 
which are not registered with the SEC (as states and local state 
agencies are excluded from regulation under the Investment Company 
Act). In addition, many unregistered and offshore alternatives to money 
market funds--unlike registered money market funds in the United States 
today--are not prohibited from imposing gates or redemption fees or 
suspending redemptions.\1913\ Other investment alternatives, such as 
bank CDs, also impose redemption restrictions.
---------------------------------------------------------------------------

    \1911\ See, e.g., Form Letter Type B [2], Type D [1-2], and Type 
F [1]; Federated IV Comment Letter; J.P. Morgan Comment Letter; 
Treasury Strategies Comment Letter; American Benefits Council 
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Nat'l Ass'n of 
College & Univ. Bus. Officers Comment Letter.
    \1912\ According to the 2012 AFP Liquidity Survey, supra note 
64, only 21% of respondents stated that enhanced cash funds were 
permissible investment vehicles under the organization's short-term 
investment policy. In contrast, 44% stated that prime money market 
funds were a permissible investment and 56% stated that Treasury 
money market funds were a permissible investment.
    \1913\ See, e.g., Proposing Release, supra note 25, Table 2, 
explanatory n.F.
---------------------------------------------------------------------------

    The Commission recognizes that not every cash investment 
alternative presented here will be available and attractive to each 
investor, which may leave investors with fewer investment options than 
those enumerated above. Investors, however, have available a range of 
investment options, with each choice offering different tradeoffs. 
Money market fund investors that are unwilling or unable to invest in 
their current option after the reforms will need to analyze the various 
tradeoffs associated with each alternative. We anticipate the money 
market fund industry may also innovate in various ways to meet 
investors' needs. For example, some managers may try to stabilize their 
funds' NAVs by choosing low principal-risk portfolio investment 
strategies, whereas other funds may seek to offer higher yields within 
the restrictions of rule 2a-7.
    We also recognize the reforms adopted today may cause investors to 
reallocate assets to investment alternatives that offer different 
combinations of yield, risk, and features than those of the funds in 
which they are invested today. The fact that investors have bought non-
government funds rather than these other investment alternatives 
reveals that they almost certainly prefer these funds to the 
alternatives. We, and a number of commenters,\1914\ acknowledge that it 
is doubtful that any of the non-money market fund investment 
alternatives provide the identical combination of price stability, 
transparency, risk, liquidity, yield, and level of regulation provided 
by past money market funds. However, with today's adopted amendments, 
the Commission addresses certain concerns inherent in the current 
structure of non-government money market funds that create incentives 
for shareholders to redeem shares ahead of other investors and thus 
contribute to the likelihood of heavy share redemptions and shareholder 
dilution. Specifically and as pointed out in the DERA study, although 
the 2010 reforms made the funds more resilient to both portfolio losses 
and investor redemptions, no fund would have been able to withstand the 
losses that the Reserve Primary Fund incurred in 2008 without breaking 
the buck, and nothing in the 2010 reforms would have prevented the 
Reserve Primary Fund's holding of Lehman Brothers debt. We therefore 
believe that the relative costs to investors from losing certain 
features of some of today's money market funds should be acceptable in 
light of the significant benefits stemming from advancing our goals of 
reducing money market funds' susceptibility to heavy redemptions, 
improving their ability to manage and mitigate potential contagion from 
redemptions, and increasing the transparency of their risks.
---------------------------------------------------------------------------

    \1914\ Form Letter Type A [1], Type B [2], Type C [1], Type D 
[1], and Type F [1]; Federated II Comment Letter; PFM Asset Mgmt. 
Comment Letter; Comment Letter of Square 1 Asset Management (Sept. 
17, 2013) (``Square 1 Comment Letter''); Comment Letter of Farmers 
Trust Company (July 23, 2013) (Farmers Trust Comment Letter''); 
Comment Letter of City of Chicago, Office of the City Treasurer 
(Sept. 24, 2013) (``Chicago Treasurer Comment Letter''); Comment 
Letter of United States Conference of Mayors (July 18, 2013) (``U.S. 
Conference of Mayors Comment Letter'').
---------------------------------------------------------------------------

2. Efficiency, Competition and Capital Formation Effects on the Money 
Market Fund Industry
    In this section, we consider certain effects on the money market 
fund industry of investors reallocating money away from certain money 
market funds as a result of our reforms. As discussed in section III.A, 
our primary reforms will not apply to government money market 
funds.\1915\ As such, we anticipate current investors in government 
funds will likely remain invested in these funds, as they will offer 
the price stability, liquidity, and yield to which these investors are 
accustomed.\1916\ As discussed further in section III.K.3 below, in 
fact we expect some non-government money market fund shareholders will 
likely reallocate their investments to government money market funds. 
Accordingly, to the extent investors reallocate funds between these two 
alternatives, we expect that our primary reforms will affect the short-
term funding market and capital allocation at least in the short-run as 
discussed further below. We also expect to have an increase in 
allocative efficiency because investors will be making choices best 
suited to their investment risk profiles. Furthermore, to the extent 
that new government funds will be offered because of an increased 
demand for government funds,

[[Page 47907]]

competition among government funds will also increase.
---------------------------------------------------------------------------

    \1915\ Government money market funds are permitted to opt in to 
the fees and gates reforms if they disclose they are doing so in 
advance. Because government funds hold assets with little credit 
risk, we believe it is unlikely that these funds will ever choose to 
impose fees or gates.
    \1916\ If government funds experience heavy inflows, the yields 
on eligible government securities, in which government funds largely 
invest, might fall. If the yields on portfolio assets fall, the 
yields on the fund will decline as well. We discuss this possibility 
and its impact in greater detail below.
---------------------------------------------------------------------------

    Like government funds, money market funds that qualify as retail 
funds will also be able to continue transacting at a stable value and 
will not be subject to the floating NAV reform. Retail funds will be 
required to consider imposing a fee or gate if their liquidity comes 
under stress. As such, retail funds will be competing with government 
and floating NAV funds based on their structure. Although some 
investors may reallocate their investments away from retail money 
market funds because they could impose a fee or gate, we expect many 
investors will remain in these funds because their investment 
experience under normal market conditions is unlikely to change. Some 
investors may move into retail money market funds in response to our 
reforms, as there are likely some natural persons currently invested in 
funds that are categorized as institutional prime or institutional tax-
exempt money market funds that would prefer to stay in a money market 
fund that maintains a stable NAV per share and that has a similar 
investment risk profile as their current fund. Funds with both retail 
and institutional investors also may create new retail-only non-
government funds with the same investment objective. Although we do not 
have a basis for estimating the amount of assets that might be 
reallocated to retail non-government funds because we do not know what 
fraction of the shareholder base of these funds today categorized as 
institutional would qualify as natural persons, we anticipate the 
number of retail funds and competition among these funds to increase as 
they compete to attract new investors and thus increase their 
allocative efficiency. The impact on competition likely should, at the 
margin, be larger if the increase in the number retail funds stems from 
new complexes offering additional retail funds as opposed to current 
complexes offering additional retail funds.
    Today's fees and gates amendments are designed to moderate 
redemption requests by allocating liquidity costs to those shareholders 
who impose such costs on funds through their redemptions and, in 
certain cases, stop heavy redemptions in times of market stress by 
providing fund boards with additional tools to manage heavy redemptions 
and improve risk transparency. As such, the fees and gates amendments 
should increase allocational efficiency in the non-government money 
market fund industry by making liquidity risk more apparent to 
shareholders in these funds through enhanced disclosure and by 
allocating the costs of redeeming shares when liquidity is costly to 
shareholders that redeem shares.\1917\ If investors make better 
informed investment decisions given the liquidity risk inherent in 
these money market funds as a result of the fees and gates amendments, 
allocational efficiency will be enhanced.
---------------------------------------------------------------------------

    \1917\ Allocational efficiency refers to investors efficiently 
allocating their funds to available investments, taking all relevant 
factors into account.
---------------------------------------------------------------------------

    In addition to the impacts discussed above, the combination of our 
floating NAV and fees and gates reforms may have a number of effects on 
efficiency, competition, and capital formation in the institutional 
prime money market fund industry. First, by allocating market-based 
gains and losses on portfolio securities in institutional prime funds 
to each shareholder on a proportionate basis, the floating NAV should 
increase allocational efficiency in this industry, as investors are 
allocating their investment capital based on true returns.\1918\ Doing 
so will further increase the allocative efficiency discussed above in 
institutional prime money market funds attributable to the fees and 
gates reform and its effect on shareholders' understanding of money 
market funds' liquidity risk.
---------------------------------------------------------------------------

    \1918\ Some commenters noted the potential for inequitable 
treatment of shareholders under the stable NAV model. See, e.g., 
Better Markets FSOC Comment Letter (stating that ``an investor that 
succeeds in redeeming early in a downward spiral may receive more 
than they deserve in the sense that they liquidate at $1.00 per 
share even though the underlying assets are actually worth less. 
Without a sponsor contribution or other rescue, that differential in 
share value is paid by the shareholders remaining in the fund, who 
receive less not only due to declining asset values but also because 
early redeemers received more than their fair share of asset 
value.''); Comment Letter of Wisconsin Bankers Association (Feb. 15, 
2013) (available in File No. FSOC-2012-0003) (stating that ``[a] 
floating NAV has the benefits of . . . reducing the possibilities 
for transaction activity that results in non-equitable treatment 
across all shareholders''). See also supra section II.B.1.
---------------------------------------------------------------------------

    Our primary reforms also may affect how different kinds of money 
market funds compete in the industry, and thus affect efficiency, 
competition, and capital formation in the industry. For example, we 
anticipate that some institutional investors will continue to demand a 
combination of relative price stability, liquidity, and yields that are 
higher than the yields offered by government funds. Managers of 
floating NAV money market funds may respond to these investors in one 
of several ways. Some managers may respond by altering their portfolio 
management and preferentially investing portfolio holdings in shorter-
maturity, lower-risk securities than they do today. They would do so to 
reduce NAV fluctuations and lessen the probability the fund's weekly 
liquid assets decline sufficiently for a fee or gate to be possible. 
These portfolio management changes may affect competition within the 
institutional prime money market fund industry (or broader money market 
fund industry) if these funds more favorably compete with other less 
conservatively managed funds. They also could affect capital formation 
to the extent they shift portfolio investment away from certain issuers 
or certain maturities or lessen the yields passed through to investors 
from their money market fund investments. In addition, an increase in 
these types of funds could encourage issuers to fund themselves with 
shorter term debt.
    Other portfolio managers of institutional prime funds could respond 
by using affiliate financial support to minimize principal volatility 
or avoid declines in weekly liquid assets that could lead to the 
imposition of a fee or gate.\1919\ The emergence of these types of 
money market funds also could have competitive effects within the 
institutional prime money market fund industry (or broader money market 
fund industry), depending on how favorably they compete with money 
market funds that are managed differently. These funds could reduce 
allocational efficiency to the extent shareholders invest in money 
market funds based on the assumption that principal volatility and 
liquidity risk will be borne by the fund's sponsor or other affiliate 
rather than on the risk-return profile of the fund's portfolio 
(although this impact could be tempered to the extent any of these 
costs are passed on to investors through higher management fees). They 
also could affect capital formation if affiliate sponsor support leads 
to higher investment in riskier or longer-term debt securities than 
otherwise would occur if investors had to bear the principal volatility 
or liquidity risk accompanying those money market fund investments.
---------------------------------------------------------------------------

    \1919\ Fund affiliates could avoid declines in weekly liquid 
assets, for example by purchasing non-weekly liquid assets or 
directly purchasing fund shares. Under the reforms we are adopting 
today, we are requiring increased disclosure of any affiliate 
financial support of money market funds. These reforms, and their 
effects on efficiency, competition, and capital formation, are 
discussed above in sections III.E and III.F.
---------------------------------------------------------------------------

    Finally, some portfolio managers of institutional prime money 
market funds may seek to competitively distinguish their funds post-
reform by altering their portfolio management and investing in 
relatively longer-term or riskier securities than they do today. These 
funds may seek to appeal to investors that, if investing in a floating 
NAV

[[Page 47908]]

money market fund that could be subject to fees or gates, now may be 
willing to sacrifice liquidity in times of stress or some principal 
stability for greater yield. The emergence of these types of money 
market funds may enhance competition in the money market fund industry 
among different types of institutional prime money market funds along 
the risk-return spectrum. It also would affect changes in capital 
formation post-reform to the extent that it shifts investment to 
issuers of longer-term or riskier securities or increases yields paid 
to investors (or increases management fees paid to certain types of 
fund complexes). Thus, depending on the magnitude of the primary 
reforms' effect on the assets managed by different types of money 
market funds, the type and number of institutional prime funds may 
contract overall, potentially limiting investors' choices among them, 
or may expand, potentially enhancing investors' choices among them. 
Accordingly, competition among institutional prime funds may increase 
or decrease with an impact that will likely be stronger if the number 
of complexes offering institutional prime funds changes.
    Finally, as discussed above, we recognize investors in 
institutional prime funds may reallocate assets to investment 
alternatives. In addition to the potential effects on investors 
described above and the short-term funding markets described below, a 
reallocation of assets out of these funds may affect the profitability 
of the money market fund industry, and thus have incremental effects on 
efficiency, competition, and capital formation. For example, fund 
complexes that, on net, experience a decline in managed money market 
fund assets as a result of our primary reforms, will likely earn lower 
fund advisers' management and other fees than they do today.\1920\ It 
is important to note, however, that fees for managing these assets will 
still be earned, but by the asset managers to which assets are 
reallocated. To the extent investors shift assets within a fund complex 
(e.g., to a government fund), at least some of the fees may be retained 
by the fund complex. If, however, investors instead reallocate assets 
to non-money market fund alternatives, the managers of these other 
options will benefit. This shift may have competitive implications 
within the money market fund industry as not all fund complexes are 
likely to be equally affected by a movement in money market fund assets 
as a result of the primary reforms. For example, fund complexes that 
primarily advise government money market funds may benefit 
competitively as these funds are generally not affected by our primary 
reforms and may experience inflows, which would raise these fund 
advisers' management fee income. Similarly, fund complexes that manage 
mostly retail money market funds may be competitively advantaged post-
reform over those that primarily manage institutional prime funds. 
These latter funds will be subject to both our floating NAV and fees 
and gates reforms and thus may experience a greater decline in assets 
than retail money market funds as a result of our primary reforms. We 
thus anticipate our primary reforms may significantly alter the 
competitive makeup of the money market fund industry, producing related 
effects on efficiency and capital formation. We believe, however, that 
these changes are necessary to accomplish our policy goals.
---------------------------------------------------------------------------

    \1920\ See Federated X Comment Letter.
---------------------------------------------------------------------------

3. Effect of Reforms on Investment Alternatives, and the Short-Term 
Financing Markets
    In this section, we consider the effects of the reforms on 
investment alternatives, issuers, and the short-term financing markets. 
We have presented extensive economic analysis relating to our final 
policy choices and discussed commenters' views in earlier sections of 
the Release. As such, we focus here on the specific macroeconomic 
effects of the reforms on investment alternatives, as well as the 
short-term financing markets and the impact of the reforms on 
efficiency, competition, and capital formation on issuers in the short-
term financing market and the short-term financing market.
    We recognized in the Proposing Release that the amendments we are 
adopting today could create incentives for investors to shift assets 
out of non-government money market funds, which could lead to changes 
in the funding of and other effects on the short-term financing 
markets. Many commenters agreed with our views.\1921\ Some commenters, 
for example, cautioned that a decrease in investor demand for money 
market funds could limit the availability and raise the cost of short-
term funding for businesses, as well as federal, state, and local 
governments, and that it is currently unclear whether these entities 
would be able to find and use alternative efficient sources of 
credit.\1922\ Since government funds are not subject to the fees and 
gates and floating NAV requirements, we disagree that today's adopted 
amendments have a negative impact on the availability and cost of 
short-term funding for the federal government. As discussed in the 
Proposing Release and herein, we believe the effects of a shift, 
including any effects on efficiency, competition, and capital 
formation, will depend on the amount of capital reallocated to specific 
investment alternatives and the nature of the alternatives. More 
specifically, the extent to which money market fund investors choose to 
reallocate their assets to investment alternatives, including other 
money market fund types, as a result of these reforms will drive the 
effect on the short-term financing markets. We discuss the potential 
impact of these shifts in investment below.
---------------------------------------------------------------------------

    \1921\ See, e.g., MFDF Comment Letter; Ariz. Ass'n of County 
Treasurers Comment Letter; Utah Treasurer Comment Letter; Northern 
Trust Comment Letter; Fidelity Comment Letter.
    \1922\ Form Letter Type E [1] and Type F [1]; Fidelity Comment 
Letter; Invesco Comment Letter; iMoneyNet Comment Letter; KeyBank 
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Fin. Svcs. 
Inst. Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, because non-government money 
market funds' investment strategies differ from a number of the 
investment alternatives enumerated, a shift by investors from non-
government money market funds to these alternatives could affect the 
markets for short-term securities. Commenters warned that movement of 
invested assets from prime money market funds to, for example, 
government money market funds could skew short-term funding away from 
private markets to the public sector.\1923\ The magnitude of the effect 
will depend on not only the size of the shift but also the extent to 
which there are portfolio investment differences between non-government 
money market funds and the chosen investment alternatives. As discussed 
in the DERA Study, for example, even a modest shift from prime funds to 
other types of money market funds could represent a sizeable increase 
in certain investments.\1924\ If instead investors in institutional 
prime funds choose to manage their cash directly rather than invest in 
alternative cash management products, they may invest in securities 
that are similar to those currently held by prime funds, in which the 
effects on issuers and the short-term financing markets will likely be 
minimal.\1925\
---------------------------------------------------------------------------

    \1923\ Blackrock II Comment Letter; Invesco Comment Letter; 
Wells Fargo Comment Letter; U.S. Bancorp Comment Letter; ICI Comment 
Letter.
    \1924\ See DERA Study, supra 24, Table 7.
    \1925\ The preference for this alternative, however, may be 
tempered by the cost to investors of managing cash on their own. 
See, e.g., supra note 580 and accompanying text.

---------------------------------------------------------------------------

[[Page 47909]]

    We believe, and a number of commenters agreed,\1926\ that some 
capital will be reallocated from non-government funds, especially 
institutional prime funds, to government money market funds. If the 
magnitude of the flows is large, we anticipate the shift in investment 
could affect not only the government securities market, but also 
issuers, including companies and municipalities, that previously sold 
securities to non-government funds. It is important to note that 
although investors may reallocate assets to government funds, it is 
also possible and even likely that some will reallocate assets to bank 
demand deposits and other investment vehicles, which would mitigate the 
negative impact of the reforms on the short-term funding market in 
general and bank issuers of short-term papers in particular.\1927\
---------------------------------------------------------------------------

    \1926\ See, e.g., Federated IV Comment Letter; TRACS Financial 
Comment Letter; Wells Fargo Comment Letter; Boeing Comment Letter; 
American Bankers Ass'n Comment Letter; Def. Contrib. Inst. Inv. 
Ass'n Comment Letter. See also Dreyfus DERA Comment Letter, 
Federated DERA I Comment Letter, Fidelity DERA Comment Letter, 
Invesco DERA Comment Letter, and Wells Fargo DERA Comment Letter.
    \1927\ See supra section III.K.1 of this Release.
---------------------------------------------------------------------------

    Commenters cautioned that there is limited market capacity if 
investors reallocate their assets from non-government money market 
funds into government money market funds.\1928\ Commenters noted a 
specific concern that reallocating assets from non-government funds to 
government funds would increase the demand for eligible government 
securities,\1929\ which could reduce these securities' yields in what 
is already a low-yield environment. Low yields on eligible government 
securities would not only affect investors in government funds, but 
also those investors who directly purchase government securities.\1930\ 
Commenters noted heavy flows to government funds during the financial 
crisis caused several government funds to close to new investors to 
prevent additional net inflows,\1931\ while yields fell close to 
zero.\1932\ These problems arose even with large issuances of 
government securities during the financial crisis.\1933\ One commenter 
specifically stated that negative yields would be problematic for the 
competitiveness of government funds and investors, as well as for 
parties holding government securities for regulatory capital and 
collateral purposes.\1934\
---------------------------------------------------------------------------

    \1928\ See, e.g., Blackrock II Comment Letter; Dreyfus Comment 
Letter; Federated II Comment Letter; Invesco Comment Letter; 
Northern Trust Comment Letter; Schwab Comment Letter.
    \1929\ See supra section III.C.1.
    \1930\ See, e.g., Federated X Comment Letter; Dreyfus DERA 
Comment Letter; Federated DERA I Comment Letter; Invesco DERA 
Comment Letter; Wells Fargo DERA Comment Letter.
    \1931\ See Dreyfus DERA Comment Letter; Invesco DERA Comment 
Letter. The commenters did not address where the potential new 
investors ultimately invested their assets.
    \1932\ See Dreyfus DERA Comment Letter; Federated DERA I Comment 
Letter.
    \1933\ See BlackRock DERA Comment Letter; Invesco DERA Comment 
Letter; ICI DERA Comment Letter.
    \1934\ See Federated DERA I Comment Letter.
---------------------------------------------------------------------------

    Evidence from the financial crisis also indicates, however, that 
government funds absorbed large inflows of assets. Specifically, 
approximately $498 billion or 24% of assets flowed out of prime funds, 
whereas $409 billion or 44% of assets flowed into government funds 
between September 2, 2008 and October 7, 2008,\1935\ and even with 
these unprecedented reallocations of assets, Treasury-bill rates 
approached or fell below zero for only a relatively short period during 
the crisis.\1936\ One commenter also noted the supply of Treasury bills 
has declined by more than $250 billion on three separate occasions 
between January 31, 2009 and March 31, 2014 without apparent market 
dislocation.\1937\ We recognize that any reallocation of assets from 
non-government money market funds into government money market funds 
may affect yields in the short-run. However, we believe that the two-
year period for funds to implement the fees and gates and floating NAV 
reforms that we are adopting may help facilitate the market adjustment 
process. For example, fund complexes with non-government funds that 
have both institutional and retail investors as well as other fund 
complexes will have time to originate retail funds not subject to the 
floating NAV requirement to meet the needs of retail clients. 
Similarly, retail investors in non-government funds that will be 
subject to the floating NAV after the implementation period will have 
time to reallocate assets to a retail fund. More generally, investors 
will have time to identify investment alternatives and consider trade-
offs for alternatives other than government funds.
---------------------------------------------------------------------------

    \1935\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. These investors would not be government money 
market funds [5].
    \1936\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. These investors would not be government money 
market funds [6-7].
    \1937\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    Commenters, using data from July 2013 through March 2014, estimated 
there are between $5.2-$6.8 trillion in eligible government 
securities.\1938\ However, as noted by several commenters, it is 
difficult to estimate the amount of assets that institutional investors 
might reallocate from non-government funds to government funds.\1939\ 
Several commenters cautioned this supply of eligible government 
securities would likely be insufficient if today's reforms were 
adopted.\1940\ One commenter, however, argued that the supply would be 
adequate.\1941\ This commenter estimated 64% or $806 billion could 
shift from prime funds to government funds,\1942\ whereas a second 
commenter estimated 25% of assets in its institutional prime funds 
would transfer permanently into government funds.\1943\ A third 
commenter estimated between $500 billion to $1 trillion.\1944\ The 
first commenter noted, however, that prime funds invested 19.5% of 
their assets on average in eligible government securities as of 
February 28, 2014, explaining that prime funds hold eligible government 
securities to meet the Daily Liquid Asset and Weekly Liquid Asset 
requirements of Rule 2a-7.\1945\ As such, they would likely divest some 
of these assets to meet investor redemption requests, thereby freeing 
up eligible government securities for government fund purchase. 
Applying this 19.5% estimate to prime funds at large and assuming 
investors reallocated 64% of prime fund assets to government 
funds,\1946\ the commenter then estimated the demand for eligible 
government securities would increase

[[Page 47910]]

``approximately $806 billion, which is only about 8% of current total 
available eligible government securities.'' \1947\ The commenter 
concluded, ``the supply of eligible government securities is more than 
adequate to meet anticipated demand.'' \1948\ We agree with this 
commenter. Applying the 19.5% estimate to institutional prime funds at 
large and assuming investors reallocated 25% of prime fund assets to 
government funds,\1949\ the demand for eligible government securities 
would increase about $239 billion, which is only about 4% of current 
total available eligible government securities.\1950\ Therefore, we do 
not anticipate the reallocation of fund assets will be large relative 
to the market for eligible government securities.
---------------------------------------------------------------------------

    \1938\ See Federated DERA I Comment Letter; Fidelity DERA 
Comment Letter; ICI DERA Comment Letter; Wells Fargo DERA Comment 
Letter. One commenter (see the Invesco DERA Comment Letter) 
estimated eligible government assets were $2 trillion, which is 
substantially lower than the other commenters' estimates. It appears 
the estimate does not include repurchase agreements collateralized 
by U.S. Treasuries or other government securities and may have other 
assumptions, so we focus here on the estimates provided in the other 
four letters.
    \1939\ See Federated DERA I Comment Letter and Invesco DERA 
Comment Letter. See also supra sections III.A-B.
    \1940\ See BlackRock DERA Comment Letter; Dreyfus DERA Comment 
Letter; Federated DERA I Comment Letter; Invesco DERA Comment 
Letter.
    \1941\ See Fidelity DERA Comment Letter.
    \1942\ Id.
    \1943\ See Dreyfus DERA Comment Letter.
    \1944\ See Federated DERA I Comment Letter. The commenter did 
not provide a basis for the estimate in this letter. We note, 
however, the commenter presented similar estimates using survey data 
in a previous letter. See Federated X Comment Letter. We address 
limitations of inferences from the survey in section III.B.
    \1945\ See Fidelity DERA Comment Letter. The Federated DERA I 
Comment Letter estimated prime funds invested 27% of assets in 
eligible government securities. More specifically, the letter stated 
prime money market funds held $95 billion in Treasury securities, 
$130 billion in agency securities, and $169 in fully collateralized 
repurchase agreements. It cited year-end assets in prime money 
market funds of $1.486 trillion.
    \1946\ See Fidelity DERA Comment Letter.
    \1947\ Id.
    \1948\ Id.
    \1949\ See Dreyfus DERA Comment Letter.
    \1950\ See Dreyfus DERA Comment Letter. This estimate assumes 
institutions invest about $1.187 trillion in prime funds. To 
estimate assets managed by institutional prime funds, we used self-
reported fund data from iMoneyNet as of February 28, 2014 to 
estimate the percentage of assets managed by institutional prime 
funds. We then multiplied the percentage times the assets managed by 
prime funds, as provided by Form N-MFP as of February 28, 2014. 
Commenters, using data from July 2013 through March 2014, estimated 
there are between $5.2-$6.8 trillion Eligible Government Securities. 
See Federated DERA I Comment Letter; Fidelity DERA Comment Letter; 
ICI DERA Comment Letter; Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------

    It is also difficult to estimate the future supply of available 
eligible government securities, given market forces and possible 
changes in the supply and demand. Commenters, as well as the staff, 
noted a number of factors that may affect the supply and demand of 
eligible government securities.\1951\ Some factors would affect the net 
supply negatively, whereas other factors would affect it positively. 
Given the large number of possible factors and the range of possible 
effects of each factor on both the supply of eligible government 
securities and the economy overall, we cannot estimate the net 
macroeconomic effect of the factors overall.\1952\ For this reason, we 
discuss these factors qualitatively.
---------------------------------------------------------------------------

    \1951\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf, pp. [4-5].
    \1952\ We note commenters did not provide data to help the 
Commission estimate the effects of these factors. See, e.g., 
BlackRock DERA Comment Letter; Dreyfus DERA Comment Letter; 
Federated DERA I Comment Letter; Fidelity DERA Comment Letter; 
Invesco DERA Comment Letter; Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------

    Several factors could increase the future demand for and decrease 
the future supply of eligible government securities. For example, one 
commenter discussed the impact of rising interest rates on the demand 
for money market funds generally and the concomitant increase in demand 
for eligible government securities.\1953\ This commenter suggested, for 
example, the ``eventual resolution of the Federal National Mortgage 
Association and Federal Home Loan Mortgage Corporation will reduce the 
supply,'' \1954\ as will a reduction in the federal deficit.\1955\ The 
same commenter noted several factors have increased the demand of 
government securities, including the stockpiling of securities by the 
Federal Reserve ``as a result of quantitative easing and other policy 
initiatives.'' \1956\ The commenter further notes continued trade 
deficits, structural and regulatory changes in the markets for 
financial contracts, and regulatory capital and liquidity requirements 
have increased and are likely to continue increasing the demand for 
U.S. government securities.\1957\ We agree with the commenter that many 
of these factors will increase the demand for U.S. government 
securities.\1958\
---------------------------------------------------------------------------

    \1953\ See Federated DERA I Comment Letter.
    \1954\ Id.
    \1955\ Id.
    \1956\ See Federated DERA I Comment Letter; Invesco DERA Comment 
Letter.
    \1957\ See Federated DERA I Comment Letter; Invesco DERA Comment 
Letter; Wells Fargo DERA Comment Letter.
    \1958\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf.
---------------------------------------------------------------------------

    On the other hand, several factors may decrease the future demand 
for and increase the future supply of eligible government securities. 
For example, one commenter hypothesized companies, seeking better 
investment opportunities, may reduce their holdings of cash 
equivalents, thereby reducing their holdings of government money market 
funds and eligible government securities.\1959\ This commenter further 
suggested that central banks might wind down their open market bond 
purchases, which could cause investors to sell short-term and purchase 
long-term government securities to earn higher yields. In addition, the 
commenter suggested that the Federal Reserve Bank of New York through 
its Overnight Reverse Repo Program might increase government repurchase 
agreements as part of its quantitative easing exit strategy,\1960\ and 
the Treasury could increase the supply of Treasury Floating Rate Notes 
designed to be attractive to money market funds and their 
investors.\1961\ Because we cannot foresee all of the ways markets will 
evolve, we cannot predict the macroeconomic effects of these 
changes.\1962\ Nevertheless, we acknowledge changes in the market 
arising from the reforms may have macroeconomic effects in the future.
---------------------------------------------------------------------------

    \1959\ See Fidelity DERA Comment Letter.
    \1960\ See Fidelity DERA Comment Letter; Federated DERA I 
Comment Letter. The Federated DERA I Comment Letter notes, however, 
using the Program to counteract ``the unintended consequences of the 
Commission's reforms may not be an appropriate use, however, of a 
monetary policy tool,'' and it may be an unreliable source of 
supply.
    \1961\ See Fidelity DERA Comment Letter.
    \1962\ It is important to also note that arguments supporting 
the idea of a shortfall typically ignore the ability of market 
participants to adapt to a changing landscape. See SEC Staff 
Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf.
---------------------------------------------------------------------------

    In a separate analysis, the staff noted that some investors that 
currently own eligible government securities might choose to reallocate 
these assets to other global safe assets,\1963\ which could free up 
eligible government securities for government fund purchase.\1964\ A 
number of commenters argued the Commission should focus solely on the 
supply of eligible government securities, given that government funds 
are largely restricted to investing in eligible government 
securities.\1965\ Several commenters also argued investors other than 
government funds may be restricted from holding assets other than 
eligible government securities, which would preclude them from buying 
other assets.\1966\ One commenter pointed out certain global safe 
assets can present risks, such as foreign exchange risk,\1967\ credit 
risk (securitized assets and investment grade corporate debt),\1968\ 
and commodity risk (gold),\1969\ and

[[Page 47911]]

suggested investors either may not choose to or cannot hold them.\1970\ 
Moreover, this commenter suggested that using global safe assets for 
regulatory and counterparty purposes may be more expensive than using 
eligible government securities.\1971\
---------------------------------------------------------------------------

    \1963\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. A ``safe asset'' is defined as any debt asset 
that promises a fixed amount of money in the future with virtually 
no default risk. Safe assets are generally considered to be 
information insensitive: Investors' concerns about asymmetric 
information or adverse selection are ameliorated when trading 
because the asset's creditworthiness is known with near certainty, 
reducing the need for investors to collect information. The safety 
of a given asset does not depend on the creditworthiness of the 
issuer alone but also is determined by the liquidity of the market 
in which the asset trades and by guarantees. Any asset can be 
rendered safe by an implicit or explicit promise from a central bank 
or credit-worthy institution to buy it if its price falls below a 
certain level.
    \1964\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf. We note government money market funds are largely 
precluded from investing in securities other than government 
securities. The market for global safe assets may provide investment 
alternatives for current investors in government funds and 
institutional investors invested in non-government funds that are 
willing to reallocate assets.
    \1965\ See Dreyfus DERA Comment Letter; Federated DERA I Comment 
Letter; Fidelity DERA Comment Letter; ICI DERA Comment Letter; 
Invesco DERA Comment Letter; Wells Fargo DERA Comment Letter.
    \1966\ See Federated DERA I Comment Letter; Wells Fargo DERA 
Comment Letter.
    \1967\ Id.
    \1968\ See Federated DERA I Comment Letter.
    \1969\ Id.
    \1970\ Id.
    \1971\ Id.
---------------------------------------------------------------------------

    We recognize that government funds and certain other investors are 
restricted from investing in assets other than eligible government 
securities and that other investors may prefer to invest in eligible 
government securities. As discussed above, commenters estimated there 
are between $5.2-$6.8 trillion of eligible government securities.\1972\ 
Of these, government money market funds today hold about $959 billion 
or 16%, which leaves over $5 trillion or 84% of eligible government 
securities in the hands of investors that may be able to reallocate 
their investments in eligible government securities to other 
assets.\1973\ The staff's analysis, which we credit, suggests any shift 
in demand from eligible government securities to global safe assets 
more generally would be small relative to the overall supply of global 
safe assets, which is estimated to be $74 trillion.\1974\ Consistent 
with this argument, a commenter notes that the entire market for 
eligible government securities is less than 10% of the market for 
global safe assets.\1975\ Based on these comments and the staff's 
analysis, we continue to believe that some investors and market 
participants may reallocate assets from eligible government securities 
to other safe assets, which would free up eligible government 
securities for government fund purchase.
---------------------------------------------------------------------------

    \1972\ See Federated DERA I Comment Letter; Fidelity DERA 
Comment Letter; ICI DERA Comment Letter; Wells Fargo DERA Comment 
Letter. One commenter (see the Invesco DERA Comment Letter) 
estimated eligible government assets were $2 trillion, which is 
substantially lower than the other commenters' estimates. It appears 
the estimate does not include repurchase agreements collateralized 
by U.S. Treasuries or other government securities and may have other 
assumptions, so we focus here on the estimates provided in the other 
four letters.
    \1973\ Based on Form N-MFP data as of February 28, 2014, 
government money market funds had approximately $959 billion in 
assets under management.
    \1974\ See SEC Staff Analysis http://www.sec.gov/comments/s7-03-13/s70313-324.pdf [3].
    \1975\ See Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------

    If significant capital flows from institutional prime funds to 
demand deposits, issuers and the short-term capital markets may be 
affected. If banks invest the additional capital in the short-term 
financing markets, we do not anticipate a large impact on issuers or 
the short-term capital markets. But if they do not, less capital will 
be available to issuers, which could negatively impact capital 
formation in the short-term financing market and perhaps increase the 
cost of short-term financing. In this scenario, however, banks, which 
tend to fund longer-term lending and capital investments, will have 
additional monies to invest in the long-term financing market, which 
could lower the cost of capital for long-term financing and aid capital 
formation in that market.
    Several commenters noted that shifts in assets from institutional 
prime funds to banks, although reducing systemic risk in money market 
funds, might increase systemic risk in the banking system.\1976\ Some 
commenters, for example, noted that a shift of assets from money market 
funds to bank deposits would increase the size of the banking sector 
and investors' reliance on FDIC-deposit insurance, possibly increasing 
the concentration of risk in banks.\1977\ Several commenters also 
observed that banks in this scenario would likely need to raise capital 
to meet capital adequacy standards.\1978\ Several commenters discussed 
the effects of evolving regulations (and related regulatory 
uncertainty) on banks' willingness to accept large inflows. For 
example, they noted that pending proposals to increase banks' leverage 
ratios could limit banks' willingness to accept large cash deposits on 
their balance sheets, because banks will need to raise large amounts of 
new capital to reflect the growth in bank assets.\1979\ Finally, 
commenters explained that state and municipal entities might not be 
able to find banks willing to accept their large deposits due to the 
high cost of collateralizing public bank deposits, a common requirement 
among municipalities.\1980\
---------------------------------------------------------------------------

    \1976\ See, e.g., Federated X DERA Comment Letter; Fidelity DERA 
Comment Letter; Invesco DERA Comment Letter; PFM Asset Mgmt. DERA 
Comment Letter; Reich & Tang DERA Comment Letter; UBS DERA Comment 
Letter.
    \1977\ See, e.g., Comment Letter of James Angel (Feb. 6, 2013) 
(available in File No. FSOC-2012-0003) (``Angel FSOC Comment 
Letter'') (stating that ``[m]any of the proposed reforms would 
seriously reduce the attractiveness of money market funds,'' which 
``could increase, not decrease, systemic risk as assets move to too-
big-to-fail banks.''); Comment Letter of Jonathan Macey (Nov. 27, 
2012) (available in File No. FSOC-2012-0003) (stating that a 
``reduced money market fund industry may lead to the flow of large 
amounts of cash into [the banking system], especially through the 
largest banks, and increase pressure on the FDIC.''); See, e.g., 
Comment Letter of Federated Investors, Inc. (Jan. 25, 2013) 
(available in File No. FSOC-2012-0003) (``A floating NAV would 
accelerate the flow of assets to ``Too Big to Fail'' banks, further 
concentrating risk in that sector.'').
    \1978\ See, e.g., Federated X Comment Letter; Angel Comment 
Letter.
    \1979\ See, e.g., Federated X Comment Letter; State Street 
Comment Letter; American Bankers Ass'n Comment Letter.
    \1980\ See, e.g., Ga. Treasurer Comment Letter; WV Bd. of Treas. 
Invs. Comment Letter; Chicago Treasurer Comment Letter. The 
commenters explained that many state and local governments have laws 
that require their bank deposits to be collateralized by marketable 
securities at a higher amount than the current $250,000 FDIC deposit 
insurance limit (often over 100 percent of the deposits after the 
deduction of the amount of deposit insurance).
---------------------------------------------------------------------------

    As discussed above, although we are not able to estimate the flows 
of capital from institutional prime funds, we do expect some outflow 
when investors in institutional prime funds weigh the costs and 
benefits of each investment alternative against the prime fund 
investment and find an investment alternative a superior allocation. 
Given the heterogeneity of investors' preferences and investment 
objectives and constraints, we do not expect that all investors will 
allocate assets to the same alternative. We expect, for example, that 
some investors will allocate assets to government funds, some to demand 
deposits, and others to various other alternatives. If, however, 
significant capital flows from prime money market funds to demand 
deposits, the size of the banking sector will increase. It is uncertain 
to what extent an increase in the size of the banking sector is a 
concern. First, banks are highly regulated and attuned to managing and 
diversifying risks. Second, because the size of the remaining 
institutional prime funds' portfolios will, in aggregate, be smaller, 
these portfolios could contain a higher percentage of high-quality 
prime assets, with improved diversification, and likely could be less 
susceptible to heavy redemptions. Taken together, it is not clear what 
the net effect on the resilience of the short-term funding markets will 
be due to a shift of assets from institutional prime funds to the 
banking sector.
    Historically, money market funds have been a significant source of 
financing for issuers of commercial paper, especially financial 
commercial paper, and for issuers of short-term municipal debt.\1981\ 
Analysis of Form

[[Page 47912]]

N-MFP data from November 2010 through March 2014 indicates that 
financial company commercial paper and asset-backed commercial paper 
comprise most of money market funds' commercial paper holdings.\1982\ 
Thus, we acknowledge that a shift by investors from non-government 
money market funds to other investment alternatives could cause a 
decline in demand for commercial paper and municipal debt, reducing 
these firms and municipalities' access to capital from money market 
funds and potentially creating a decline in short-term financing for 
them.\1983\ If, however, money market fund investors shift capital to 
investment alternatives that demand the same assets as prime money 
market funds, the net effect on the short-term financing markets should 
be small.
---------------------------------------------------------------------------

    \1981\ Based on Form N-MFP data, non-financial company 
commercial paper, which includes corporate and non-financial 
business commercial paper, is a small fraction of overall money 
market holdings. In addition, commercial paper financing by non-
financial businesses is a small portion (one percent) of their 
overall credit market instruments. According to Federal Reserve 
Board flow of funds data, as of December 31, 2012 non-financial 
company commercial paper totaled $130.5 billion compared with 
$12,694.2 billion of total credit market instruments outstanding for 
these entities. As such, we do not anticipate a significant effect 
on the market for non-financial corporate fund raising. Federal 
Reserve Board flow of funds data is available at http://www.federalreserve.gov/releases/z1/Current/z1.pdf.
    \1982\ In addition, according to the DERA Study, supra note 24, 
``as of March 31, 2012, money market funds held $1.4 trillion in 
Treasury debt, Treasury repo, Government agency debt, and Government 
agency repo as its largest sector exposure, followed by $659 billion 
in financial company commercial paper and CDs, its next largest 
sector exposure.''
    \1983\ See, e.g., Comment Letter of Associated Oregon Industries 
(Jan. 18, 2013) (available in File No. FSOC-2012-0003) (stating that 
if the proposed reforms ``drive investors out of money market funds, 
the flow of short-term capital to businesses will be significantly 
disrupted.''); U.S. Chamber FSOC Comment Letter (stating that ``any 
changes [that make money market funds] a less attractive investment 
will impact the overall costs for issuers in the commercial paper 
market resulting from a reduced demand in commercial paper.''); 
Comment Letter of N.J. Municipal League (Jan. 23, 2013) (available 
in File No. FSOC-2012-0003) (stating that ``money market funds hold 
more than half of the short-term debt that finances state and 
municipal governments for public projects,'' which could force local 
governments to ``limit projects and staffing, spend more on 
financing . . . or increase taxes'' if such financing was no longer 
available.); Comment Letter of Government Finance Officers 
Association, et al. (Feb. 13, 2013) (available in File No. FSOC-
2012-0003) (stating that with respect to FSOC's floating NAV 
proposal, ``changing the fundamental feature of money market funds . 
. . would dampen investor demand for municipal securities and 
therefore could deprive state and local governments and other 
borrowers of much-needed capital.'').
---------------------------------------------------------------------------

    As discussed in the DERA Study, the 2008-2012 increase in bank 
deposits coupled with the contraction of money market funds provides 
data to examine how capital formation can be affected by a reallocation 
of capital among different funding sources. According to Federal 
Reserve Board flow-of-funds data, money market funds' investments in 
commercial paper declined by 45%, or $277.7 billion, from the end of 
2008 to the end of 2012. Contemporaneously, funding corporations 
reduced their holdings of commercial paper by 99% or $357.7 
billion.\1984\ The end result was a contraction of more than 40% or 
$647.5 billion in the amount of commercial paper outstanding.
---------------------------------------------------------------------------

    \1984\ The Federal Reserve flow of funds data defines funding 
corporations as ``funding subsidiaries, custodial accounts for 
reinvested collateral of securities lending operations, Federal 
Reserve lending facilities, and funds associated with the Public-
Private Investment Program (PPIP).''
---------------------------------------------------------------------------

    Although the decline in funds' commercial paper holdings was large, 
it is important to place commercial paper borrowing by financial 
institutions into perspective by considering its size compared with 
other funding sources. As with non-financial businesses, financial 
company commercial paper is a small fraction (3.2%) of all credit 
market instruments.\1985\ We have also witnessed the ability of 
issuers, especially financial institutions, to adjust to changes in 
markets. Financial institutions, for example, dramatically reduced 
their use of commercial paper from $1.1 trillion at the end of 2008 to 
$449.2 billion at the end of 2012.\1986\ As such, we continue to 
believe that financial institutions, as well as other firms, will be 
able to identify alternate short-term financing sources if the amount 
of capital available to purchase financial commercial paper declines in 
response to our money market fund rule changes.
---------------------------------------------------------------------------

    \1985\ According to the Federal Reserve Flow of Funds data as of 
December 31, 2012, commercial paper outstanding was $449.2 billion 
compared with $13,852.2 billion of total credit market instruments 
outstanding for financial institutions.
    \1986\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data. See also 2012 FSOC Annual 
Report, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf, at 55-56, 66 (showing 
substantial declines in domestic banking firm's reliance on short-
term wholesale funding compared with deposit funding). The Basel III 
liquidity framework also proposes requirements aimed at limiting 
banks' reliance on short-term wholesale funding. See 2011 FSOC 
Annual Report, available at http://www.treasury.gov/initiatives/fsoc/Documents/FSOCAR2011.pdf, at 90 (describing Basel III's 
proposed liquidity coverage ratio and the net stable funding ratio); 
Basel Committee on Banking Supervision: Basel III: The Liquidity 
Coverage Ratio and liquidity risk monitoring tools (Jan. 2013), 
available at http://www.bis.org/publ/bcbs238.pdf (describing 
revisions to the liquidity coverage ratio).
---------------------------------------------------------------------------

    We recognize, however, that as part of this shift there is the 
potential that commercial paper issuers may have to offer higher yields 
to attract alternate investors, which would increase issuers' short-
term cost of capital.\1987\ Any increase in yield would likely increase 
demand for these investments which in turn could to some extent 
mitigate the potential adverse capital formation effects on the 
commercial paper market. Issuers, facing higher short-term financing 
costs, might consider the trade-offs of shifting into longer-term 
sources of financing. To the extent issuers' funding costs rise, 
whether short or long term, issuers will be less likely to raise 
capital and invest in projects, possibly affecting capital formation 
negatively. However, we also note that to the extent that fees and 
gates slow capital from leaving money market funds during times of 
stress, the fees and gates amendments adopted today should benefit the 
short-term funding market. This is because money from maturing 
portfolio assets may need to be reinvested in the short-term funding 
market, which may help prevent that market from completely locking up 
during times of stress as we have experienced during the financial 
crisis. To that extent, fees and gates may allow issuers to continue 
accessing the short-term capital market served by money market funds 
while they identify alternate sources of short-term capital.
---------------------------------------------------------------------------

    \1987\ See, e.g., Federated X Comment Letter.
---------------------------------------------------------------------------

    Municipalities also could be affected if the new amendments cause 
the size or number of municipal money market funds to contract. 
Commenters expressed concern about a loss of funding or other adverse 
impacts on state and local governments.\1988\ As discussed in detail in 
section III.B, however, we anticipate the impact will likely be 
relatively small. As of the last quarter of 2013, municipal funds held 
approximately 7% of the municipal debt outstanding.\1989\ Of that 7%, 
retail investors owned approximately 71% of the assets under 
management. Even though municipal funds will be subject to our fees and 
gates reforms, we do not anticipate that retail investors in 
significant numbers will divest their assets in municipal funds because 
these funds should continue to offer price stability,\1990\ yield, and 
liquidity in all

[[Page 47913]]

but exceptional circumstances. We therefore anticipate that many retail 
investors will continue to find municipal funds to be an attractive 
cash management tool compared to other alternatives.
---------------------------------------------------------------------------

    \1988\ A number of commenters argued that applying our floating 
NAV reform to municipal funds would reduce demand for municipal 
securities and raise the costs of financing. See, e.g., Fidelity 
Comment Letter (noting that tax-exempt funds purchase approximately 
65% of short-term municipal securities and that fewer institutional 
investors in tax-exempt funds will lead to less purchasing of short-
term municipal securities by tax-exempt funds and a corresponding 
higher yield paid by municipal issuers to attract new investors); 
BlackRock II Comment Letter; Federated VII Comment Letter; ICI 
Comment Letter; U.S. Mayors Comment Letter.
    \1989\ Based on data from Form N-MFP and the Federal Reserve 
Board ``Flow of Funds Accounts of the United States'' (Z.1), which 
details the flows and levels of municipal securities and loans, to 
estimate outstanding municipal debt, (March 6th, 2014), available at 
http://www.federalreserve.gov/releases/z1/current/z1.pdf. This 
estimate is consistent with a previous estimate presented in U.S. 
Securities and Exchange Commission. 2012 Report on the Municipal 
Securities Market. The estimate in the 2012 report was based on data 
from Mergent's Municipal Bond Securities Database.
    \1990\ Retail municipal funds are exempt from the floating NAV 
requirement adopted today.
---------------------------------------------------------------------------

    Of that 7% of municipal debt outstanding that municipal funds held, 
institutional investors, who might divest their municipal fund assets 
if they do not want to invest in a floating NAV fund, held 
approximately 30% of assets.\1991\ Because we estimate that 
institutional municipal funds held approximately 2% of the total 
municipal debt outstanding, we believe at most approximately 2% is at 
risk of leaving the municipal debt market.\1992\ Of this 2% of the 
municipal debt market that institutions hold, we anticipate many 
investors that currently invest in institutional municipal funds likely 
value the tax benefits of the funds and should choose to continue 
investing in municipal funds to take advantage of the tax benefits. In 
addition, we anticipate that some investors who qualify as natural 
persons and currently are invested in institutional prime funds may 
reallocate their assets to retail municipal funds, thereby increasing 
investment in retail municipal funds.
---------------------------------------------------------------------------

    \1991\ See Dreyfus II Comment Letter indicated that based on 
data from iMoneyNet institutional tax-exempt funds represent 
``approximately $80 billion in assets,'' which ``constitute 
approximately 30% of the current Municipal MMF industry.'' 
Commission staff estimates based on data from Form N-MFP and 
iMoneyNet as of February 28, 2014 confirm these statistics. To 
estimate the assets managed by the retail and institutional segments 
of municipal funds, we used self-reported fund data from iMoneyNet 
as of February 28, 2014 to estimate percentages. We then multiplied 
the percentages times the total assets managed by municipal funds, 
as provided by Form N-MFP as of February 28, 2014. We note the 
retail designation is self-reported and omnibus accounts in these 
funds may include both individual and institutional beneficial 
owners. For these reasons, our estimates may underestimate the 
number of funds with retail investors. In the Proposing Release, we 
estimated that retail investors own close to all municipal fund 
assets. We now recognize retail investors own approximately 71% of 
municipal fund assets.
    \1992\ This estimate is calculated as follows: Municipal funds 
hold 7.5% of municipal debt outstanding x 29% of municipal assets 
held by institutional investors = 2.2% of total municipal debt held 
by institutions.
---------------------------------------------------------------------------

    Even if municipal funds were to reduce their purchasing of 
municipal securities, we expect that other investors may fill the gap. 
Between the end of 2008 and the end of 2012, for example, money market 
funds decreased their holdings of municipal debt by 34% or $172.8 
billion.\1993\ Despite this reduction in holdings by money market 
funds, municipal issuers increased aggregate borrowings by over 4% 
between the end of 2008 and the end of 2012. Municipalities were able 
to fill the gap by attracting other investor types. Other types of 
mutual funds, for example, increased their municipal securities 
holdings by 61% or $238.6 billion. Depository institutions have also 
increased their funding of municipal issuers during this time period by 
$141.2 billion as investors have shifted their assets away from money 
market funds into bank deposit accounts. Life insurance companies 
almost tripled their municipal securities holdings from $47.1 billion 
at the end of 2008 to $121 billion at the end of 2012. Because 
historically other types of investors have increased their investment 
in municipal debt when money market funds have decreased their 
investment, the Commission expects that other investors may again 
increase their investment in municipal debt if money market funds 
reduce their funding of the municipal debt market in the future, though 
we note that yields on municipal securities could rise. For these 
reasons, we do not anticipate the amendments adopted today will 
substantially affect capital formation in the municipal debt market.
---------------------------------------------------------------------------

    \1993\ The statistics in this paragraph are based on the Federal 
Reserve Board's Flow of Funds data.
---------------------------------------------------------------------------

    The amendments we are adopting today, including the floating NAV 
requirement and enhanced disclosure requirements should improve 
informational efficiency in the capital markets by increasing 
investors' ability to knowledgably allocate capital. We recognize, 
however, that a fund's imposition of a liquidity fee increases the cost 
of reallocating their assets while it is in place, whereas a gate 
prevents investors from doing so. The additional costs of liquidity and 
inability of investors to redeem shares may impede the efficient 
allocation of capital and hence capital formation during periods of 
market stress because investors will not be able to reallocate capital 
as freely. We have tried to mitigate the magnitude of this effect by 
reducing the time that gates are in place to at most 10 business days 
in any 90-day period (down from the proposed 30 calendar days) and by 
adopting a 1% default liquidity fee (down from the proposed 2% fee). We 
also expect that funds will impose fees and gates infrequently.\1994\
---------------------------------------------------------------------------

    \1994\ As discussed in section III.E, the DERA study found that 
2.7% of the funds had their monthly weekly liquid assets percentages 
fall below 30% and 0.02% of the funds had their monthly weekly 
liquid assets percentages fall below 10%.
---------------------------------------------------------------------------

    Although we recognize that the reallocation of assets by money 
market fund investors may affect efficiency, competition, and capital 
formation within the short-term financing markets, the final amendments 
reflect our efforts to moderate the amount of assets that may be 
potentially redistributed by limiting our fees and gates requirement to 
non-government funds and our floating NAV requirement to institutional 
prime funds. If shareholders either remain in non-government money 
market funds or move to alternatives that invest in similar underlying 
assets, the competitive effects are likely to be small. If, however, 
investors reallocate (whether directly or through intermediaries) 
investments into substantively different assets, the effects may be 
larger. In that case, issuers may have to access different investor 
bases and perhaps offer higher yields to attract capital, whether from 
the smaller money market fund industry or from other investors. Either 
way, we recognize that issuers that are unable to offer the required 
higher yield may have difficulties raising capital, at least in the 
short-term financing markets. However, as discussed in detail earlier 
in this section, we can neither precisely estimate the amount of 
capital that will be reallocated nor its destination.
    The Commission anticipates other competitive consequences and 
effects on capital formation as well. For example, we expect managers 
of non-government money market funds will have incentives to closely 
manage weekly liquid assets and principal risk so as to avoid crossing 
the threshold for triggering fees and gates or having a volatile 
NAV.\1995\ To manage these risks, fund managers will have incentives to 
hold short-maturity, low-risk securities, and as a result the overall 
short-term financing markets may tilt toward these issuances. If so, 
the prices of these securities are likely to rise and yields may fall. 
We anticipate issuers that are able and willing to issue securities 
that meet these criteria may gain a competitive advantage over other 
issuers in the market. Alternatively, the new amendments may create a 
competitive advantage for issuers of higher yielding and riskier assets 
that are rule 2a-7-eligible securities if non-government funds pursue 
more aggressive investment strategies within the confines of rule 2a-7 
or if relatively less risk-averse investors avoid government funds and 
instead invest in non-government funds. If so, issuers of higher-
yielding 2a-7-eligible assets may gain a competitive advantage.
---------------------------------------------------------------------------

    \1995\ See, e.g., SIFMA Comment Letter; BlackRock II Comment 
Letter; Wells Fargo Comment Letter; Peirce & Greene Comment Letter; 
Dreyfus Comment Letter; Goldman Sachs Comment Letter.
---------------------------------------------------------------------------

    The DERA study pointed out that although the 2010 reforms made 
money

[[Page 47914]]

market funds more resilient to both portfolio losses and investor 
redemptions, no fund would have been able to withstand the losses that 
the Reserve Primary Fund incurred in 2008 without breaking the buck, 
and nothing in the 2010 reforms would have prevented the Reserve 
Primary Fund's holding of Lehman Brothers debt. We therefore believe 
that the costs to participants in the short-term funding market are 
acceptable relative to the benefits stemming from advancing our goals 
of reducing money market funds' susceptibility to heavy redemptions, 
improving their ability to manage and mitigate potential contagion from 
redemptions, and increasing the transparency of their risks.

L. Certain Alternatives Considered

    In this section, we discuss certain reasonable alternatives that we 
considered as potential other methods for achieving our primary reform 
goals, as well as a number of other alternatives suggested by 
commenters, and discuss their benefits as well as their 
limitations.\1996\ The goals of today's reforms include reducing money 
market funds' susceptibility to heavy redemptions, improving their 
ability to manage and mitigate potential contagion from such 
redemptions, and increasing the transparency of their risks, while 
preserving, as much as possible, the benefits of money market funds. 
Having considered carefully the trade-offs of the alternatives 
discussed below, we believe, based on our experience, observations, and 
analysis, as well as careful consideration of comments received on the 
adopted reforms and alternatives, that the amendments we are adopting 
today best effectuate our policy goals.
---------------------------------------------------------------------------

    \1996\ This section discusses reasonable alternatives to the 
primary fees and gates and floating NAV reforms discussed above. We 
also discuss reasonable alternatives to other rule amendments, as 
well as more specific or distinct issues, throughout other parts of 
the Release. For example, see supra section III.B.5 for a discussion 
of alternatives related to decimal place rounding.
---------------------------------------------------------------------------

1. Liquidity Fees, Gates, and Floating NAV Alternatives
    In the Proposing Release, we presented a number of reform options. 
Among them were standalone floating NAV, standalone fees and gates, and 
a combination of fees, gates, and a floating NAV requirement. Today we 
are adopting an approach that includes fees and gates for all non-
government money market funds, as well as an additional targeted reform 
of a floating NAV for the funds with investors most susceptible to 
heavy redemptions, institutional prime funds.\1997\ We are adopting 
this approach based on our evaluation, discussed both in other sections 
of this Release and below, of our policy goals, experience, 
observations, and analysis, as well as careful consideration of 
comments received on the following reasonable alternatives.
---------------------------------------------------------------------------

    \1997\ We did not propose to apply either the fees and gate or 
floating NAV reforms to government money market funds, and 
accordingly the final amendments do not apply to government funds, 
for the policy reasons discussed in section III.C.1. The analysis of 
reasonable alternatives below therefore does not focus on the 
potential effects of these alternatives as applied to government 
funds.
---------------------------------------------------------------------------

a. Standalone Liquidity Fees and Redemption Gates
    One option outlined in the Proposing Release was for non-government 
fund boards to be given discretion to impose liquidity fees and permit 
imposition of redemption gates under certain conditions, but without 
also requiring a floating NAV for institutional prime money market 
funds.\1998\ We believe a standalone fee option would reduce money 
market funds' susceptibility to heavy redemptions when liquidity costs 
are high and fund liquidity is stressed and would allocate liquidity 
costs to redeeming shareholders, making them pay for the liquidity that 
they receive, rather than transferring such liquidity costs to 
remaining shareholders. Gates, in addition to liquidity fees, would 
help improve the ability of fund managers and boards to manage and 
mitigate potential contagion from high levels of shareholder 
redemptions.\1999\ A standalone fees and gates requirement would 
eliminate some of the benefits of money market funds as they exist 
today for investors, but retain others. Investors would face the 
possibility of costly redemptions or the elimination of redemptions 
temporarily when fund liquidity is stressed. On the other hand, fees 
and gates, as discussed in section III.A and below, would retain the 
advantages of a stable-price product, avoiding certain issues 
associated with floating NAV funds. A large number of commenters 
supported, to varying degrees and with varying caveats, our fees and 
gates proposal.\2000\ Many other commenters, however, expressed their 
opposition to fees and gates.\2001\ We discuss specific comments on 
fees and gates in detail in section III.A.\2002\
---------------------------------------------------------------------------

    \1998\ See Proposing Release, supra note 25, at section III.B. 
We note that we have adopted this alternative for a certain subset 
of funds-namely retail funds that limit their investors to natural 
persons. We discuss the reasons why we adopted this alternative for 
retail funds, and the tradeoffs involved, in section III.C.2.
    \1999\ See section III.A for a detailed discussion of 
commenters' responses.
    \2000\ See, e.g., Form Letter Type A, Fidelity Comment Letter; 
Federated V Comment Letter; Northern Trust Comment Letter.
    \2001\ See, e.g., Capital Advisors Comment Letter; Boston 
Federal Reserve Comment Letter; Americans for Fin. Reform Comment 
Letter; Edward Jones Comment Letter.
    \2002\ We discuss the trade-offs of standalone fees versus 
standalone gates in section III.L.1.a below.
---------------------------------------------------------------------------

    As discussed here and in the Proposing Release, liquidity fees are 
designed to preserve the current benefits of principal stability, 
liquidity, and a market yield, 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.'' \2003\ Even if a liquidity fee is imposed, fund 
investors will continue to be able to access liquidity, although at a 
cost. The ability of fund boards to impose liquidity fees when 
liquidity costs are high would have many benefits, including reducing 
the incentives for shareholders to redeem shares when the fees are in 
effect. Liquidity fees will require redeeming shareholders to bear the 
liquidity costs associated with their redemptions, rather than 
transferring those costs to remaining shareholders. Likewise, fees 
would help reduce investors' incentives to redeem shares ahead of other 
investors, especially if fund managers deplete their funds' most liquid 
assets first to meet redemptions, leaving later redemption requests to 
be met by selling less liquid assets. Liquidity fees would protect fund 
liquidity by requiring redeeming shareholders to repay funds for the 
liquidity costs incurred. For these reasons, we believe liquidity fees 
would reduce money market funds' susceptibility to heavy redemptions 
when liquidity fees are high and would improve fund managers and 
boards' ability to manage and mitigate potential contagion from such 
redemptions.
---------------------------------------------------------------------------

    \2003\ See Proposing Release, supra note 25, n.343.
---------------------------------------------------------------------------

    We also recognize that the possibility of fees and gates being 
imposed when a fund is under stress may make the risk of investing in 
money market funds more salient and transparent to some investors, 
which could sensitize them to the risks of investing in the funds. The 
disclosure amendments we are adopting today will require funds to 
provide disclosure to investors regarding the possibility of fees and 
gates being imposed if a fund's liquidity is significantly stressed. 
Funds' disclosures that shareholders may face liquidity fees and 
redemption gates may help inform and could perhaps sensitize some of 
those investors to some of the risks of investing in money market 
funds.

[[Page 47915]]

    Redemption gates would stop heavy redemptions in times of market or 
fund stress.\2004\ Like liquidity fees, gates would preserve the 
current benefits of money market funds under most market conditions. 
Funds, however, would be able to use gates to respond to runs by 
halting redemptions. Gates would provide a ``cooling off'' period, 
which might temper the effects of short-term investor panic, possibly 
reducing investors' incentives to redeem shares. In addition, gates 
would allow funds to generate additional internal liquidity as assets 
mature and would reduce or eliminate the likelihood that funds sell 
otherwise desirable assets and engage in ``fire sales.'' They would 
also provide time for funds to identify solutions in crises and 
communicate the nature of any stresses to shareholders.
---------------------------------------------------------------------------

    \2004\ See supra section III.A. We note, however, gates could 
prompt pre-emptive runs if investors anticipate them. We believe, 
however, that several aspects of today's amendments mitigate this 
risk, and the effects of such pre-emptive runs should they occur. 
For example, board discretion in imposing gates mitigates this risk. 
We have also tried to mitigate the magnitude of this effect by 
reducing the time that gates are in place to at most 10 business 
days in any 90-day period (down from the proposed 30 days) and 
adopted a 1% default liquidity fee (down from a 2% fee).
---------------------------------------------------------------------------

    Standalone liquidity fees and gates would preserve many of the 
current benefits of money market funds under normal market conditions. 
As discussed in the Proposing Release, the ability of funds to impose 
liquidity fees and redemption gates, had it been available during the 
financial crisis, might have helped some funds manage the heavy 
redemptions that occurred and may have helped limit the contagion 
effects of such redemptions, though it is impossible to know what 
exactly would have happened if money market funds had operated with 
fees and gates at that time. Unlike a floating NAV, which affects day-
to-day fund pricing, fund boards would impose liquidity fees and gates 
only when liquidity costs are high and fund liquidity is stressed. In 
addition, a standalone liquidity fee and redemption gate structure 
would preserve many of the benefits of stable price money market funds, 
avoiding many of the costs associated with floating NAV funds.\2005\
---------------------------------------------------------------------------

    \2005\ As discussed previously, the Commission acknowledges, for 
example, some investors may reallocate assets from floating NAV 
prime funds to either government money market fund or other stable-
price alternatives, which may impose costs on investors, funds, and 
the short-term capital markets. We discuss these effects in more 
detail in section III.K.
---------------------------------------------------------------------------

    The Commission recognizes, however, that liquidity fees and 
redemption gates address some of the risks associated with money market 
funds, but cannot address all of the factors that might lead to heavy 
redemptions in certain money market funds. As discussed previously, we 
have found that certain money market funds (i.e., institutional prime 
funds) pose particularly significant risks that fees and gate alone do 
not fully address.\2006\ Specifically, fees and gates are intended to 
enhance money market funds' ability to manage and mitigate potential 
contagion from high levels of redemptions and make investors pay their 
share of the costs of the liquidity that they receive. They do not, 
however, eliminate the incremental incentive for certain investors to 
redeem shares ahead of other shareholders when their money market 
fund's shadow price falls below $1.00--a risk to which institutional 
prime funds are particularly susceptible, and the potential resultant 
dilution of remaining shareholders interests. Thus, we believe a 
liquidity fee combined with a redemption gate--without a floating NAV--
will not adequately address this risk of heavy redemptions for 
institutional prime funds. However, balanced with the competing goal of 
retaining the benefits of money market funds for investors to the 
extent possible, as discussed above, we believe that a standalone fees 
and gates approach does meet our policy goals when applied to retail 
funds.\2007\
---------------------------------------------------------------------------

    \2006\ See supra section III.B.
    \2007\ The tradeoffs of just a fee or gate (without a floating 
NAV) are discussed in section III.A. We note that one commenter 
suggested a ``penny rounding'' alternative that, if combined with 
fees and gates, is very similar to the fees and gates alternative we 
proposed (which included a requirement for penny-rounded pricing). 
We discuss this alternative at notes 512-515 and accompanying text. 
We are not adopting this suggested ``penny rounding'' alternative 
combined with fees and gates for the reasons described in this 
section III.L.1.a.
---------------------------------------------------------------------------

b. Standalone Floating NAV
    Another option outlined in the Proposing Release was for 
institutional prime funds to transact at a floating NAV with no 
liquidity fees or gates.\2008\ Most commenters opposed requiring a 
standalone floating NAV.\2009\ As we discuss in detail in section 
III.B, we believe a floating NAV requirement reduces certain money 
market funds' susceptibility to heavy redemptions and improves the 
allocation of gains, losses, and costs among shareholders. It does not, 
however, fully address the ability of fund managers and boards to 
manage and mitigate potential contagion from high levels of shareholder 
redemptions. A standalone floating NAV requirement would eliminate some 
of the benefits of a stable-price fund for institutional investors, 
while retaining other benefits that investors currently experience with 
money market funds.
---------------------------------------------------------------------------

    \2008\ See Proposing Release, supra note 25, at section III.A.
    \2009\ See supra section III.B for a detailed discussion of 
comments we received on this issue.
---------------------------------------------------------------------------

    First and foremost, we believe a standalone floating NAV would help 
reduce institutional prime money market funds' susceptibility to heavy 
redemptions by reducing the incremental incentive for shareholders in 
these funds to redeem shares ahead of other investors when a fund's 
shadow NAV falls below $1.00.\2010\ As discussed in Section III.B, a 
floating NAV requirement mandating that institutional prime money 
market funds transact at share prices that reflect current market-based 
factors (not amortized cost or penny rounding, as currently is 
permitted) would lessen investors' incentives to redeem early to take 
advantage of transacting at a stable value. As a result, the floating 
NAV requirement by itself without an accompanying liquidity fee and/or 
redemption gate would help mutualize potential losses and costs among 
all investors, including redeeming shareholders.\2011\
---------------------------------------------------------------------------

    \2010\ Although most commenters opposed requiring a floating 
NAV, a number of commenters did agree that a floating NAV would 
address this incremental incentive to redeem. See, e.g., Thrivent 
Comment Letter; TIAA-CREF Comment Letter; Fin. Svcs. Roundtable 
Comment Letter; SIFMA Comment Letter; Systemic Risk Council Comment 
Letter. But see, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter; Federated IV Comment Letter; Ropes & Gray Comment Letter; 
ICI Comment Letter; Chamber II Comment Letter.
    \2011\ See, e.g., Deutsche Comment Letter; TIAA-CREF Comment 
Letter; Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

    A standalone floating NAV, which many observers perceive to be more 
equitable than a stable NAV,\2012\ may also minimize investor dilution. 
A standalone floating NAV should result in redeeming investors 
receiving only their fair share of the fund when there are embedded 
losses in the portfolio, thereby avoiding dilution of remaining 
shareholders. A standalone floating NAV requirement would also preserve 
certain current benefits of money market funds, because investors would 
continue to be able to redeem shares during times of market stress 
without paying a liquidity fee or waiting for a redemption gate to be 
lifted. A standalone floating NAV would also avoid certain costs 
associated with liquidity fees and redemption gates.
---------------------------------------------------------------------------

    \2012\ See supra section III.B; see also TIAA-CREF Comment 
Letter.
---------------------------------------------------------------------------

    We anticipate a standalone floating NAV would contribute to the 
allocation of money market fund risks in the same ways that a floating 
NAV does in a combination approach. As discussed in the Proposing 
Release and in section

[[Page 47916]]

III.B, a floating NAV requirement is designed to increase the 
allocation of the risks present in money market funds by causing 
shareholders to experience gains and losses when a fund's value 
fluctuates. Some money market fund investors, accustomed to a stable 
NAV, may not appreciate the risks associated with money market funds 
whose prices may remain stable, but whose underlying values may 
fluctuate in times of market stress. As we have discussed previously, 
transacting at prices based on current market values will help ensure 
that institutional investors who invest in floating NAV funds do so 
only if they are willing to tolerate small fluctuations in share price 
in return for potentially higher yield.\2013\ And for those investors 
who are unwilling to tolerate the risk that the price fluctuations 
reflect, we anticipate they may reallocate their investments to other, 
more appropriate alternatives, which may help reduce any redemption 
pressure that these investors could have caused in times of stress had 
they remained in the funds.\2014\
---------------------------------------------------------------------------

    \2013\ See, e.g. Vanguard Comment Letter.
    \2014\ See supra section III.B.
---------------------------------------------------------------------------

    A standalone floating NAV would not necessarily eliminate, however, 
shareholders' incentives to redeem shares from institutional prime 
money market funds ahead of other investors when liquidity costs are 
high. In times of severe market stress when the secondary markets for 
funds' assets become illiquid and liquidity costs are high, investors 
may still have an incentive to rapidly redeem shares before their 
fund's liquidity dries up. A floating NAV may also not alter 
institutional prime money market fund shareholders' incentives to 
redeem shares in times of market stress when investors want to shift 
from money market funds into securities with greater quality, 
liquidity, and transparency. As such, when the situation develops, a 
standalone floating NAV would not necessarily prevent heavy shareholder 
redemptions in institutional prime money market funds and the related 
effects on the short-term capital markets or help fund managers and 
boards manage redemptions.\2015\ Thus, a standalone floating NAV would 
likely be insufficient to satisfy these important policy goals of the 
money market fund reform.
---------------------------------------------------------------------------

    \2015\ We have discussed the particular risks posed by 
institutional prime funds throughout this Release and especially in 
section III.B.
---------------------------------------------------------------------------

    We have therefore determined to adopt a floating NAV as a targeted 
reform that is intended to supplement the broader liquidity fees and 
gates reforms discussed above (as well as other reforms discussed in 
sections III.E, III.I, and III.J) by addressing the incremental 
incentive for institutional investors to redeem from prime funds. We 
believe that an approach that includes both fees and gates for all non-
government money market funds as well as a floating NAV for a subset of 
those funds (i.e., institutional prime money market funds) provides 
fund managers and boards with targeted and additional tools to manage 
heavy redemptions and help limit contagion.
c. Fund Choice of Standalone Floating NAV or Standalone Liquidity Fees 
and Redemption Gates
    We also considered providing institutional prime money market funds 
a choice of either transacting with a floating NAV or being able to 
impose liquidity fees and gates in times of stress--in other words, 
each institutional prime money market fund would choose to apply either 
the floating NAV alternative or the liquidity fees and gates 
alternative.\2016\ In the Proposing Release, we discussed how providing 
such a choice might allow each money market fund to select the reform 
alternative that is most efficient, cost-effective, and preferable to 
its shareholders. We suggested such a choice might enhance the 
efficiency of our reforms and minimize costs and competitive impacts.
---------------------------------------------------------------------------

    \2016\ We note that we did not propose to require retail or 
government funds to adopt a floating NAV, and accordingly this 
discussion focuses on the tradeoffs between allowing such a choice 
for institutional prime funds. We discuss the reasons why we are not 
mandating either a floating NAV or fees and gates for government 
money market funds, but allowing them to opt in to fees and gates if 
they choose in section III.C.1 and discuss why we believe that a 
floating NAV is not necessary for retail funds in section III.C.2.
---------------------------------------------------------------------------

    A number of commenters offered support for this ``choice'' reform 
approach,\2017\ and one commenter specifically opposed it.\2018\ The 
commenters who supported allowing funds to choose which reform 
alternative to implement argued that this approach would allow the 
market to decide which reform was most suitable rather than imposing a 
top-down solution. They noted that each alternative offers a varying 
set of benefits and drawbacks and that allowing funds to choose which 
reform to implement would allow them to offer different kinds of funds 
to clients who may have divergent priorities for either liquidity or a 
stable NAV.\2019\ These commenters also suggested that letting each 
fund choose would allow them to select the approach that they can 
implement at lowest cost and with least disruption. The commenters who 
supported allowing fund choice between the principal reforms we are 
adopting today also emphasized they did not support imposing both 
reforms in combination, only alternatively.\2020\ One commenter that 
supported fund choice nonetheless suggested intermediaries may be 
unwilling to accommodate funds that have two options as they would have 
to bear the costs of dealing with both sets of reforms for different 
funds.\2021\ The commenter that opposed allowing a choice of structural 
reforms stated that having both primary structural reforms available 
could be confusing for investors and may promote regulatory 
arbitrage.\2022\ They argued that the Commission should adopt a 
standardized structure that is simple for investors to 
understand.\2023\
---------------------------------------------------------------------------

    \2017\ Dreyfus Comment Letter; Legg Mason Comment Letter; ICI 
Comment Letter; MFDF Comment Letter.
    \2018\ Vanguard Comment Letter.
    \2019\ See, e.g., ICI Comment Letter; MFDF Comment Letter; SPARK 
Comment Letter.
    \2020\ See, e.g., ICI Comment Letter; Dreyfus Comment Letter; 
Goldman Sachs Comment Letter.
    \2021\ See ICI Comment Letter.
    \2022\ See Vanguard Comment Letter.
    \2023\ Id.
---------------------------------------------------------------------------

    We have carefully considered these comments. However, for the same 
reasons that we believe a standalone approach with either fees and 
gates or floating NAV would not fully address the risks inherent in 
money market funds, we believe, based on our consideration of relevant 
risks and policy objectives, allowing institutional prime money market 
funds to choose between them also would not address the risks posed by 
money market funds. As discussed above, the floating NAV alternative by 
itself would not necessarily eliminate shareholders' incentives to 
redeem shares from money market funds ahead of other investors when 
liquidity costs are high. In times of severe market stress when the 
secondary markets for funds' assets become illiquid and liquidity costs 
are high, investors may still have an incentive to redeem shares before 
their fund's liquidity dries up. A floating NAV also may not alter 
money market fund shareholders' incentives to redeem shares in times of 
market stress when investors want to shift from money market funds into 
securities with greater quality, liquidity, and transparency. As such, 
a floating NAV alternative by itself would not necessarily prevent 
heavy shareholder redemptions and the related effects on the short-term 
capital markets

[[Page 47917]]

or help fund managers and boards manage the rapid heavy redemptions to 
which institutional prime funds can be susceptible. These funds would 
lack the additional tools of fees and gates to help manage heavy 
redemptions and limit contagion. Thus, providing institutional prime 
funds an alternative and having some funds adopt a floating NAV would 
prevent us from satisfying certain important policy goals of the money 
market fund reform for those funds.
    Some funds might instead choose to adopt the liquidity fees and 
gates option. However, as discussed above, these funds, while having 
certain tools to manage heavy redemptions, would have a diminished 
ability to address an important factor that can lead to redemptions in 
money market funds. Specifically, fees and gates would not eliminate 
the incentive for institutional investors to redeem shares ahead of 
other shareholders to avoid market-based losses embedded in their 
fund's portfolio or mitigate shareholder dilution. Liquidity fees and 
gates would not allocate day-to-day gains, losses, and costs to 
investors on a proportionate basis, a risk that is particularly 
relevant to institutional prime funds.
    In addition, we note that today neither funds nor their investors 
may necessarily internalize the full likely effects of their own 
decisions on other funds and investors and the short-term financing 
markets, and thus capital formation.\2024\ The approach that we are 
adopting today, which subjects all non-government funds to the fees and 
gates reform and only institutional prime funds to the additional 
floating NAV requirement, is designed to address these externalities by 
reducing money market funds' susceptibility to heavy redemptions and 
improving their ability to manage and mitigate potential contagion from 
such redemptions. Because allowing institutional prime funds to choose 
between either a floating NAV or fees and gates would effectively 
negate the combined effects of the reforms that we have found to be 
necessary to address their risks, we believe that this is not the most 
appropriate alternative, for the reasons discussed above. For these 
reasons, we now believe neither liquidity fees and redemption gates nor 
floating NAV, alone, addresses all of the factors that might lead to 
heavy redemptions in institutional prime money market funds, and 
thereby to allow them such a choice would not effectively mitigate all 
of the risks that our reforms are designed to address.
---------------------------------------------------------------------------

    \2024\ See generally MFDF Comment Letter (discussing, in the 
context of fees and gates, that boards need not put significant 
emphasis on the broader systemic effects of their decisions).
---------------------------------------------------------------------------

d. Standalone Fees or Standalone Gates
    The amendments we are adopting today will allow funds to impose 
liquidity fees and redemption gates.\2025\ Some commenters on the 
proposal, however, expressed a preference for either just fees or just 
gates. For example, some commenters noted a preference for fees over 
gates.\2026\ One commenter argued that liquidity fees could slow runs, 
as the price for liquidity would be factored into investors' redemption 
decisions, whereas a gate could exacerbate the risk of pre-emptive runs 
if investors expect gates to be imposed.\2027\ Another commenter stated 
that although a liquidity fee might be acceptable to shareholders if it 
reflected the cost of liquidity, gates that prevented investors from 
accessing their cash would be the least attractive alternative for 
institutional investors that use money market funds for cash management 
purposes.\2028\
---------------------------------------------------------------------------

    \2025\ As discussed in section III.C.1, government funds are not 
required to impose fees or gates, but may opt to do so if they 
choose. We believe that if a government fund were to choose to opt 
into a fee and gate regime, for the same reasons discussed below, 
such a fund should have the flexibility to use both tools, rather 
than be limited to just one or the other. We further note that 
gating is always entirely discretionary (once a fund goes below 30% 
weekly liquid assets), and that if a board finds that a fee is not 
in the best interests of the fund need not impose it, and thus a 
government fund that opted into fees and gates could apply 
effectively only a fee or only a gate if the boards finds that using 
only one such tools is in the best interests of the fund.
    \2026\ See, e.g., Deutsche Comment Letter; Capital Advisors 
Comment Letter.
    \2027\ See Deutsche Comment Letter.
    \2028\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    Conversely, other commenters expressed a preference for gates over 
fees.\2029\ One commenter noted liquidity fees are unlikely to prevent 
institutional investors from redeeming shares in a crisis, but that 
gates would be more likely to achieve the Commission's goals.\2030\ 
Similarly, another commenter described gates as the ``most effective 
option in addressing run risk,'' but was skeptical as to whether fees 
``would deter shareholders from redeeming their shares in a time of 
extreme market stress.'' \2031\ Finally, a commenter suggested 
implementing only fully discretionary gates but no fees, noting in part 
that, ``establishing appropriate triggers and setting properly sized 
fees in advance are difficult and likely futile tasks.'' \2032\
---------------------------------------------------------------------------

    \2029\ See, e.g., Fein Comment Letter; Peirce & Greene Comment 
Letter.
    \2030\ See Fein Comment Letter.
    \2031\ See U.S. Bancorp Comment Letter.
    \2032\ See Peirce & Greene Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that funds and their boards should be 
permitted to choose between fees and gates but be capable of utilizing 
both when determining the best way to address heavy redemptions. As 
discussed in section III.1 above, fees and gates can accomplish similar 
policy goals, but one may be better suited to one set of circumstances 
or funds than the other.\2033\ The flexibility in today's amendments 
should address many of the commenters' concerns in favoring one 
approach over the other,\2034\ because it gives boards the option to 
impose fees, gates, neither or both. The flexibility provided in 
today's amendments will allow funds to tailor the redemption 
restrictions they employ to market conditions, as well as the 
preferences and behavior of their particular shareholder base and to 
adapt restrictions over time as they and the industry gain experience 
employing such restrictions. Of course, consideration of any such 
factors would have to be made in the context of the fund's best 
interests.\2035\ The flexibility provided by today's amendments also 
allows funds to alter their approach as events unfold. For example, if 
a board determines initially that a liquidity fee is in the best 
interests of the fund, but the fee turns out to be ineffective in 
reducing heavy redemptions, the board

[[Page 47918]]

may then choose to impose a redemption gate. Accordingly, we believe 
that providing funds and their boards with the flexibility to choose on 
an ongoing basis between fees and gates best meets our policy goals of 
reducing money market funds' susceptibility to heavy redemptions and 
helping funds manage and mitigate potential contagion from such 
redemptions.
---------------------------------------------------------------------------

    \2033\ As discussed in the Proposing Release, shareholders 
valuing principal preservation may prefer a redemption gate over 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 access to that investor's money market fund 
shareholdings--it just imposes a greater cost for that liquidity if 
the fund is under stress. See, 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''); 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 (stating that it ``would not make sense 
to restrict the redeemer willing to pay the price of liquidity''); 
see also Capital Advisors Comment Letter.
    \2034\ See supra section III.A.1.c.i addressing pre-emptive run 
concerns and section III.A.2 addressing concerns with default 
thresholds and fees. We also note that, to the extent an investor is 
seeking to invest in a money market fund for cash management 
purposes and views a fund with the ability to impose a fee or gate 
as incompatible with cash management, it may alternatively invest in 
a government money market fund that does not impose fees and gates.
    \2035\ See rule 2a-7(c)(i) and (ii).
---------------------------------------------------------------------------

e. Partial Gates
    We are adopting amendments to rule 2a-7 that, like the proposal, 
will allow a fund board to impose a gate on all redemptions, but that 
will not allow for partial redemption gates.\2036\ A number of 
commenters advocated allowing the board greater discretion to impose 
partial gates.\2037\ For example, some commenters noted partial gates 
would provide investors with some immediate liquidity, but allow funds 
time to regenerate liquidity or service redemptions under improved 
market conditions.\2038\ In addition, a commenter stated that partial 
gates would, ``make it easier for a board to determine that a gate is 
in the best interests of the fund because a partial gate would impose a 
lesser hardship on investors.'' \2039\
---------------------------------------------------------------------------

    \2036\ See rule 2a-7(c)(2)(i)(B).
    \2037\ See, e.g., Wilmington Trustees Comment Letter; UBS 
Comment Letter; Chamber II Comment Letter; ABA Business Law Section 
Comment Letter; see also Comment Letter of HSBC Global Asset 
Management on the European Commission's Green Paper on Shadow 
Banking (May 28, 2012) (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).
    \2038\ See, e.g., Wilmington Trustee Comment Letter; ABA 
Business Law Section Comment Letter; Deutsche Comment Letter.
    \2039\ See ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    Commenters suggested a variety of approaches for imposing partial 
gates. For example, a commenter proposed allowing shareholders to 
redeem ``at least 50% of their remaining balance at the then basis-
point rounded NAV plus a 1% fee.'' \2040\ Others proposed imposing 
partial gates with greater restrictions on shareholders making larger 
redemptions and lower or no restrictions on shareholders making smaller 
redemptions.\2041\ Another commenter suggested limiting redemptions to 
10% of outstanding shares per day and applying this limitation pro rata 
among all redeeming shareholders that day, with the balance of 
unredeemed shares carried to the next day until all redemption requests 
have been met.\2042\ In contrast, other commenters were opposed to the 
idea of partial redemption gates, citing significant operational 
challenges and costs,\2043\ as well as the potential for arbitrary and 
inconsistent application among funds and inequitable treatment among 
shareholders.\2044\
---------------------------------------------------------------------------

    \2040\ See Capital Advisors Comment Letter.
    \2041\ See UBS Comment Letter; Chamber II Comment Letter.
    \2042\ See HSBC Comment Letter.
    \2043\ See Fidelity Comment Letter; Fin. Info. Forum Comment 
Letter; Federated V Comment Letter.
    \2044\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    We have determined not to permit partial redemption gates under 
amended rule 2a-7. An important policy goal of this reform is to 
improve funds' ability to manage and mitigate potential contagion from 
such redemptions. Partial gates do not fully stop runs, because 
shareholders can continue to redeem shares. Although board discretion 
to impose partial gates may be effective for individual funds, it may 
not address our larger concerns about contagion resulting from rapid 
heavy redemptions. There may exist times when full gates are required 
to limit the contagion effects of heavy redemptions on remaining 
investors and the short-term financing markets, but individual firms 
may choose instead to impose partial gates. We also note that a number 
of commenters opposed partial gates, noting significant operational 
challenges and costs, which are not associated with full gates.\2045\ 
We also believe the benefits of allowing partial gating is further 
diminished now that we are adopting only a 10 business day maximum gate 
period, because 10 business days (rather than the 30-day gate under the 
proposal) may be a more reasonably manageable period of time during 
which investors may not need the safety valve that a partial gate might 
afford.
---------------------------------------------------------------------------

    \2045\ See, e.g., Fidelity Comment Letter; Fin. Info. Forum 
Comment Letter; Federated V Comment Letter.
---------------------------------------------------------------------------

    There are several additional potential issues with partial gates. 
First, we understand it may be difficult for funds to achieve desired 
outcomes with partial gates, and partial gates may create unintended 
consequences. For example, when a Florida LGIP suspended redemptions in 
2007 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 was subject to a 2% redemption fee.\2046\ We understand 
that investors redeemed most of what was allowed under the partial gate 
without triggering the redemption fee, which meant the partial gate not 
only did not stop the run, but may have triggered redemptions up to 
that limit.\2047\
---------------------------------------------------------------------------

    \2046\ See David Evans and Darrell Preston, Florida Investment 
Chief Quits; Fund Rescue Approved, Bloomberg (Dec. 4, 2007).
    \2047\ See, 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 withdrew assets subject to the redemption 
fee).
---------------------------------------------------------------------------

    Second, partial gates based on the size of redemptions may also be 
easily manipulated unless appropriate, but costly and complex, 
procedures are put in place to prevent such gaming. For example, a 
partial gate that allowed small redemptions could result in investors 
redeeming small amounts over a number of days, essentially achieving 
large redemptions through multiple smaller redemption 
transactions.\2048\ Funds could prevent this sort of gaming by limiting 
each shareholder's redemptions to a certain amount, but this type of 
restriction would only serve to increase the costs and complexity of 
such a gate. Third, a partial gate based on the size of redemptions 
could effectively exempt certain types of funds and their shareholders 
(e.g., retail funds and their shareholders) from a gating requirement.
---------------------------------------------------------------------------

    \2048\ See supra section III.A.1.c herein discussing gaming of 
redemption restrictions.
---------------------------------------------------------------------------

    Fourth, we also believe partial gates would complicate the fees and 
gates requirements as an operational matter. If partial gates were 
assessed on a redemption-by-redemption basis (e.g., the size of a 
shareholder's redemption), we believe, as one commenter stated, ``[t]he 
systems enhancements necessary to track holdings for purposes of 
determining each shareholder's redemption limit would be more 
complicated, cumbersome, and costly than the changes required to 
implement the full gate.'' \2049\ Similarly, complexity would be 
compounded by the existence of omnibus accounts, as funds would need to 
track all redemptions made by a single investor through multiple 
accounts over the course of a day to prevent investors from making 
redemptions in excess of the limit imposed by a partial gate in a 
single day by spreading them over multiple omnibus accounts.
---------------------------------------------------------------------------

    \2049\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

f. In-Kind Redemptions
    As discussed in the Proposing Release, we requested comment in 2009

[[Page 47919]]

on a potential amendment that would require funds to satisfy redemption 
requests in excess of a certain size through in-kind redemptions.\2050\ 
We also requested comment on this type of redemption restriction when 
we requested comment on the PWG Report.\2051\ Almost all commenters on 
the PWG alternative opposed it.\2052\ 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.\2053\ 
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 under stress with 
similar adverse consequences for the funds and the short-term financing 
markets.\2054\
---------------------------------------------------------------------------

    \2050\ See 2009 Proposing Release, supra note 66, at section 
III.B; PWG Report, supra note 506, at section 3.c. 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. 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 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. See 2009 Proposing Release, supra note 66, 
at n.30.
    \2051\ See PWG Report, supra note 506, at section 3.c 
(discussing requiring that money market funds satisfy certain 
redemptions in-kind).
    \2052\ But see Proposing Release, supra note 25 at n.472.
    \2053\ See Proposing Release, supra note 25 at 233-34 n.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. See Proposing Release, supra note 25, at n.474.
    \2054\ See Proposing Release, supra note 25 at n.475.
---------------------------------------------------------------------------

    In connection with the current reforms, we again asked for comment 
regarding possible in-kind redemption restrictions. Two commenters 
noted the complexity of implementing this mechanism.\2055\ One of these 
commenters suggested that the Commission permit, but not require, money 
market funds to meet redemptions by returning a pro rata share of the 
fund's assets rather than cash to investors.\2056\ In light of these 
comments and comments we previously received, we continue to believe 
requiring in-kind redemptions could create operational difficulties 
that might prevent funds from treating investors fairly in practice. In 
contrast, we anticipate reforms such as liquidity fees and gates would 
fulfill many of our policy goals in a manner that is operationally 
simpler and potentially fairer to investors than in-kind redemptions.
---------------------------------------------------------------------------

    \2055\ See State Street Comment Letter (``State Street agrees 
with commenters that requiring in[hyphen]kind redemptions would be 
unworkable due to the complex valuation and operational issues that 
would be imposed on both the fund and on investors receiving 
portfolio securities.''); HSBC Comment Letter.
    \2056\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    We also note requiring in-kind redemptions would not necessarily 
stop runs and the related adverse effects on the short-term financing 
markets and capital formation. Rather, we believe the liquidity fees 
and gates approach described in section III.A would better achieve our 
policy goals, including improving money market funds' ability to manage 
and mitigate potential contagion from high levels of redemptions and 
helping to preserve the benefits of money market funds for investors 
and the short-term financing markets for issuers. We note that money 
market funds are already permitted to satisfy redemptions in kind if 
they disclose such a possibility in the fund's prospectus.\2057\
---------------------------------------------------------------------------

    \2057\ See section 2(a)(32) (defining a redeemable security as a 
security where the holder is entitled . . . to receive approximately 
his proportionate share of the issuer's current net assets, or the 
cash equivalent thereof (italics added)). See also rule 18f-1, which 
provides an exemption from certain prohibitions of section 18(f)(1) 
of the Act with regard to redemptions in kind and in cash.
---------------------------------------------------------------------------

g. Standalone Floating NAV Combined With Only Liquidity Fees or 
Redemption Gates
    The Commission also considered combining a floating NAV with either 
a liquidity fee or a redemption gate; that is, we considered an 
alternative where money market funds would be required to maintain a 
floating NAV combined with a liquidity fee but not a redemption gate 
and an alternative where money market funds would be required to 
maintain a floating NAV combined with a redemption gate but not a 
liquidity fee. Combining a floating NAV with just a liquidity fee or 
just a redemption gate would simplify the operational implementation of 
the rule and perhaps make money market funds more attractive to 
investors.
    These more limited combinations, however, would likely fail to 
achieve the policy goals of the money market fund reform to the same 
extent as the full set of reforms that we are adopting today. Without 
liquidity fees, there would be heightened incentives for shareholders 
to redeem in times of market stress before fund managers deplete their 
funds' liquidity to meet redemptions. The costs of providing liquidity 
to redeeming shareholders would fall on non-redeeming shareholders, 
creating a financial inequity between shareholder types.
    Similarly, without the possibility of imposing gates, funds would 
lose an important tool to manage redemptions during periods of stress. 
They would not be able to fully halt redemptions, which could affect 
funds' ability to generate internal liquidity as assets mature, perhaps 
undermining capital formation. Losing the time necessary to generate 
internal liquidity would increase the likelihood funds would have to 
sell desirable assets, perhaps at ``fire sale'' prices. Funds would not 
have as much time to identify solutions and communicate with investors 
as they would with gates. They would also lose the ability to create a 
``cooling off'' period, which might temper the effects of short-term 
investor panic, possibly reducing investors' incentives to redeem 
shares.
    Precommiting to either a combination of a floating NAV and fees or 
a combination of a floating NAV and gates would reduce funds' ability 
to manage heavy redemptions relative to having a floating NAV and both 
fees and gates. In addition, it would limit boards' ongoing discretion 
to address potential problems. A fund's optimal response to managing 
heavy redemptions would likely depend on its particular circumstance, 
market conditions, and the appropriateness of imposing a fee or gate. 
As discussed in section III.A above, we believe funds are likely to 
first impose fees in times of market stress and then to impose gates, 
but only if fees fail to control redemptions. That said, the managers 
of a fund that experiences a credit event in an otherwise healthy 
economy might instead choose to gate their fund to staunch redemptions, 
forgoing a liquidity fee because liquidity costs are low. By forcing 
funds to precommit to fees or gates (along with a floating NAV), this 
alternative limits funds' ability to manage and mitigate potential 
contagion from such redemptions.
2. Alternatives in the FSOC Proposed Recommendations
    As discussed in the Proposing Release, we considered a number of 
alternatives for regulatory reform, including the reforms proposed by 
FSOC. We received comment on several of these alternatives. After 
considering the comments that FSOC received on their proposed reforms 
(the ``FSOC Proposed Recommendations''), as well as the comments we 
received on the

[[Page 47920]]

Proposing Release and the economic analysis set forth in this Release, 
we have concluded that these alternatives generally would not achieve 
our regulatory goals as well as the reforms we are adopting today. We 
are, however, today adopting a floating NAV for institutional funds, 
which was one proposed reform included in the FSOC Proposed 
Recommendations. We discuss below these options, and our principal 
reasons for not adopting them (other than the floating NAV for 
institutional prime money market funds).
    In November 2012, the 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 \2058\--requiring that 
money market funds use a floating NAV--is one of the reforms we are 
adopting today for institutional prime money market funds. We discuss 
this option in section III.B below. The other two options in the FSOC 
Proposed Recommendations each would require that money market funds 
maintain a NAV buffer, or a specified amount of additional assets 
available to absorb daily fluctuations in the value of the fund's 
portfolio securities. 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.'' \2059\ 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:
---------------------------------------------------------------------------

    \2058\ See FSOC Proposed Recommendations, supra note 1562, at 
section V.A.
    \2059\ Under 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 1562, 
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.
---------------------------------------------------------------------------

     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).\2060\ 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.\2061\ 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 would bear to the extent 
that the firms redirect this funding from other essential activities, 
as further discussed below.\2062\
---------------------------------------------------------------------------

    \2060\ See FSOC Proposed Recommendations, supra note 1562, at 
section V.B.
    \2061\ Under 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 506, 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.
    \2062\ This 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., Comment Letter of The Systemic Risk Council (Jan. 18, 
2013) (available in File No. FSOC 2012-0003) (``Systemic Risk 
Council FSOC Comment Letter'') (``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.'')).
---------------------------------------------------------------------------

    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.\2063\ 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.''
---------------------------------------------------------------------------

    \2063\ See FSOC Proposed Recommendations, supra note 1562, at 
section V.C.
---------------------------------------------------------------------------

    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.\2064\ The 
other measures discussed in the FSOC Proposed Recommendations include 
more stringent investment diversification requirements (which we are 
generally adopting, as discussed in section III.I above), increased 
minimum liquidity levels (which we are not adopting), and more robust 
disclosure requirements (which we are generally adopting, as discussed 
in sections III.E and III.F above).\2065\
---------------------------------------------------------------------------

    \2064\ See id, at section V.C.
    \2065\ The 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 are not adopting this alternative. 
There is no evidence that current liquidity requirements are 
inadequate, and several commenters agreed. See, e.g., ICI Comment 
Letter, U.S. Bancorp Comment Letter, Federated Comment Letter. For 
example, the DERA 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 DERA Study, supra 
note 24. We have therefore determined not to address additional 
minimum liquidity requirements at this time.

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[[Page 47921]]

    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, and that 
we received on the Proposing Release. As we discuss in more detail 
below, the Commission is not pursuing these alternatives because we 
continue to 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 reforms we are adopting today.
a. NAV Buffer
    Several commenters expressed support for a NAV buffer (which we did 
not propose), although no commenters explicitly discussed an opposition 
to such a buffer as part of their comments on this proposal.\2066\ In 
particular, two commenters argued that a capital buffer would reduce 
the incentives for a fund to take excessive risk and for investors to 
run.\2067\ As discussed in the Proposing Release, 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.\2068\
---------------------------------------------------------------------------

    \2066\ See, e.g., Americans for Fin. Reform Comment Letter; 
Comment Letter of Dorothy B. Sherry (Sept. 21, 2013) (``Sherry 
Comment Letter''); Occupy the SEC Comment Letter. However, many 
commenters opposed a NAV buffer when included as an alternative in 
the FSOC recommendation. See, e.g. Comment Letter of Invesco Ltd. 
(Feb. 15, 2013) (available in File No. FSOC-2012-0003) (``Invesco 
FSOC Comment Letter''); Blackrock FSOC Comment Letter; Comment 
Letter of Independent Directors Council (Jan. 23, 2013) (available 
in File No. FSOC-2012-0003) (``IDC FSOC Comment Letter'').
    \2067\ See, e.g., Hanson et al. Comment Letter; Squam Lake 
Comment Letter.
    \2068\ Even 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 47 (``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 47 (``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 59 (``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.''); Comment Letter of 
Occupy the SEC (Feb. 15, 2013) (available in File No. FSOC-2012-
0003) (``Occupy the SEC FSOC Comment Letter''), supra note 52 
(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).
---------------------------------------------------------------------------

    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 \2069\ must 
have been designed to absorb daily price fluctuations as well as 
relatively large security defaults.\2070\ 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. Two commenters 
disagreed, noting that a capital buffer in the range of three to four 
percent would reduce yields for ordinary investors by about five basis 
points.\2071\ However, another commenter asserted that a capital buffer 
would have a much more dramatic effect on yields by effectively turning 
prime money market funds into synthetic Treasury funds.\2072\ 
Accordingly, as we discuss below, a buffer of the size contemplated by 
either alternative in the FSOC Proposed Recommendations appears to be 
too costly to be practicable.\2073\
---------------------------------------------------------------------------

    \2069\ While 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.
    \2070\ For 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.
    \2071\ See Americans for Fin. Reform Comment Letter; Squam Lake 
Comment Letter.
    \2072\ See Craig M. Lewis, The Economic Implications of Money 
Market Fund Capital Buffers (Nov. 2013), available at http://www.sec.gov/divisions/riskfin/workingpapers/rsfi-wp2014-01.pdf 
(``Lewis'').
    \2073\ There 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.
---------------------------------------------------------------------------

i. Benefits of a NAV Buffer
    As discussed in the Proposing Release, 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.\2074\ As noted by commenters, it would preserve 
money market funds' stable share price and

[[Page 47922]]

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.\2075\ Like the reforms we are adopting today, the NAV buffer 
presents trade-offs between stability, yield, and liquidity.
---------------------------------------------------------------------------

    \2074\ See FSOC Proposed Recommendations, supra 1562, at section 
V.B.
    \2075\ See Americans for Fin. Reform Comment Letter; Squam Lake 
Comment Letter.
---------------------------------------------------------------------------

    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).\2076\ 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 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.
---------------------------------------------------------------------------

    \2076\ See, e.g., Occupy the SEC FSOC Comment Letter, supra note 
52.
---------------------------------------------------------------------------

    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, as noted by commenters, 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.\2077\
---------------------------------------------------------------------------

    \2077\ See, e.g., Harvard Business School FSOC Comment Letter, 
supra note 47 (``Capital buffers also mean that there is an investor 
class that explicitly bears losses and has incentives to curb ex 
ante risk taking.''); Americans for Fin. Reform Comment Letter; 
Hanson et al. Comment Letter; and Squam Lake Comment Letter.
---------------------------------------------------------------------------

    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.\2078\ 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 that is 24% greater than the loss 
precipitating the redemptions.
---------------------------------------------------------------------------

    \2078\ See, e.g., Comment Letter of J.P. Morgan Asset Management 
(Jan. 14, 2013) (available in File No. FSOC-2012-0003) (``J.P. 
Morgan FSOC Comment Letter'') (``[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.'').
---------------------------------------------------------------------------

    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
    The Proposing Release also recognized that there are significant 
ongoing costs associated with a NAV buffer. Some commenters agreed that 
a capital buffer would impose a cost on funds and their investors, but 
these commenters claimed that the magnitude of the costs would be 
relatively modest.\2079\ For the reasons discussed below, we disagree 
with these commenters that the costs would be relatively modest. Costs 
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 experience sudden 
losses.\2080\ Such rapid severe redemptions could impair the fund's 
business model and viability.
---------------------------------------------------------------------------

    \2079\ See Americans for Fin. Reform Comment Letter; Hanson et 
al. Comment Letter; Squam Lake Comment Letter.
    \2080\ See, e.g., Systemic Risk Council FSOC Comment Letter 
(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 2091 and accompanying discussion.
---------------------------------------------------------------------------

    Another possible implication 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.\2081\
---------------------------------------------------------------------------

    \2081\ But see, e.g., U.S. Chamber FSOC Comment Letter (arguing 
that ``a NAV buffer is likely to incentivize sponsors to reach for 
yield.''); Vanguard FSOC Comment Letter (``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.''); Federated V Comment 
Letter (``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.'').

---------------------------------------------------------------------------

[[Page 47923]]

    The most significant indirect cost of a NAV buffer is the 
opportunity cost associated with maintaining a NAV buffer.\2082\ 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.\2083\
---------------------------------------------------------------------------

    \2082\ See Lewis, supra note 2072.
    \2083\ The 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 (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 
(``[A]ny capital over 0.75% will make the MMF product uneconomical 
for sponsors to offer.''); Comment Letter of Federated Investors, 
Inc. (Feb. 15. 2013) (available in File No. FSOC-2012-0003) 
(``Federated Investors Feb. 15 FSOC Comment Letter'') (calculating 
that ``prime MMFs would no longer be economically viable products'' 
based on cost estimates provided by the ICI.).
---------------------------------------------------------------------------

    The second indirect cost of a NAV buffer is the equilibrium rate of 
return that a provider of funding for a NAV buffer would demand.\2084\ 
An entity that provides such funding, possibly the fund sponsor, would 
expect to be paid a return that sets the market value of the buffer 
equal to the amount of the capital contribution. Since a NAV buffer is 
designed to absorb the same amount of risk regardless of its size, as 
noted by at least one commenter, the promised yield, or cost of the 
buffer, increases with the relative amount of risk it is expected to 
absorb.\2085\ This is a well-known leverage effect.\2086\
---------------------------------------------------------------------------

    \2084\ See Lewis, supra note 2072.
    \2085\ See Squam Lake Comment Letter.
    \2086\ The leverage effect reflects the concept that higher 
leverage levels induce an equity holder to demand higher returns to 
compensate for the higher risk levels.
---------------------------------------------------------------------------

    One could analogize a NAV buffer to bank capital by considering the 
similarities between money market funds with a NAV buffer and banks 
with capital. A traditional bank generally finances long-term assets 
(customer loans) with short-term liabilities (demand deposits). The 
Federal Reserve Board, as part of its prudential regulation, requires 
banks to adhere to certain minimum capital requirements.\2087\ Bank 
capital, among other functions, provides a buffer that allows banks to 
withstand a certain amount of sudden demands for liquidity and losses 
without becoming insolvent and thus needing to draw upon federal 
deposit insurance or other aspects of the regulatory safety net for 
banks.\2088\ The fact that the bank assets have a long maturity and are 
illiquid compared to the bank's liabilities results in a maturity and 
liquidity mismatch problem that creates the possibility of a depositor 
run during periods of stress.\2089\ Capital is one part of a prudential 
regulatory framework employed to deter runs in banks and generally 
protect the safety and soundness of the banking system. A money market 
fund with a NAV buffer has been described as essentially a ``special 
purpose bank'' where fund shareholders' equity is equivalent to demand 
deposits and a NAV buffer is analogous to the bank's capital.\2090\ 
Since a NAV buffer is effectively a leveraged position in the 
underlying assets of the fund that is designed to absorb interest rate 
risk and mitigate default risk, a provider of buffer funding should 
demand a return that reflects the fund's aggregate cost of capital plus 
compensation for the fraction of default risk it is capable of 
absorbing.
---------------------------------------------------------------------------

    \2087\ See the Federal Reserve Board's Web site on Capital 
Guidelines and Adequacy, available at http://www.federalreserve.gov/bankinforeg/topics/capital.htm, for an overview of minimum capital 
requirements.
    \2088\ See, e.g., Allen N. Berger et al., The Role of Capital in 
Financial Institutions, 19 J. of Banking and Fin. 393 (1995) 
(``Berger'') (``Regulators require capital for almost all the same 
reasons that other uninsured creditors of banks `require' capital--
to protect themselves against the costs of financial distress, 
agency problems, and the reduction in market discipline caused by 
the safety net.'').
    \2089\ More generally, banks are structured to satisfy 
depositors' preference for access to their money on demand with 
businesses' preference for a source of longer-term capital. However, 
the maturity and liquidity transformation provided by banks can also 
lead to runs. Deposit insurance, access to a lender of last resort, 
and other bank regulatory tools are designed to lessen the incentive 
of depositors to run. See, e.g., Douglas W. Diamond & Philip H. 
Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. Pol. Econ 
401 (June 1983) (``Diamond & Dybvig''); Mark J. Flannery, Financial 
Crises, Payment System Problems, and Discount Window Lending, 28 
Journal of Money, Credit and Banking 804 (1996); Jeffrey A. Miron, 
Financial Panics, the Seasonality of the Nominal Interest Rate, and 
the Founding of the Fed, 76 American Economic Review 125 (1986); S. 
Bhattacharya & D. Gale, Preference Shocks, Liquidity, and Central 
Bank Policy, in New Approaches to Monetary Economics (eds., W. 
Barnnett and K. Singleton, 1987).
    \2090\ See, e.g., Gary Gorton & George Pennacchi, Money Market 
Funds and Finance Companies: Are They the Banks of the Future?, in 
Structural Change in Banking (Michael Klausner & Lawrence J. White, 
eds. 1993), at 173-214.
---------------------------------------------------------------------------

    The effectiveness of a NAV buffer to protect against large-scale 
redemptions during periods of stress is predicated upon whether 
shareholders expect the decline in the value of the fund's portfolio to 
be less than the value of the NAV buffer. Once investors anticipate 
that the buffer will be depleted, they have an incentive to redeem 
before it is completely depleted.\2091\ In this sense, a NAV buffer 
that is not sufficiently large is incapable of fully mitigating the 
possibility of a liquidity run. The drawback with increasing buffer 
size to address this risk, however, is that the opportunity costs of 
operating a buffer increase as the size of the buffer increases. Due to 
the correlated nature of portfolio holdings across money market funds, 
this could amplify market-wide run risk if NAV buffer impairment also 
is highly correlated across money market funds. The incentive to redeem 
could be further amplified if, as contemplated in the FSOC Proposed 
Recommendations, a NAV buffer failure would require a money market fund 
to either liquidate or convert to a floating NAV. If investors 
anticipate this occurring, some investors that value principal 
stability and liquidity may no longer view money market funds as viable 
investments.
---------------------------------------------------------------------------

    \2091\ See, e.g., Federal Reserve Bank Presidents FSOC Comment 
Letter (``The [FSOC] Proposal notes that a fund depleting its NAV 
buffer would be required to suspend redemptions and liquidate under 
rule 22e-3 or continue operating as a floating NAV fund. However, 
this sequence of events could be destabilizing. Investors in 3% NAV 
buffer funds may be quite risk averse, even more so than floating 
NAV MMF investors might be, given their revealed preference for 
stable NAV shares. If they foresee a possible conversion to floating 
NAV once the buffer is depleted, these risk-averse investors would 
have an incentive to redeem prior to conversion. If, on the other 
hand, investors foresee a suspension of redemptions, they would 
presumably have an even stronger incentive to redeem before facing a 
liquidity freeze when the NAV buffer is completely depleted.'').
---------------------------------------------------------------------------

    As noted above, substantial NAV buffers may be able to absorb much, 
if not all, of the default risk in the underlying portfolio of a money 
market fund. This implies that any compensation for bearing default 
risk will be transferred from current money market fund shareholders to 
those financing the NAV buffer, effectively converting a prime money 
market fund into a fund that mimics the return of a Treasury fund for 
current money market

[[Page 47924]]

fund shareholders. If fund managers are unable to pass through the 
yield associated with holding relatively riskier securities (compared 
to government securities), like commercial paper or short-term 
municipal securities, to money market fund shareholders, it is likely 
that they will reduce their investment in these securities.\2092\ While 
lower yields would reduce, but not necessarily eliminate, the utility 
of the product to investors, it could have a negative impact on capital 
formation. Since the probability of breaking the buck is higher for a 
money market fund that invests in these relatively riskier securities 
(e.g., a fund with a WAM of 90 days rather than one with a WAM of 60 
days) \2093\ and fund managers cannot pass through the higher 
associated yields, it is likely that managers will reduce investments 
in these securities because they cannot differentiate their funds on 
the basis of yield.
---------------------------------------------------------------------------

    \2092\ But see supra note 2081.
    \2093\ See DERA Study, supra note 24, at 28-31.
---------------------------------------------------------------------------

    In addition, many investors are attracted to money market funds 
because they provide a stable value but have higher rates of return 
than Treasury securities. These higher rates of return are intended to 
compensate for exposure to greater credit risk and potential volatility 
than Treasury securities. As a result of funding the buffer, the 
returns to money market fund shareholders are likely to decline, 
potentially reducing demand from investors who are attracted to money 
market funds for their higher yield than alternative stable value 
investments.\2094\
---------------------------------------------------------------------------

    \2094\ See, e.g., Invesco FSOC Comment Letter (``As a result of 
the ongoing ultra-low interest rate environment, MMF yields remain 
at historic lows . . . A requirement to divert a portion of a MMF's 
earnings in order to build a NAV buffer would result in prime MMF 
yields essentially equaling those of Treasury MMFs (which would not 
be required to maintain a buffer under the Proposal). Faced with the 
choice of equivalent yields but asymmetrical risks, logical 
investors would abandon prime funds for Treasury funds, potentially 
triggering the very instability that reforms are intended to prevent 
and vastly reducing corporate borrowers' access to short-term 
financing.'').
---------------------------------------------------------------------------

    Taken together, the demand by investors for some yield and the 
incentives for fund managers to reduce portfolio risk may impact 
competition and capital formation in two ways. First, investors seeking 
higher yield may move their funds to other alternative investment 
vehicles resulting in a contraction in the money market fund industry. 
In addition, fund managers may have an incentive to reduce the funds' 
investment in commercial paper or short-term municipal securities in 
order to reduce the volatility of cash flows and increase the 
resilience of the NAV buffer. In both of these cases, there may be an 
effect on the short-term financing markets if the decrease in demand 
for short-term securities from money market funds results in an 
increase in the cost of capital for issuers of commercial paper and 
other securities.
    We have carefully considered the comments received on both the PWG 
report and our Proposing Release regarding the NAV buffer alternative 
and we continue to believe that our original analysis of the costs and 
benefits remains appropriate. Specifically, we continue to believe that 
a NAV buffer should not be adopted because we feel that a NAV buffer 
would reduce yields on money market funds and would therefore render 
such funds to be unattractive to many investors to a greater extent 
than the reforms we are adopting.
b. Minimum Balance at Risk
    As discussed above, under the second alternative in the FSOC 
Proposed Recommendations, a 1% capital buffer is paired with an MBR or 
a holdback of a certain portion of a shareholder's money market fund 
shares.\2095\ In the event of fund losses, this alternative effectively 
would create a ``waterfall'' with the NAV buffer bearing first losses, 
subordinated holdback shares bearing second losses, followed by non-
subordinated holdback shares, and finally by the remaining shares in 
the fund (and then only if the loss exceeded the aggregate value of the 
holdback shares). This allocation of losses, in effect, would impose a 
``liquidity fee'' on redeeming shareholders if the fund experiences a 
loss that exceeds the NAV buffer. The value of the holdback shares 
effectively provides the non-redeeming shareholders with an additional 
buffer cushion when the NAV buffer is exhausted. The Commission did not 
receive any comments on this alternative, and, as discussed below, we 
continue to believe that a minimum balance at risk is not the most 
appropriate alternative to meet the policy goals of our reforms.
---------------------------------------------------------------------------

    \2095\ See FSOC Proposed Recommendations, supra note 1562, at 
section V.B.
---------------------------------------------------------------------------

i. Benefits of a Minimum Balance at Risk
    As discussed in the Proposing Release, an MBR requirement could 
provide some benefits to money market funds. First, it would force 
redeeming shareholders to pay for the cost of liquidity during periods 
of severe market stress when liquidity is particularly costly. Such a 
requirement could create an incentive against shareholders 
participating in a run on a fund facing potential losses of certain 
sizes because shareholders will incur greater losses if they 
redeem.\2096\ It thus may reduce the amount of less liquid securities 
that funds would need to sell in the secondary markets at unfavorable 
prices to satisfy redemptions and therefore may increase stability in 
the short-term financing markets.
---------------------------------------------------------------------------

    \2096\ See, e.g., Comment Letter of Jeffrey Gordon (Feb. 28, 
2013) (available in File No. FSOC-2012-0003) (``Gordon FSOC Comment 
Letter'') (``[T]he Minimum Balance at Risk feature is a novel way to 
reduce MMF run risk by imposing some of the run costs on the users 
of MMFs.'').
---------------------------------------------------------------------------

    Second, it would allocate liquidity costs to investors demanding 
liquidity when the fund itself is under severe stress. This would be 
accomplished primarily by making redeeming shareholders bear first 
losses when the fund first depletes its buffer and then the fund's 
value falls below its stable share price within 30 days after their 
redemption. Redeeming shareholders subject to the holdback are the ones 
whose redemptions may have contributed to fund losses if securities are 
sold at fire sale prices to satisfy those redemptions. If the fund 
sells assets to meet redemptions, the costs of doing so would be 
incurred while the redeeming investor is still in the fund because of 
the delay in redeeming his or her holdback shares. Essentially, 
investors would face a choice between redeeming to preserve liquidity 
and remaining invested in the fund to protect their principal.
    Third, an MBR would provide the fund with 30 days to obtain cash to 
satisfy the holdback portion of a shareholder's redemption. This may 
give the fund time for distressed securities to recover when, for 
example, the market has acquired additional information about the 
ability of the issuer to make payment upon maturity. As of February 28, 
2014, 43% of prime money market fund assets had a maturity of 30 days 
or less.\2097\ Thus, an MBR would provide time for potential losses in 
fund portfolios to be avoided since distressed securities could trade 
at a heavy discount in the market but may ultimately pay in full at 
maturity. This added resiliency could not only benefit the fund and its 
investors, but it also could reduce the contagion risk that a run on a 
single fund can cause when assets are correlated across the money 
market fund industry.
---------------------------------------------------------------------------

    \2097\ Based 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.

---------------------------------------------------------------------------

[[Page 47925]]

ii. Costs of a Minimum Balance at Risk
    However, we also recognized that there are a number of drawbacks to 
an MBR requirement. It forces shareholders that redeem more than 97% of 
their assets to pay for any losses, if incurred, on the entire 
portfolio on a ratable basis. Rather than simply delaying redemption 
requests, the contingent nature of the way losses are distributed among 
shareholders forces early redeeming investors to bear the losses they 
are trying to avoid.
    As discussed in section III.A.1 above, there may be a tendency for 
a money market fund to meet redemptions by selling assets that are the 
most liquid and have the smallest capital losses. Liquid assets may be 
sold first because managers can trade at close to their non-distressed 
valuations because they do not typically experience large liquidity 
discounts. Managers also tend to sell assets whose market-based values 
are close to or exceed amortized cost because realized capital gains 
and losses will be reflected in a fund's shadow price. Assets that are 
highly liquid will not be sold at significant discounts to fair value. 
Since the liquidity discount associated with the sale of liquid assets 
is smaller than that for illiquid assets, shareholders can continue to 
immediately redeem shares at $1.00 per share under an MBR provided the 
fund is capable of selling liquid assets. Once a fund exhausts its 
supply of liquid assets, it will sell less liquid assets to meet 
redemption requests, possibly at a loss. If in fact assets are sold at 
a loss, the stable value of the fund's shares could be impaired, 
motivating shareholders to be the first to leave. Therefore, even with 
a NAV buffer and an MBR there continues to be an incentive to redeem in 
times of fund and market stress.\2098\
---------------------------------------------------------------------------

    \2098\ See, e.g., Comment Letter of Federated Investors, Inc. 
(Dec. 17, 2012) (available in File No. FSOC-2012-0003) (``The data, 
analyses, surveys and other commentary in the SEC's docket show 
convincingly that the MBR/capital proposal's impact in reducing runs 
is speculative and unproven and in fact could and likely would 
precipitate runs under certain circumstances.''); Comment Letter of 
Charles Schwab (Jan. 17, 2013) (available in File No. FSOC-2012-
0003) (``[I]t is not clear to us that holding back a certain 
percentage of a client's funds would reduce run risk.'')
---------------------------------------------------------------------------

    The MBR, which applies to all redemptions without regard to the 
fund's circumstances at the time of redemption, constantly restricts 
some portion of an investor's holdings. Under the resulting continuous 
impairment of full liquidity, many current investors who value 
liquidity in money market funds may shift their investment to other 
short-term investments that offer higher yields or fewer restrictions 
on redemptions. A reduction in the number of money market funds and/or 
the amount of money market fund assets under management as a result of 
any further money market fund reforms would have a greater negative 
impact on money market fund sponsors whose fund groups consist 
primarily of money market funds, as opposed to sponsors that offer a 
more diversified range of mutual funds or engage in other financial 
activities (e.g., brokerage). Given that money market funds' largest 
commercial paper exposure is to issuances by financial 
institutions,\2099\ a reduction in the demand of money market 
instruments may have an impact on the ability of financial institutions 
to issue commercial paper.\2100\
---------------------------------------------------------------------------

    \2099\ See supra section III.K.3.
    \2100\ See, e.g., Wells Fargo FSOC Comment Letter (``the MBR 
requirement would have the anticipated impact of driving investors 
and sponsors out of money market funds. We expect that the resulting 
contraction of assets in the money market fund industry would, in 
turn, have disruptive effects on the short-term money markets, 
decrease the supply of capital and/or raise the cost of borrowing 
for businesses, states, municipalities and other local governments 
that rely on money market funds, and jeopardize the fragile state of 
the economy and its long-term growth prospects.'').
---------------------------------------------------------------------------

    The MBR would introduce additional complexity to what to-date has 
been a relatively simple product for investors to understand. For 
example, requiring shareholders that redeem more than 97% of their 
balances to bear the first loss creates a cash flow waterfall that is 
complex and that may be difficult for unsophisticated investors to 
understand fully.\2101\
---------------------------------------------------------------------------

    \2101\ Several commenters have noted that the MBR would be 
confusing to retail investors. See, e.g., Comment Letter of Fidelity 
Investments (Feb. 14, 2013) (available in File No. FSOC-2012-0003); 
Comment Letter of T. Rowe Price (Jan. 30, 2013) (available in File 
No. FSOC-2012-0003).
---------------------------------------------------------------------------

    Implementing an MBR could involve significant operational costs. 
These would include costs to convert existing shares or issue new 
holdback and subordinated holdback shares and changes to systems that 
would allow record-keepers to account for and track the MBR and 
allocation of unrestricted, holdback or subordinated holdback shares in 
shareholder accounts. We expect that these costs would vary 
significantly among funds depending on a variety of factors. In 
addition, funds subject to an MBR may have to amend or adopt new 
governing documents to issue different classes of shares with different 
rights: unrestricted shares, holdback shares, and subordinated holdback 
shares.\2102\ The costs to amend governing documents would vary based 
on the jurisdiction in which the fund is organized and the amendment 
processes enumerated in the fund's governing documents, including 
whether board or shareholder approval is necessary.\2103\ The costs of 
obtaining shareholder approval, amending governing documents, or 
changing domicile would depend on a number of factors, including the 
size and the number of shareholders of the fund.\2104\
---------------------------------------------------------------------------

    \2102\ One commenter on the PWG Report suggested that the MBR 
framework may be achieved by issuing different classes of shares 
with conversion features triggered by shareholder activity. See 
Comment Letter of Federated Investors, Inc. (Mar. 16, 2012) 
(available in File No. 4-619). Multiple class structures are common 
among funds offering different arrangements for the payment of 
distribution costs and related shareholder services. Funds have also 
developed the operational capacity to track and convert certain 
share classes to others based on the redemption activity of the 
shareholder. See Mutual Fund Distribution Fees; Confirmations, 
Investment Company Act Release No. 29367 (July 21, 2010) [75 FR 
47064 (Aug. 4, 2010)], at section III.D.1.b.
    \2103\ See Comment Letter of Federated Investors, Inc. (Re: 
Alternative 2) (Jan. 25. 2013) (available in File No. FSOC-2012-
0003); March 2012 PWG Comment Letter.
    \2104\ Other factors may include the concentration of fund 
shares among certain shareholders, the number of objecting 
beneficial owners and non-objecting beneficial owners of street name 
shareholders, whether certain costs can be shared among funds in the 
same family, whether the fund employs a proxy solicitor and the 
services the proxy solicitor may provide, and whether the fund, in 
connection with sending a proxy statement to shareholders, uses the 
opportunity to have shareholders vote on other matters. Other 
matters that may be set forth in the proxy materials include the 
election of directors, a change in investment objectives or 
fundamental investment restrictions, and fund reorganization or re-
domicile.
---------------------------------------------------------------------------

    As noted above, we did not receive any comments on the MBR 
alternative based on our discussion of it in the Proposing Release and 
we continue to believe that overall, the complexity of an MBR may be 
more costly for unsophisticated investors because they may not fully 
appreciate the implications. In addition, money market funds and their 
intermediaries (and money market fund shareholders that have in place 
cash management systems) could incur potentially significant 
operational costs to modify their systems to reflect a MBR requirement. 
We believe that an MBR coupled with a NAV buffer would turn money 
market funds into a more complex instrument whose valuation may become 
more difficult for investors to understand.
3. Alternatives in the PWG Report
    As discussed in the Proposing Release, we considered each option 
discussed in the President's Working Group on Financial Markets, which 
published a report on money market fund reform options in 2010 (the 
``PWG

[[Page 47926]]

Report'').\2105\ We discussed these alternatives in the Proposing 
Release, and the comments that we had received on several of these 
alternatives, as discussed below. We have decided not to pursue these 
options because we believe, after considering the comments we received 
on the PWG Report, as well as the comments we received on the Proposing 
Release and the economic analysis set forth in this Release, that they 
would not achieve our regulatory goals as well as the package of 
reforms that we are adopting today. We discuss below these options, and 
our principal reasons for not adopting them.\2106\
---------------------------------------------------------------------------

    \2105\ Report 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.
    \2106\ We note we may not have the legal authority to implement 
some of the alternatives discussed below, even were we to find that 
they might help achieve our regulatory goals.
---------------------------------------------------------------------------

a. Private Emergency Liquidity Facility
    As discussed in the Proposing Release, one option outlined by the 
PWG Report, is a private emergency liquidity facility (``LF'') for 
money market funds.\2107\ One comment letter on the PWG Report proposed 
a structure for such a facility in some detail.\2108\ Under this 
proposal, the LF would be organized as a state-chartered bank or trust 
company. Sponsors of prime money market funds would be required to 
provide initial capital to the LF in an amount based on their assets 
under management up to 4.9% of the LF's total initial equity, but with 
a minimum investment amount. The LF also would charge participating 
funds commitment fees of 3 basis points per year on fund assets under 
management. Finally, at the end of its third year, the LF would issue 
to third parties time deposits paying a rate approximately equal to the 
3-month bank CD rate. The LF would be designed to provide initially $7 
billion in backup redemption liquidity to prime money market funds, 
$12.3 billion at the end of the first year, $30 billion at the end of 
five years, and $50-55 billion at the end of year 10 (these figures 
take into account the LF's ability to expand its capacity by borrowing 
through the Federal Reserve's discount window). The LF would be 
leveraged at inception, but would seek to achieve and maintain a 
minimum leverage ratio of 5%. Each fund would be able to obtain a 
maximum amount of cash from the LF. The LF would not provide credit 
support. It would not provide liquidity to a fund that had ``broken the 
buck'' or would ``break the buck'' after using the LF. There also would 
be eligibility requirements for money market fund access to the LF.
---------------------------------------------------------------------------

    \2107\ See PWG Report, supra note 506, at 23-25.
    \2108\ See ICI Jan 2011 PWG Comment Letter.
---------------------------------------------------------------------------

    Participating funds would elect a board of directors that would 
oversee the LF, with representation from large, medium, and smaller 
money market fund complexes. The LF would have restrictions on the 
securities that it could purchase from funds seeking liquidity and on 
the LF's investment portfolio. The LF would be able to pledge approved 
securities (less a haircut) to the Federal Reserve discount window. We 
note that the interaction with the Federal Reserve discount window (as 
well as the bank structure of the LF) means that the Commission does 
not have regulatory authority to create the LF.
    An LF could lessen and internalize some of the liquidity risk of 
money market funds that contributes to their vulnerability to liquidity 
runs by acting as a purchaser of last resort if a liquidity event is 
triggered. It also could create efficiency gains by pooling this 
liquidity risk within the money market fund industry.\2109\ Commenters 
on the PWG Report addressing this option generally supported the 
concept of the LF, stating that it would facilitate money market funds 
internalizing the costs of liquidity and other risks associated with 
their operations through the cost of participation. In addition, such a 
facility could reduce contagion effects by limiting the need for fire 
sales of money market fund assets to satisfy redemption 
pressures.\2110\
---------------------------------------------------------------------------

    \2109\ The liquidity facility would function in a fashion 
similar to private deposit insurance for banks. For the economics of 
using a liquidity facility to stop runs, see Diamond & Dybvig, supra 
note 2089.
    \2110\ See, e.g., ICI Jan 2011 PWG Comment Letter; Letter of the 
Dreyfus Corporation (Jan. 10, 2011) (available in File No. 4-619) 
(``Dreyfus PWG Comment Letter''); Comment Letter of Federated 
Investors, Inc. (Jan. 7, 2011) (available in File No. 4-619).
---------------------------------------------------------------------------

    However, several commenters expressed reservations regarding this 
reform option. For example, one commenter supported ``the idea'' of 
such a facility ``in that it could provide an incremental liquidity 
cushion for the industry,'' but noted that ``it is difficult to ensure 
that [a liquidity facility] with finite purchasing capacity is fairly 
administered in a crisis . . . , [which] could lead to [money market 
funds] attempting to optimize the outcome for themselves, rather than 
working cooperatively to solve a systemic crisis.'' \2111\ This 
commenter also stated that shared capital ``poses the danger of 
increased risk-taking by industry participants who believe that they 
have access to a large collective pool of capital.'' \2112\ Another 
commenter, although ``receptive to a private liquidity facility,'' 
expressed concern that the facility itself might be vulnerable to runs 
if the facility raises funding through the short-term financing 
markets.\2113\ This commenter also noted other challenges in designing 
such a facility, including governance issues and ``the fact that 
because of its size, the liquidity facility would only be able to 
address the liquidity needs of a very limited number of funds and would 
not be able to meet the needs of the entire industry in the event of a 
run.'' \2114\ Another commenter expressed concerns that ``the costs, 
infrastructure and complications associated with private liquidity 
facilities are not worth the minimal liquidity that would be 
provided.'' \2115\ Finally, another commenter echoed this concern, 
stating:
---------------------------------------------------------------------------

    \2111\ Comment Letter of BlackRock Inc. (Jan. 10, 2011) 
(available in File No. 4-619) (``BlackRock PWG Comment Letter'').
    \2112\ Id. In the case of deposit insurance, bank capital is 
used to overcome the moral hazard problem of excessive risk taking. 
See, e.g., Berger, supra note 2088; Michael C. Keeley & Frederick T. 
Furlong, A Reexamination of Mean-Variance Analysis of Bank Capital 
Regulation, 14 J. of Banking and Fin. 69 (1990).
    \2113\ Comment Letter of Wells Fargo Funds Management, LLC (Jan. 
10, 2011) (available in File No. 4-619) (``Wells Fargo PWG Comment 
Letter'').
    \2114\ Id.
    \2115\ Comment Letter of Fidelity Investments (Jan. 10, 2011) 
(available in File No. 4-619) (``Fidelity Jan 2011 PWG Comment 
Letter'').

[a private liquidity facility] cannot possibly eliminate completely 
the risk of breaking the buck without in effect eliminating maturity 
transformation, for instance through the imposition of capital and 
liquidity standards on the private facilities. Thus, in the case of 
a pervasive financial shock to asset values, [money market fund] 
shareholders will almost certainly view the presence of private 
facilities as a weak reed and widespread runs are likely to develop. 
In turn, government aid is likely to flow. Because shareholders will 
expect government aid in a pervasive financial crisis, shareholder 
and [money market fund] investment decisions will be distorted. 
Therefore, we view emergency facilities as perhaps a valuable 
enhancement, but not a reliable overall solution either to the 
problem of runs or to the broader problem of distorted investment 
decisions.\2116\
---------------------------------------------------------------------------

    \2116\ Comment Letter of Federal Reserve Bank of Richmond (Jan. 
10, 2011) (available in File No. 4-619) (``Richmond Fed PWG Comment 
Letter'').

    A private liquidity facility was also discussed at the 2011 
Roundtable, where many participants made points

[[Page 47927]]

and expressed concerns similar to those discussed above.\2117\
---------------------------------------------------------------------------

    \2117\ See, e.g., Roundtable Transcript, supra note 63. (Brian 
Reid, Investment Company Institute) (discussing the basic concept 
for a private liquidity facility as proposed by the Investment 
Company Institute and its potential advantages providing additional 
liquidity to money market funds when market makers were unwilling or 
unable to do so); (Paul Tucker, Bank of England) (discussing the 
potential policy issues involved in the Federal Reserve extending 
discount window access to such a facility); (Daniel K. Tarullo, 
Federal Reserve Board) (discussing the potential policy issues 
involved in the Federal Reserve extending discount window access to 
such a facility); (Jeffrey A. Goldstein, Department of Treasury) 
(questioning whether there were potential capacity issues with such 
a facility); (Sheila C. Bair, Federal Deposit Insurance Corporation) 
(stating her belief that ``the better approach would be to try to 
reduce or eliminate the systemic risk, as opposed to just kind of 
acknowledge it'' and institutionalize a ``bailout facility'' in a 
way that would exacerbate moral hazard).
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding this 
alternative after we proposed our reforms. However, as noted in the 
Proposing Release, we have considered comments on the PWG Report, and 
our staff has spent considerable time evaluating whether an LF would 
successfully mitigate the risk of liquidity runs in money market funds 
and change the economic incentives of market participants. We continue 
to believe that this alternative should not be adopted for the reasons 
discussed in the Proposing Release, including, foremost because we are 
concerned that a private liquidity facility would not have sufficient 
purchasing capacity in the event of a widespread run without access to 
the Federal Reserve's discount window and we do not have legal 
authority to grant discount window access to an LF. Access to the 
discount window would raise complicated policy considerations and 
likely would require legislation.\2118\ In addition, such a facility 
would not protect money market funds from capital losses triggered by 
credit events as the facility would purchase securities at the 
prevailing market price. Thus, we are concerned that such a facility 
without additional loss protection would not sufficiently prevent 
widespread liquidity-induced runs on money market funds.
---------------------------------------------------------------------------

    \2118\ See, e.g., id. (Paul Tucker, Bank of England) (``As I 
understand it, this is a bank whose sole purpose is to stand between 
the Federal Reserve and the money market mutual fund industry. If I 
think about that as a central banker, I think `So, I'm lending to 
the money market mutual fund industry.' What do I think about the 
regulation of the money market mutual fund industry? . . . And the 
other thought I think I would have is . . .`If the money market 
mutual fund industry can do this, what's to stop other parts of our 
economy doing this and tapping into the special ability of the 
central bank to create liquidity' . . . It's almost to bring out the 
enormity of the idea that you have floated . . . it's posing very 
big questions indeed, about who should have direct access and to the 
nature of the monetary economy.'')
---------------------------------------------------------------------------

    We also continue to be concerned about the conflicts of interest 
inherent in any such facility given that it would be managed by a 
diverse money market fund industry, not all of whom may have the same 
interests at all times. Participating money market funds would be of 
different sizes and the governance arrangements would represent some 
fund complexes and not others. There may be conflicts relating to money 
market funds whose nature or portfolio makes them more or less likely 
to ever need to access the LF. The LF may face conflicts allocating 
limited liquidity resources during a crisis, and choosing which funds 
gain access and which do not. To be successful, an LF would need to be 
managed such that it sustains its credibility, particularly in a 
crisis, and does not distort incentives in the market to favor certain 
business models or types of funds.
    These potential issues collectively created a concern that such a 
facility may not prove effective in a crisis and thus we would not be 
able to achieve our regulatory goals of reducing money market funds' 
susceptibility to liquidity runs and the corresponding impacts on 
investor protection and capital formation. Combined with our lack of 
authority to create an LF bank with access to the Federal Reserve's 
discount window, these concerns ultimately have led us to not pursue 
this alternative.
b. Insurance
    As discussed in the Proposing Release, we also considered whether 
money market funds should be required to carry some form of public or 
private insurance, similar to bank accounts that carry Federal Deposit 
Insurance Corporation deposit insurance, which has played a central 
role in mitigating the risk of runs on banks.\2119\ The Treasury's 
Temporary Guarantee Program helped slow the run on money market funds 
in September 2008, and thus we naturally considered whether some form 
of insurance for money market fund shareholders might mitigate the risk 
of liquidity runs in money market funds and their detrimental impacts 
on investors and capital formation.\2120\ Insurance might replace money 
market funds' historical reliance on discretionary sponsor support, 
which has covered capital losses in money market funds in the past but, 
as discussed above, also contributes to these funds' vulnerability to 
liquidity runs.
---------------------------------------------------------------------------

    \2119\ See generally Charles W. Calomiris, Is Deposit Insurance 
Necessary? A Historical Perspective, 50 J. Econ. Hist. 283 (1990); 
Rita Carisano, Deposit Insurance: Theory, Policy and Evidence 
(1992); Diamond & Dybvig, supra note 2089.
    \2120\ Authority for a guarantee program like the Temporary 
Guarantee Program for Money Market Funds has since been removed. See 
Emergency Economic Stabilization Act of 2008 Sec.  131(b), 12 U.S.C. 
5236 (2008) (prohibiting the Secretary of Treasury from using the 
Exchange Stabilization Fund for the establishment of any future 
guaranty programs for the U.S. money market fund industry).
---------------------------------------------------------------------------

    As noted in the Proposing Release, although a few commenters on the 
PWG Report expressed some support for a system of insurance for money 
market funds,\2121\ most opposed this potential reform option.\2122\ 
Those commenters expressed concern that government insurance would 
create moral hazard and encourage excessive risk taking by funds.\2123\ 
They also asserted that such insurance could distort capital flows from 
bank deposits or government money market funds into prime money market 
funds, and that this disintermediation could and likely would cause 
significant disruption to the banking system and the money 
market.\2124\ For example, one commenter stated that:
---------------------------------------------------------------------------

    \2121\ See, e.g., Richmond Fed PWG Comment Letter (stating that 
insurance would be a second best solution for mitigating the risk of 
runs in money market funds after a floating net asset value because 
insurance premiums and regulation are difficult to calibrate 
correctly, so distortions would likely remain); Comment Letter of 
Paul A. Volcker (Feb. 11, 2011) (available in File No. 4-619) 
(``Volcker PWG Comment Letter'') (stating that money market funds 
wishing to retain a stable net asset value should reorganize as 
special purpose banks or ``submit themselves to capital and 
supervisory requirements and FDIC-type insurance on the funds under 
deposit'').
    \2122\ See, e.g., Comment Letter of the American Bankers 
Association (Jan. 10, 2011) (available in File No. 4-619) 
(``American Bankers PWG Comment Letter''); BlackRock PWG Comment 
Letter; Dreyfus PWG Comment Letter; Fidelity Jan 2011 PWG Comment 
Letter; Wells Fargo PWG Comment Letter; Comment Letter of John M. 
Winters (Jan. 5, 2011) (available in File No. 4-619) (``Winters PWG 
Comment Letter'').
    \2123\ See, e.g., American Bankers PWG Comment Letter; BlackRock 
PWG Comment Letter; ICI Jan 2011 PWG Comment Letter; Wells Fargo PWG 
Comment Letter.
    \2124\ See, e.g., ICI Jan 2011 PWG Comment Letter; Wells Fargo 
PWG Comment Letter.

    ``If the insurance program were partial (for example, capped at 
$250,000 per account), many institutional investors likely would 
invest in this partially insured product rather than directly in the 
market or in other cash pools because the insured funds would offer 
liquidity, portfolios that were somewhat less risky than other 
pools, and yields only slightly lower than alternative cash pools. 
Without insurance covering the full value of investors' account 
balances, however, there would still be an incentive for these 
investors to withdraw the uninsured portion of their assets from 
these funds during periods of severe market stress.'' \2125\
---------------------------------------------------------------------------

    \2125\ See ICI Jan 2011 PWG Comment Letter.


[[Page 47928]]


---------------------------------------------------------------------------

    Commenters stated that with respect to private insurance, it has 
been made available in the past but the product proved unsuccessful due 
to its cost and in the future would be too costly.\2126\ They also 
stated that they did not believe any private insurance coverage would 
have sufficient capacity.\2127\ However, some commenters on our 
Proposing Release supported a system of insurance for money market 
funds, noting that historically insurance has provided stability during 
times of stress.\2128\
---------------------------------------------------------------------------

    \2126\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan 
2011 PWG Comment Letter; Dreyfus PWG Comment Letter; Wells Fargo PWG 
Comment Letter; Winters PWG Comment Letter.
    \2127\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan 
2011 PWG Comment Letter; Wells Fargo PWG Comment Letter; Winters PWG 
Comment Letter.
    \2128\ See Comment Letter of John Chang (June 27, 2013) (``Chang 
Comment Letter''); Comm. on Cap. Mkt. Reg. Comment Letter.
---------------------------------------------------------------------------

    We have carefully considered the comments on the PWG Report and our 
Proposing Release. However, considering foremost that we do not have 
regulatory authority to create a public insurance scheme for money 
market funds, we are not pursuing this option. Separately, we continue 
to believe that it would not achieve our goal, among others, of 
materially reducing the contagion effects from heavy redemptions at 
money market funds without undue costs. We have made this determination 
based on money market fund insurance's potential for creating moral 
hazard and encouraging excessive risk-taking by money market funds, 
given the difficulties and costs involved in creating effective risk-
based pricing for insurance and additional regulatory structure to 
offset this incentive.\2129\ If insurance actually increases moral 
hazard and decreases corresponding market discipline, it may in fact 
increase rather than decrease money market funds' susceptibility to 
liquidity runs. If the only way to counter these incentives was by 
imposing a very costly regulatory structure and risk-based pricing 
system our reforms potentially offer a better ratio of benefits to 
associated costs. Finally, we were concerned with the difficulty of 
creating private insurance at an appropriate cost and of sufficient 
capacity for a several trillion-dollar industry that tends to have 
highly correlated tail risk. All of these considerations have led us to 
not pursue this option further.
---------------------------------------------------------------------------

    \2129\ See, e.g., Yuk-Shee Chan et al., Is Fairly Priced Deposit 
Insurance Possible?, 47 J. Fin. 227 (1992).
---------------------------------------------------------------------------

c. Special Purpose Bank
    In the Proposing Release, we also evaluated whether money market 
funds should be regulated as special purpose banks. Stable net asset 
value money market fund shares can bear some similarity to bank 
deposits.\2130\ Some aspects of bank regulation could be used to 
mitigate some of the risks described in section II above.\2131\ Money 
market funds could benefit from access to the special purpose bank's 
capital, government deposit insurance and emergency liquidity 
facilities from the Federal Reserve on terms codified and well 
understood in advance, and thus with a clearer allocation of risks 
among market participants. We did not receive any comments on this 
alternative.
---------------------------------------------------------------------------

    \2130\ See supra note 2090 and accompanying text.
    \2131\ Id.
---------------------------------------------------------------------------

    As the PWG Report noted, and as commenters reinforced, there are a 
number of drawbacks to regulating money market funds as special purpose 
banks. Although a few commenters expressed some support for this 
option,\2132\ almost all commenters on the PWG Report addressing this 
possible reform option opposed it.\2133\ Some commenters stated that 
the costs of converting money market funds to special purpose banks 
would likely be large relative to the costs of simply allowing more of 
this type of cash management activity to be absorbed into the existing 
banking sector.\2134\ Others expressed concern that regulating money 
market funds as special purpose banks would radically change the 
product, make it less attractive to investors and thereby have 
unintended consequences potentially worse than the mitigated risk, such 
as leading sophisticated investors to move their funds to unregulated 
or offshore money market fund substitutes and thereby limiting the 
applicability of the current money market fund regulatory regime and 
creating additional systemic risk.\2135\ For example, one of these 
commenters stated that transforming money market funds into special 
purpose banks would create homogeneity in the financial regulatory 
scheme by relying on the bank business model for all short-term cash 
investments and that ``[g]iven the unprecedented difficulties the 
banking industry has experienced recently, it seems bizarre to propose 
that [money market funds] operate more like banks, which have absorbed 
hundreds of billions of dollars in government loans and handouts.'' 
\2136\ Some pointed to the differences between banks and money market 
funds as justifying different regulatory treatment, and expressed 
concern that concentrating investors' cash management activity in the 
banking sector could increase systemic risk.\2137\
---------------------------------------------------------------------------

    \2132\ See Volcker PWG Comment Letter (``MMMFs that desire to 
offer their clients bank-like transaction services . . . and 
promises of maintaining a constant or stable net asset value (NAV), 
should either be required to organize themselves as special purpose 
banks or submit themselves to capital and supervisory requirements 
and FDIC-type insurance on funds under deposit.''); Winters PWG 
Comment Letter (supporting it as the third best option, stating that 
``[a]s long as the federal government continues to be the only 
viable source of large scale back-up liquidity for MMFs, it is 
intellectually dishonest to pretend that MMFs are not the functional 
equivalent of deposit-taking banks. Thus, inclusion in the federal 
banking system is warranted.'').
    \2133\ See, e.g., BlackRock PWG Comment Letter; Fidelity Jan 
2011 PWG Comment Letter; ICI Jan 2011 PWG Comment Letter; Comment 
Letter of the Institutional Money Market Funds Association (Jan. 10, 
2011) (available in File No. 4-619) (``IMMF Comment Letter'').
    \2134\ See, e.g., Richmond Fed PWG Comment Letter; ICI Jan 2011 
PWG Comment Letter.
    \2135\ See, e.g., Comment Letter of the Mutual Fund Directors 
Forum (Jan. 10, 2011) (available in File No. 4-619) (``MFDF PWG 
Comment Letter''); Fidelity Jan 2011 PWG Comment Letter; ICI Jan 
2011 PWG Comment Letter.
    \2136\ See Fidelity Jan 2011 PWG Comment Letter.
    \2137\ See, e.g., Fidelity Jan 2011 PWG Comment Letter; ICI Jan 
2011 PWG Comment Letter.
---------------------------------------------------------------------------

    Foremost, we are not pursuing this option because we lack 
regulatory authority to transform money market funds into special 
purpose banks. Separately, however, we continue to believe that the 
potential costs involved in creating a new special purpose bank 
regulatory framework to govern money market funds are not justified. In 
addition, given our view that money market funds have some features 
similar to banks but other aspects quite different from banks, applying 
substantial parts of the bank regulatory regime to money market funds 
would not be well tailored to the structure of and risks involved in 
money market funds compared to the reforms we are adopting in this 
Release. As noted above, we received no comments on this alternative 
after the Proposing Release was issued. After considering our lack of 
regulatory authority to transform money market funds into special 
purpose banks as well as the views expressed in the PWG comment letters 
and for the reasons set forth above, we continue to believe that 
transforming money market funds into special purpose banks is not the 
most appropriate reform.
d. Dual Systems of Money Market Funds
    In the Proposing Release, we evaluated options that would institute 
a dual system of money market funds, where either institutional money 
market

[[Page 47929]]

funds or money market funds using a stable share price would be subject 
to more stringent regulation than others. As discussed in the PWG 
Report,\2138\ money market fund reforms could focus on providing 
enhanced regulation solely for money market funds that seek to maintain 
a stable net asset value, rather than a floating NAV. Enhanced 
regulations could include any of the regulatory reform options 
discussed above such as mandatory insurance, a private liquidity 
facility, or special purpose bank regulation. Money market funds that 
did not comply with these enhanced constraints would have a floating 
NAV (though they would still be subject to the other risk-limiting 
conditions contained in rule 2a-7).
---------------------------------------------------------------------------

    \2138\ See PWG Report, supra note 506, at 29-32.
---------------------------------------------------------------------------

    There also may be other enhanced forms of regulation or other types 
of dual systems. For example, an alternative formulation of this 
regulatory regime would apply the enhanced regulatory constraints 
discussed above (e.g., a private liquidity facility or insurance) only 
to ``institutional'' money market funds, and ``retail'' money market 
funds would continue to be subject to rule 2a-7 as it exists today. We 
note that our decision to not subject retail and government money 
market funds to a floating NAV requirement and to not subject 
government money market funds to a fees and gates requirement in effect 
creates a dual system, which we discuss in greater detail in section 
III.C.1.
    These dual system regulatory regimes for money market funds could 
provide several important benefits. They attempt to apply the enhanced 
regulatory constraints on those aspects of money market funds that most 
contribute to their susceptibility to liquidity runs--whether it is 
institutional investors that have shown a tendency to run or a stable 
net asset value created through the use of amortized cost valuation 
that can create a first mover advantage for those investors that redeem 
at the first signs of potential stress. A dual system that imposes 
enhanced constraints on stable net asset value money market funds would 
allow investors to choose their preferred mixture of stability, risk, 
and return.
    Because insurance, special purpose banks, and the private liquidity 
facility generally are beyond our regulatory authority to create, these 
particular dual options, which would impose one of these regulatory 
constraints on a subset of money market funds, could not be created 
under our current regulatory authority. Other options, such as 
requiring a floating NAV or liquidity fees and gates only for some 
types of money market funds, however, could be imposed under our 
current authority and are being adopted today.
    Each of these dual systems generally has the same advantages and 
disadvantages as the potential enhanced regulatory constraints that 
would be applied, described above. In addition, for any two-tier system 
of money market fund regulation to be effective in reducing the risk of 
contagion effects from heavy redemptions, investors would need to fully 
understand the difference between the two types of funds and their 
associated risks. If they did not, they may indiscriminately flee both 
types of money market funds even if only one type experiences 
difficulty.\2139\
---------------------------------------------------------------------------

    \2139\ For example, when the Reserve Primary Fund broke the buck 
in September 2008, all money market funds managed by Reserve 
Management Company, Inc. experienced runs, even the Reserve U.S. 
Government Fund, despite the fact that the Reserve U.S. Government 
Fund had a quite different risk profile. See Press Release, A 
Statement Regarding The Reserve Primary and U.S. Government Funds 
(Sept. 19, 2008) available at http://www.primary-yieldplus-inliquidation.com/pdf/PressReleasePrimGovt2008_0919.pdf (``The U.S. 
Government Fund, which had approximately $10 billion in assets under 
management at the opening of business on September 15, 2008, has 
received redemption requests this week of approximately $6 
billion.'').
---------------------------------------------------------------------------

    However, given the difficulties, drawbacks, and limitations on our 
regulatory authority associated with dual systems involving a special 
purpose bank, private liquidity facility and insurance, we continue to 
believe that a dual system of money market fund regulation involving 
these enhanced regulatory constraints should not be adopted. We did not 
receive any comments on these types of dual systems. However, as noted 
above, our current reforms would to some extent create a dual system of 
money market funds, and we discuss in greater detail our rationale for 
that approach, together with an analysis of commenter's views and the 
economic effects of that approach, in section III.C.1.

M. Clarifying Amendments

    Since our adoption of amendments to rule 2a-7 in 2010, a number of 
questions have arisen regarding the application of certain of those 
changes. As stated in the Proposing Release, we are taking this 
opportunity to amend rule 2a-7 to clarify the operation of these 
provisions. In addition, we are also amending rule 2a-7 to state more 
clearly a limit we imposed on money market funds' investments in second 
tier securities in 2010.\2140\ Two commenters stated that they 
supported our clarifying amendments but did not comment on any specific 
provisions of the amendments.\2141\ One of these commenters generally 
supported our amendments but did not address or discuss any costs or 
benefits.\2142\ The second commenter stated that it believed the 
clarifying amendments conform with current fund practices, that there 
would be no costs to funds that may not currently conform to these 
amendments, and that there would be little to no effect on market 
efficiency, competition or capital formation.\2143\ A third commenter 
stated that most, if not all, money market funds currently conform to 
the proposed clarifying amendments, and stated that it does not 
anticipate a significant cost burden to the industry in conforming with 
any of the proposed amendments.\2144\ This commenter specifically 
supported certain of the amendments and provided comment on certain 
specific provisions of the amendments.\2145\ We discuss these comments 
below. No commenters objected to the proposed clarifying amendments.
---------------------------------------------------------------------------

    \2140\ In addition, we are adopting as proposed, technical, 
conforming amendments to rule 419(b)(2)(iv) under the Securities Act 
of 1933 (17 CFR 230.419(b)(2)(iv)), which references certain 
paragraphs in rule 2a-7 the location of which is changing under our 
amendments. Specifically, we are replacing references to 
``paragraphs (c)(2), (c)(3), and (c)(4)'' with ``paragraph (d)''.
    \2141\ See U.S. Bancorp Comment Letter; Fidelity Comment Letter.
    \2142\ See Fidelity Comment Letter.
    \2143\ See U.S. Bancorp Comment Letter.
    \2144\ See State Street Comment Letter.
    \2145\ Id.
---------------------------------------------------------------------------

    As stated in the Proposing Release, we believe that for funds that 
are already acting consistently with our amendments, there will be no 
associated costs. We requested comment as to whether there would be any 
costs to funds that may not currently conform to the clarifying 
amendments. As noted above, no commenter provided any quantification of 
potential costs or benefits but one commenter suggested that there 
would be no costs to funds that may not currently conform to the 
clarifying amendments \2146\ and one commenter stated that it does not 
anticipate a significant cost burden to the industry in conforming with 
the proposed amendments.\2147\ As stated in the Proposing Release, we 
understand that most funds currently comply with our clarifying 
amendments and did not receive comments stating otherwise, except that 
one commenter noted that funds do not always include open sales 
receivables as liquid assets, and do not necessarily determine maturity 
for short-term floating rate securities in the

[[Page 47930]]

manner proposed by the amendment.\2148\ This commenter did note 
however, that it agreed that most, if not all money market funds 
currently conform to the proposed clarifying amendments.\2149\ We 
therefore expect that the clarifying amendments will likely not result 
in any significant economic effects or quantifiable costs or benefits.
---------------------------------------------------------------------------

    \2146\ See U.S. Bancorp Comment Letter.
    \2147\ See State Street Comment Letter.
    \2148\ Id.
    \2149\ Id.
---------------------------------------------------------------------------

1. Definitions of Daily Liquid Assets and Weekly Liquid Assets
    We are adopting, as proposed, amendments to clarify certain 
characteristics of instruments that qualify as a ``daily liquid asset'' 
or ``weekly liquid asset'' for purposes of the rule. First, we are 
making clear that money market funds cannot use the maturity-shortening 
provisions in current paragraph (d) of rule 2a-7 regarding interest 
rate readjustments \2150\ when determining whether a security satisfies 
the maturity requirements of a daily liquid asset or weekly liquid 
asset,\2151\ which include securities that will mature within one or 
five business days, respectively.\2152\ Using an interest rate 
readjustment to determine maturity as permitted under current paragraph 
(d) for these purposes allows funds to include as daily or weekly 
liquid assets securities that the fund would not have a legal right to 
convert to cash in one or five business days. This is not consistent 
with the purposes of the minimum daily and weekly liquidity 
requirements, which are designed to increase a fund's ability to pay 
redeeming shareholders in times of market stress when the fund cannot 
rely on the market or a dealer to provide immediate liquidity.\2153\
---------------------------------------------------------------------------

    \2150\ See current rule 2a-7(d) (providing a number of 
exceptions to the general requirement that the maturity of a 
portfolio security be deemed to be the period remaining (from the 
trade date) until the date on which, in accordance with the terms of 
the security, the principal amount must unconditionally be paid; the 
exceptions generally provide that a fund may shorten the maturity 
date of certain securities to the period remaining until the next 
readjustment of the interest rate or the period remaining until the 
principal amount can be recovered through demand).
    \2151\ See rule 2a-7(a)(8); rule 2a-7(a)(34). The amended 
definitions require funds to determine a security's maturity in the 
same way they must calculate for purposes of determining WAL under 
amended rule 2a-7(d)(1)(iii).
    \2152\ Current rule 2a-7(a)(8) defines ``daily liquid assets'' 
to include (i) cash, (ii) direct obligations of the U.S. government, 
or (iii) securities that will mature or are subject to a demand 
feature that is exercisable and payable within one business day. 
Current rule 2a-7(a)(32) defines ``weekly liquid assets'' to include 
(i) cash; (ii) direct obligations of the U.S. government; (iii) 
securities that will mature or are subject to a demand feature that 
is exercisable and payable within five business days; or (iv) 
Government securities (as defined in section 2(a)(16) of the Act) 
that are issued by a person controlled or supervised by and acting 
as an instrumentality of the U.S. government that are issued at a 
discount to the principal amount to be repaid at maturity and have a 
remaining maturity date of 60 days or less.
    \2153\ See 2010 Adopting Release, supra note 17, at text 
following n.213.
---------------------------------------------------------------------------

    Second, we are adopting as proposed, amendments to require that an 
agency discount note with a remaining maturity of 60 days or less 
qualifies as a ``weekly liquid asset'' only if the note is issued 
without an obligation to pay additional interest on the principal 
amount.\2154\ Our amendment clarifies that interest-bearing agency 
notes that are issued at a discount do not qualify.\2155\ We understand 
that these interest-bearing agency notes issued at a discount are 
extremely rare and do not believe that interest-bearing agency notes 
are among the very short-term agency discount notes that appeared to be 
relatively liquid during the 2008 market events and that we determined 
could qualify as weekly liquid assets.\2156\
---------------------------------------------------------------------------

    \2154\ See rule 2a-7(a)(34)(iii).
    \2155\ We understand that an interest-bearing agency note might 
be issued at a discount to facilitate a rounded coupon rate (i.e., 
2.75% or 3.5%) when yield demanded on the note would otherwise 
require a coupon rate that is not rounded.
    \2156\ See 2010 Adopting Release, supra note 17, at text 
accompanying and following nn.251-55. Our determination was informed 
by average daily yields of 30 day and 60 day agency discount notes 
during the fall of 2008. We believe that interest-bearing agency 
notes issued at a discount were not included in the indices of the 
agency discount notes on which we based our analysis or if they were 
included, there were too few to have affected the indices' averages.
---------------------------------------------------------------------------

    Finally, we are amending as proposed, rule 2a-7 to include in the 
definitions of daily and weekly liquid assets amounts receivable that 
are due unconditionally within one or five business days, respectively, 
on pending sales of portfolio securities.\2157\ These receivables, like 
certain other securities that qualify as daily or weekly liquid assets, 
provide liquidity for the fund because they give a fund the legal right 
to receive cash in one to five business days. A fund (or its adviser) 
could include these receivables in daily and weekly liquid assets if 
the fund (or its adviser) has no reason to believe that the buyer might 
not perform.
---------------------------------------------------------------------------

    \2157\ See rule 2a-7(a)(8)(iv); rule 2a-7(a)(34)(v).
---------------------------------------------------------------------------

    We continue to understand that the instruments that most money 
market funds currently hold as daily and weekly liquid assets currently 
conform to the amendments and that these practices are consistent with 
positions our staff has taken in informal guidance to money market 
funds.\2158\ Although one commenter noted that it is not always typical 
for money market funds to include open sales receivables as liquid 
assets, this commenter also stated that most, if not all, money market 
funds currently conform to the proposed amendments.\2159\ The first two 
clarifying amendments discussed above are designed to make clear that 
securities with maturities determined according to interest rate resets 
and interest bearing agency notes issued at a discount do not qualify 
as daily or weekly liquid assets, as applicable.\2160\ Because both of 
these types of securities are less liquid than the limited types of 
instruments that do qualify, any funds that alter their future 
portfolio investments to conform to these requirements would benefit 
from increased liquidity and ability to absorb larger amounts of 
redemptions. We continue to believe that by including certain 
receivables as daily and weekly assets, funds will benefit because the 
types of assets that can satisfy those liquidity requirements will be 
increased.
---------------------------------------------------------------------------

    \2158\ See Staff Responses to Questions about Money Market Fund 
Reform, (revised Nov. 24, 2010) (http://www.sec.gov/divisions/investment/guidance/mmfreform-imqa.htm) (``Staff Responses to MMF 
Questions''), Questions II.1, II.2, II.4.
    \2159\ See State Street Comment Letter.
    \2160\ See rule 2a-7(a)(8)(iii) (definition of daily liquid 
assets); rule 2a-7(a)(34)(iii) and (iv) (definition of weekly liquid 
assets).
---------------------------------------------------------------------------

    We also continue to believe that there would not be any significant 
costs associated with our amendments to the definitions of daily and 
weekly liquid assets. We do not anticipate that there will be 
operational costs for any funds that currently hold securities that 
will no longer qualify as daily or weekly assets because those 
securities likely would mature before the compliance date for our 
amendments.\2161\ Because we continue to believe that most money market 
funds are currently acting consistently with the amendments that 
clarify assets that qualify as daily and weekly assets, we do not 
anticipate that the amendments will have any effect on efficiency or 
capital formation. To the extent that some funds' practices do not 
already conform, however, the clarifications may eliminate any 
competitive advantages that may have resulted from those practices, 
although we expect that any such advantages would have been small 
because the amendments make minor clarifying changes to the assets that 
qualify as daily and weekly liquid assets but do not otherwise remove a 
significant portion of assets that would otherwise

[[Page 47931]]

qualify as daily or weekly liquid assets. We did not receive comments 
suggesting otherwise.
---------------------------------------------------------------------------

    \2161\ See current rule 2a-7(a)(12)(i) (An eligible security 
must have a remaining maturity of no more than 397 days); see infra 
section III.N.4 (discussing the compliance date for the clarifying 
amendments).
---------------------------------------------------------------------------

2. Definition of Demand Feature
    We are amending the definition of demand feature in rule 2a-7 as 
proposed to mean a feature permitting the holder of a security to sell 
the security at an exercise price equal to the approximate amortized 
cost of the security plus accrued interest, if any, at the time of 
exercise, paid within 397 calendar days of exercise.\2162\ Our 
amendment eliminates the requirement that a demand feature be 
exercisable at any time on no more than 30 calendar days' notice.\2163\
---------------------------------------------------------------------------

    \2162\ See rule 2a-7(a)(9).
    \2163\ A demand feature is currently defined to mean (i) a 
feature permitting the holder of a security to sell the security at 
an exercise price equal to the approximate amortized cost of the 
security plus accrued interest, if any, at the time of exercise. A 
demand feature must be exercisable either: (a) At any time on no 
more than 30 calendar days' notice; or (b) At specified intervals 
not exceeding 397 calendar days and upon no more than 30 calendar 
days' notice; or (ii) A feature permitting the holder of an ABS 
unconditionally to receive principal and interest within 397 
calendar days of making demand. See current rule 2a-7(a)(9).
---------------------------------------------------------------------------

    One commenter addressed this proposed clarifying amendment, stating 
that it agreed that eliminating the requirement that a demand feature 
be exercisable at any time on no more than 30 days' notice would 
clarify the operation of rule 2a-7.\2164\ Eliminating the requirement 
that a demand feature be exercisable at any time on no more than 30 
days' notice removes from rule 2a-7 a provision that has become 
obsolete. In 1986, the Commission expanded the notice period from seven 
days to 30 days for all types of demand features and emphasized that 
the notice requirement was at least in part designed to ensure that 
money market funds maintain adequate liquidity.\2165\ Because, as 
discussed in section II.E.1 above, the 2010 amendments added 
significant new provisions to enhance the liquidity of money market 
funds, we continue to believe it is unnecessary to continue to require 
that demand features be exercised at any time on no more than 30 days' 
notice.\2166\ Therefore, the demand feature definition will focus on 
funds' ability to receive payment within 397 calendar days of exercise 
of the demand feature.
---------------------------------------------------------------------------

    \2164\ See State Street Comment Letter.
    \2165\ See Acquisition and Valuation of Certain Portfolio 
Instruments by Registered Investment Companies, Investment Company 
Act Release No. 14983 (Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)] 
(``The Commission still believes that some limit must be placed on 
the extent to which funds relying on the rule will have to 
anticipate their cash and investment needs more than seven days in 
advance. However, the Commission believes that funds should be able 
to invest in the demand instruments that are being marketed with 
notice periods of up to 30 days, as long as the directors are 
cognizant of their responsibility to maintain an adequate level of 
liquidity.''). Liquidity was also a concern when the Commission 
added the definition of demand feature for asset-backed securities 
and noted that it was done, in part, to make clear the date on which 
there was a binding obligation to pay (and not just the scheduled 
maturity). See 1996 Adopting Release, supra note 1735, at 
accompanying nn.151-152.
    \2166\ Our amendments are also consistent with a position our 
staff has taken in the past. See, e.g., SEC No-Action Letter to 
Citigroup Global Markets, Inc. (May 28, 2009), available at http://www.sec.gov/divisions/investment/noaction/2009/citigroupglobal052809-2a7.htm.
---------------------------------------------------------------------------

    As stated in the Proposing Release, we believe that eliminating the 
30-day notice requirement may improve efficiency by simplifying the 
operation of rule 2a-7 regarding demand features and providing issuers 
with more flexibility. One commenter agreed that limiting the 30-day 
notice requirement may improve efficiency by simplifying the operation 
of rule 2a-7.\2167\ As noted in the Proposing Release, our amendment 
will permit funds to purchase securities with demand features from a 
larger pool of issuers. We continue to believe that permitting funds to 
purchase securities with demand features from a larger pool of issuers 
may promote competition among issuers and facilitate capital formation 
because issuers will have a higher number of other issuers to compete 
against in selling securities to funds, which in turn may incentivize 
issuers to develop new or additional securities with demand features. 
We also continue to believe that our amendment will not impose costs on 
funds, and did not receive comment indicating otherwise.\2168\ One 
commenter agreed that it did not anticipate any additional cost to the 
industry in connection with this amendment.\2169\
---------------------------------------------------------------------------

    \2167\ See State Street Comment Letter.
    \2168\ We note that demand features and guarantees are 
referenced in rule 12d3-1(d)(7)(v) (providing that, subject to a 
diversification limitation, the acquisition of a demand feature or 
guarantee is not an acquisition of securities of a securities 
related business (that would otherwise be prohibited pursuant to 
section 12(d)(3) of the Act)) and rule 31a-1(b)(1) (requiring that a 
fund's detailed records of daily purchase and sale records include 
the name and nature of any demand feature provider or guarantor). We 
do not believe that our amendment will provide any benefits or 
impose any costs with respect to these rules, other than those 
described above. We also are updating the cross references to the 
definition of the terms ``demand feature'' and ``guarantee'' in rule 
12d3-1(d)(7)(v), which defines these terms by reference to rule 2a-7 
(replacing the references to ``rule 2a-7(a)(8)'' and ``rule 2a-
7(a)(15)'' with ``Sec.  270.2a-7(a)(9)'' and ``Sec.  270.2a-
7(a)(18)'') and rule 31a-1(b)(1) (replacing the references to ``rule 
2a-7(a)(8)'' and ``rule 2a-7(a)(15)'' with ``Sec.  270.2a-7(a)(9)'' 
and ``Sec.  270.2a-7(a)(18)'').
    \2169\ See State Street Comment Letter.
---------------------------------------------------------------------------

3. Short-Term Floating Rate Securities
    We are also amending rule 2a-7 as proposed to clarify the method 
for determining WAL for short-term floating rate securities.\2170\ WAL 
is similar to a fund's WAM, except that WAL is determined without 
reference to interest rate readjustments.\2171\ Under current rule 2a-
7, a short-term variable rate security, the principal of which must 
unconditionally be paid in 397 calendar days or less, is ``deemed to 
have a maturity equal to the earlier of the period remaining until the 
next readjustment of the interest rate or the period remaining until 
the principal amount can be recovered through demand.'' \2172\ A short-
term floating rate security, the principal amount of which must 
unconditionally be paid in 397 calendar days or less, is ``deemed to 
have a maturity of one day'' because the interest rate for a floating 
rate security will change on any date there is a change in the 
specified interest rate.\2173\
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    \2170\ See rule 2a-7(i)(4).
    \2171\ See current rule 2a-7(c)(2)(iii).
    \2172\ See current rule 2a-7(d)(2).
    \2173\ See current rule 2a-7(d)(4). Rule 2a-7 distinguishes 
between floating rate and variable rate securities based on whether 
the securities' interest rate adjusts (i) when there is a change in 
a specified interest rate (floating rate securities), or (ii) on set 
dates (variable rate securities); current rule 2a-7(a)(15) (defining 
``floating rate security''); current rule 2a-7(a)(31) (defining 
``variable rate security'').
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    Despite the difference in wording of the maturity-shortening 
provisions for floating rate and variable rate securities, the 
Commission has always intended for these provisions to work in parallel 
and provide the same results.\2174\ The omission of an explicit 
reference to demand features in the maturity-shortening provision for 
short-term floating rate securities, however, has created uncertainty 
in determining the maturity of short-term floating rate securities with 
a demand feature for purposes of calculating a fund's WAL.\2175\ 
Therefore, we are amending rule 2a-7(d)(4) to provide that, for 
purposes of determining WAL, a short-term floating rate security shall 
be deemed to have a maturity equal to the period remaining until the 
principal amount can be recovered through demand.\2176\
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    \2174\ See 1996 Adopting Release, supra note 1735, at n.154 (the 
maturity of a floating rate security subject to a demand feature is 
the period remaining until principal can be recovered through 
demand).
    \2175\ Long-term floating rate securities that are subject to a 
demand feature are deemed to have a maturity equal to the period 
remaining until the principal amount can be recovered through 
demand. See current rule 2a-7(d)(5).
    \2176\ See rule 2a-7(i)(4).
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    As stated in the Proposing Release, we understand that most money 
market funds currently determine maturity for

[[Page 47932]]

short-term floating rate securities consistent with our 
amendment.\2177\ Although one commenter noted that it does not 
determine maturity for short-term floating rate securities in the 
manner consistent with the proposed amendment and instead uses the rate 
reset date regardless of the type of security, this commenter did state 
that most, if not all, money market funds currently conform to the 
proposed clarifying amendments.\2178\ This commenter also noted that it 
agreed that there would be minimal cost related to the proposed 
amendment.\2179\ Accordingly, we continue to believe that the amendment 
will likely not result in costs to most funds and that to the extent a 
fund may not already act consistently with our amendment, the amendment 
will likely not result in significant costs to such a fund. Any funds 
that currently limit or avoid investments in short-term floating rate 
securities because they would look to the security's stated final 
maturity date rather than the demand feature for purposes of 
determining WAL (which could significantly increase the WAL) may 
benefit if they increase investments in short-term floating rate 
securities that are higher yielding than alternative investments in the 
fund's portfolio. To the extent that those funds may have experienced 
any competitive yield disadvantage because they limited or avoided 
these investments, the amendments should address those effects. Because 
we continue to believe that most funds currently interpret the maturity 
requirements as we provide in our amendments, we believe that although 
our changes may produce benefits, these benefits are not quantifiable 
because we cannot predict the extent to which, absent our amendments, 
funds may have decided to interpret the maturity requirements 
differently in the future. For those funds that do not currently 
interpret the maturity requirements as we provide in our amendments, we 
are unable to estimate any quantifiable benefits because we are unable 
to predict the extent to which a fund may increase investments in 
short-term floating rate securities that are higher yielding than 
alternative investments in the fund's portfolio, and did not receive 
any comments on such issue. We also believe that our amendments will 
not result in a significant, if any, impact on efficiency or capital 
formation. We did not receive any comments suggesting otherwise.
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    \2177\ Such a determination would be consistent with informal 
guidance that the staff has provided. See Investment Company 
Institute, Request for Interpretation under rule 2a-7 (Aug. 10, 
2010) (incoming letter and response) at http://www.sec.gov/divisions/investment/noaction/2010/ici081010.htm.
    \2178\ See State Street Comment Letter.
    \2179\ Id.
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4. Second Tier Securities
    In 2010, we amended rule 2a-7 to limit money market funds to 
acquiring second tier securities with remaining maturities of 45 days 
or less.\2180\ As discussed in the Proposing Release, our analysis in 
adopting this requirement was focused primarily on second tier 
securities' credit risk, credit spread risk, and liquidity, all of 
which are more appropriately measured by the security's final legal 
maturity, rather than its maturity recognizing interest rate 
readjustments, which focuses on interest rate risk. Thus to state more 
clearly the way in which this limitation operates, we are amending rule 
2a-7 as proposed to state specifically that the 45-day limit applicable 
to second tier securities must be determined without reference to the 
maturity-shortening provisions in rule 2a-7 for interest rate 
readjustments.\2181\
---------------------------------------------------------------------------

    \2180\ See 2010 Adopting Release, supra note 17, at nn.65-69 and 
accompanying text.
    \2181\ See rule 2a-7(d)(2)(ii).
---------------------------------------------------------------------------

    We continue to believe that most money market funds currently 
determine the remaining maturity for second tier securities consistent 
with this amendment. Accordingly, we continue to believe that our 
amendment will likely not result in costs to funds or impact 
competition, efficiency, or capital formation. In cases where the 45-
day limit applicable to second tier securities is determined with 
reference to the maturity-shortening provisions for interest rate 
adjustments for certain funds, such funds that alter their future 
portfolio investments to conform to this amendment may benefit from 
increased liquidity. In addition, as we noted in the Proposing Release, 
any funds that currently hold securities that would no longer qualify 
as second tier securities would not incur costs because those 
securities likely would mature before the compliance date for our 
amendments.\2182\ We did not receive any comments suggesting otherwise.
---------------------------------------------------------------------------

    \2182\ See infra section III.N.4 (discussing the compliance date 
for the clarifying amendments).
---------------------------------------------------------------------------

N. Compliance Dates

    The compliance dates for our amendments are set forth below. The 
compliance date for our floating NAV and liquidity fees and gates 
amendments is October 14, 2016. The compliance date for new Form N-CR 
is July 14, 2015 and the compliance date for our diversification, 
stress testing, disclosure, Form PF, Form N-MFP, and clarifying 
amendments is April 14, 2016. If any provision of these rules, or the 
application thereof to any person or circumstance, is held to be 
invalid, such invalidity shall not affect other provisions or 
application of such provisions to other persons or circumstances that 
can be given effect without the invalid provision or application.
1. Compliance Date for Amendments Related to Liquidity Fees and Gates
    The compliance date for our amendments related to liquidity fees 
and gates, including any related amendments to disclosure, is October 
14, 2016.\2183\ We are adopting a compliance period of 2 years for 
money market funds to implement the fees and gates amendments instead 
of the proposed one-year compliance period. One commenter argued that 
the compliance period for our fees and gates amendments should be 
reduced.\2184\ Several commenters, however, argued that our fees and 
gates amendments require at least 2 years to implement.\2185\ For 
example, one commenter stated that the multiple programming 
requirements and costs involved suggest that 2 years is a reasonable 
amount of time to require implementation of fees and gates.\2186\ In 
addition, a few commenters recommended extending the compliance period 
for fees and gates to 3 years.\2187\ After further consideration, we 
have decided to extend the compliance period to 2 years.
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    \2183\ We expect a fund to make any related changes to 
disclosure at the time the fund implements the amendments related to 
fees and gates.
    \2184\ See Santoro Comment Letter.
    \2185\ See, e.g., Dreyfus Comment Letter; UBS Comment Letter.
    \2186\ See Dreyfus Comment Letter.
    \2187\ See Fidelity Comment Letter.
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    We expect that providing a longer compliance period will allow 
additional time for money market funds and their sponsors and service 
providers to conduct the requisite operational changes to their systems 
to implement these provisions, and for fund sponsors to restructure or 
establish new money market funds if they choose to rely on an available 
exemption.\2188\ It also will provide a substantial amount of time for 
money market fund shareholders to consider the reforms and make any

[[Page 47933]]

corresponding changes to their investments. In addition, we have 
decided to adopt a two-year compliance period in order to provide a 
uniform compliance date for the floating NAV and fees and gates 
amendments, which we believe will provide money market funds with a 
smoother transition and prevent funds from having to make various 
operational and compliance changes multiple times. Accordingly, the 
compliance date is 2 years after the effective date of the adoption of 
the amendments to rule 2a-7(c)(2) and other related provisions of rule 
2a-7 that apply to the liquidity fees and gates amendments, rule 22e-
3(a)(1) and (d), rule 30b1-7, rule 30b1-8, rule 482(b)(3)(i) and 
(b)(4), Parts E-G of Form N-CR, Form N-MFP and Items 3, 4(b)(1), and 
16(g)(1) of Form N-1A.
---------------------------------------------------------------------------

    \2188\ See, e.g., Fidelity Comment Letter (stating that, as the 
SEC acknowledges, in addition to the requisite systems modifications 
that fund sponsors and service providers must implement, many fund 
sponsors may need to restructure or establish new money market funds 
if they chose to rely on any exemptions available).
---------------------------------------------------------------------------

2. Compliance Date for Amendments Related to Floating NAV
    The compliance date for our amendments related to floating NAV, 
including any related amendments to disclosure, is October 14, 
2016.\2189\ We are adopting, as proposed, a compliance period of 2 
years for money market funds to implement the floating NAV amendments. 
A few commenters stated that they agreed that the transition period for 
the floating NAV amendments should be at least 2 years.\2190\ Most 
commenters, however, argued for a compliance period longer than the 
proposed two-year period,\2191\ with some commenters specifically 
arguing that the floating NAV amendments require at least 3 years to 
implement.\2192\ Several commenters suggesting a longer compliance 
period argued that adopting a floating NAV would require significant 
operational modifications.\2193\ In addition, many of the commenters 
recommending a longer compliance period argued that the relevant tax 
and accounting issues should be resolved by the appropriate regulator 
well before the compliance date of any final money market fund 
reform.\2194\ As we discuss above in section III.B.6, we have been 
informed that, the Treasury Department and the IRS today will propose 
new regulations and issue a revenue procedure (with an effective date 
of 60 days after publication of today's reforms in the Federal 
Register) that address relevant tax and accounting issues associated 
with our amendments.\2195\ A two-year compliance period also will allow 
time for the Commission to consider finalizing rules removing NRSRO 
ratings from rule 2a-7, so that funds could make many of the 
compliance-related changes at one time.
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    \2189\ We expect a fund to make any related changes to 
disclosure at the time the fund implements the amendments related to 
floating NAV.
    \2190\ See, e.g., T. Rowe Price Comment Letter; HSBC Comment 
Letter; Northern Trust Comment Letter.
    \2191\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment 
Letter; Fidelity Comment Letter.
    \2192\ See, e.g., ICI Comment Letter; Goldman Sachs Comment 
Letter; Legg Mason Comment Letter.
    \2193\ See, e.g., ICI Comment Letter; Legg Mason & Western Asset 
Comment Letter.
    \2194\ See, e.g., BlackRock II Comment Letter; Fidelity Comment 
Letter; J.P. Morgan Comment Letter; ABA Business Law Section Comment 
Letter.
    \2195\ See supra section III.B.6.
---------------------------------------------------------------------------

    After further consideration, we believe it is appropriate to adopt 
a compliance period of 2 years. We expect that a two-year compliance 
period will provide time for funds and their shareholders to make any 
operational modifications necessary to transition to a floating NAV. In 
addition, we expect that a two-year compliance period will allow time 
for funds to implement any needed changes to their investment policies 
and train staff, and also provide time for investors to analyze and 
consider how they might wish to adjust their cash management 
strategies. A two-year compliance period also will allow funds to 
reorganize their operations and establish new funds to meet the 
definition of a retail money market fund, to the extent necessary. 
Accordingly, the compliance date is 2 years after the effective date of 
the adoption of the amendments to rule 2a-7(c) and other related 
provisions of rule 2a-7 that apply to the floating NAV amendments, rule 
22e-3(a)(1) and (d), rule 30b1-7, rule 482(b)(3)(i) and (b)(4), Form N-
MFP and Item 4(b)(1) of Form N-1A.
3. Compliance Date for Rule 30b1-8 and Form N-CR
    The compliance date for rule 30b1-8, Form N-CR, and the related Web 
site disclosure \2196\ is July 14, 2015. We received no comments 
specifically addressing the compliance date for rule 30b1-8, Form N-CR 
or the related Web site disclosure. After reviewing the operational 
considerations as well as the significant interest of investors and the 
Commission in receiving this information, we are adopting, as proposed, 
a compliance period of 9 months.
---------------------------------------------------------------------------

    \2196\ See rule 2a-7(h)(10)(v) (Web site disclosure of certain 
information required to be reported in Form N-CR).
---------------------------------------------------------------------------

    We are eliminating, as proposed, the provision in current rule 2a-7 
that requires money market funds to report defaults or events of 
insolvency to the Commission by email, because it would duplicate Part 
B (default or event of insolvency of portfolio security issuer) of Form 
N-CR.\2197\ We are also eliminating, as proposed, the provision in 
current rule 2a-7 that requires money market funds to disclose to the 
Commission by email instances when a sponsor supports a fund by 
purchasing a security pursuant to rule 17a-9, because it would 
duplicate Part C (provision of financial support to fund) of Form N-
CR.\2198\ Money market funds will continue to be required to comply 
with these email notification requirements in rule 2a-7 until the date 
in which money market funds are required to comply with Part B and Part 
C of Form N-CR. Accordingly, the effective date of removal of the email 
notification requirements in rule 2a-7 is 9 months after the effective 
date of the adoption of Part B and Part C of Form N-CR.\2199\
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    \2197\ See current rule 2a-7(7)(iii)(A).
    \2198\ See current rule 2a-7(7)(iii)(B).
    \2199\ We note that a money market fund need not comply with the 
email notification requirements prior to the effective date of 
removal if the money market fund instead elects to comply with the 
requirements of Part B and Part C of Form N-CR, as applicable.
---------------------------------------------------------------------------

    We note that Part E (imposition of liquidity fee), Part F 
(suspension of fund redemptions) and Part G (removal of liquidity fees 
and/or resumption of fund redemptions) of Form N-CR are disclosure 
items specifically related to our liquidity fees and gates amendments 
and therefore would also have a conforming compliance period of 2 
years. Accordingly, the compliance date for Parts E-G of Form N-CR and 
the related Web site disclosure requirements pursuant to rule 2a-
7(h)(10)(v) is 2 years after the effective date of the adoption of Part 
E-G of Form N-CR and rule 2a-7(h)(10)(v). The compliance date for all 
other Parts of Form N-CR is 9 months. Accordingly, the compliance date 
for rule 30b1-8, Parts A-D and Part H of Form N-CR, and the related Web 
site disclosure requirements pursuant to rule 2a-7(h)(10)(v) is 9 
months after the effective date of the adoption of rule 30b1-8, Parts 
A-D and Part H of Form N-CR and rule 2a-7(h)(10)(v).
4. Compliance Date for Diversification, Stress Testing, Disclosure, 
Form PF, Form N-MFP, and Clarifying Amendments
    The compliance date for amendments that are not specifically 
related to either floating NAV or liquidity fees and gates, including 
amendments to diversification, stress testing, disclosure that are not 
specifically related to either floating NAV or liquidity fees and 
gates,

[[Page 47934]]

Form PF, Form N-MFP, and clarifying amendments is April 14, 2016. We 
are adopting an 18 month compliance period for money market funds to 
implement these amendments instead of the proposed 9 month compliance 
period. As discussed above, disclosure amendments that relate to the 
floating NAV or liquidity fees and gates amendments will have a two-
year compliance period. For disclosure amendments that are not 
specifically related to the floating NAV or liquidity fees and gates 
amendments, we are adopting an 18 month compliance period. These 
disclosure amendments include amendments to Form N-1A requiring 
historical disclosure of affiliate financial support,\2200\ and 
amendments to rule 2a-7 requiring certain Web site disclosure of 
portfolio holdings and other fund information.\2201\ Several commenters 
argued that the compliance period for amendments not relating to 
floating NAV or liquidity fees and gates should be extended in order 
for funds to implement the amendments and make any necessary 
operational changes.\2202\ After further consideration, we expect that 
18 months will allow additional time for money market funds and their 
sponsors and service providers to implement any applicable requirements 
and conduct any requisite operational changes to their systems to 
implement these provisions.
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    \2200\ See Item 16(g)(2) of Form N-1A (historical disclosure of 
affiliate financial support). For purposes of the required 
historical disclosure of affiliate financial support, funds will be 
required only to disclose events that occur on or after the 
compliance date. See supra section III.E.5.
    \2201\ See rules 2a-7(h)(10)(i)-(iv). For purposes of the 
required Web site disclosure of portfolio holdings and other fund 
information, funds will be required to disclose such information for 
the prior six months, even if such information is from prior to the 
compliance date. See supra section III.E.9.
    \2202\ See, e.g., ICI Comment Letter (recommending a minimum of 
18 months for funds to comply with the disclosure amendments); UBS 
Comment Letter (recommending a 12 to 18 month compliance period for 
all proposed regulatory changes that are not specifically related to 
either floating NAV or liquidity fees and gates); Dreyfus Comment 
Letter (recommending a two-year compliance period for amendments 
that are not specifically related to either floating NAV or 
liquidity fees and gates).
---------------------------------------------------------------------------

    Accordingly, the compliance date for amendments relating to 
diversification is 18 months after the effective date of the amendments 
to rule 2a-7(a)(18) and (d)(3) and other related provisions of rule 2a-
7 that apply to the diversification amendments. The compliance date for 
amendments related to stress testing is 18 months after the effective 
date of the amendments to rule 2a-7(g)(8) and other related provisions 
of rule 2a-7 that apply to the stress testing amendments. The 
compliance date for disclosure amendments not specifically related to 
either floating NAV or liquidity fees and gates is 18 months after the 
effective date of the amendments to Item 16(g)(2) of Form N-1A and rule 
2a-7(h)(10). The compliance date for amendments to rule 204(b)-1 under 
the Advisers Act and Form PF is 18 months after the effective date of 
the amendments to rule 204(b)-1 under the Advisers Act and Form PF. The 
compliance date for amendments to rule 30b1-7 and Form N-MFP is 18 
months after the effective date of the amendments to rule 30b1-7 and 
Form N-MFP. The compliance date for the clarifying amendments is 18 
months after the effective date of the amendments to rule 2a-7 
pertaining to the clarifying amendments.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collections 
of information'' within the meaning of the Paperwork Reduction Act of 
1995 (``PRA'').\2203\ The titles for the existing collections of 
information are: ``Rule 2a-7 under the Investment Company Act of 1940, 
money market funds'' (Office of Management and Budget (``OMB'') Control 
No. 3235-0268); ``Rule 22e-3 under the Investment Company Act of 1940, 
Exemption for liquidation of money market funds'' (OMB Control No. 
3235-0658); ``Rule 30b1-7 under the Investment Company Act of 1940, 
Monthly report for money market funds'' (OMB Control No. 3235-0657); 
``Rule 34b-1(a) under the Investment Company Act of 1940, Sales 
Literature Deemed to be Misleading'' (OMB Control No. 3235-0346); 
``Rule 204(b)-1 under the Investment Advisers Act of 1940, Reporting by 
investment advisers to private funds'' (OMB Control No. 3235-0679); 
``Rule 482 under the Securities Act of 1933, Advertising by an 
Investment Company as Satisfying Requirements of Section 10'' (OMB 
Control No. 3235-0565); ``Form N-1A under the Securities Act of 1933 
and under the Investment Company Act of 1940, Registration statement of 
open-end management investment companies'' (OMB Control No. 3235-0307); 
``Form N-MFP, Monthly schedule of portfolio holdings of money market 
funds'' (OMB Control No. 3235-0657); and ``Form PF, Reporting Form for 
Investment Advisers to Private Funds and Certain Commodity Pool 
Operators and Commodity Trading Advisers'' (OMB Control No. 3235-0679). 
We are also submitting new collections of information for new rule 
30b1-8 and new Form N-CR under the Investment Company Act of 
1940.\2204\ The Commission submitted these collections of information 
to the OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
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    \2203\ 44 U.S.C. 3501 through 3521.
    \2204\ We also are proposing additional amendments that do not 
affect the relevant rules' paperwork collections (e.g., we propose 
to amend Investment Company Act rule 12d3-1 solely to update cross 
references in that rule to provisions of rule 2a-7).
---------------------------------------------------------------------------

    Today the Commission is adopting amendments intended 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. Our 
amendments will (i) permit all money market funds to impose a liquidity 
fee and/or ``gate'' the fund if a fund's weekly liquidity level falls 
below the required regulatory amount; (ii) require all non-government 
money market funds to impose a liquidity fee if the fund's weekly 
liquidity level falls below a designated regulatory threshold, unless 
the fund's board determines that imposing such a fee is not in the best 
interests of the fund; (iii) require, as a targeted reform, that 
institutional non-government money market funds sell and redeem shares 
based on the current market-based value of the securities in their 
underlying portfolios, rounded to four decimal places (e.g., $1.0000), 
i.e., transact at a floating NAV; and (iv) require that money market 
funds adopt other amendments designed to make money market funds more 
resilient, including increasing diversification of their portfolios, 
enhancing their stress testing, and improving transparency through 
enhanced disclosure. The amendments further require investment advisers 
to certain unregistered liquidity funds, which can resemble money 
market funds, to provide additional information about those funds to 
the SEC. We discuss below the collection of information burdens 
associated with these amendments.

A. Rule 2a-7

    A number of the amendments we are adopting today, including our 
liquidity fees and gates reform, as well as our floating NAV reform, 
affect rule 2a-7. These amendments to rule 2a-7 also amend or establish 
new collection of information burdens by: (a) Requiring money market 
funds to be diversified with respect to the sponsors of asset-backed 
securities by deeming the

[[Page 47935]]

sponsor to guarantee the asset-backed security unless the fund's board 
of directors makes a finding otherwise; (b) requiring that ``retail 
money market funds'' adopt and implement policies and procedures 
reasonably designed to limit beneficial ownership of the fund to 
natural persons; (c) requiring that ``government money market funds'' 
amend policies and procedures to reflect the 0.5% de minimis non-
conforming basket; (d) requiring money market funds' boards to make and 
document a number of determinations regarding the imposition of fees 
and gates when weekly liquid assets fall below a certain threshold; (e) 
replacing the requirement that funds promptly notify the Commission via 
electronic mail of defaults and other events with disclosure on new 
Form N-CR; (f) amending the stress testing requirements; and (g) 
amending the disclosures that money market funds are required to post 
on their Web sites. Unless otherwise noted, the estimated burden hours 
discussed below are based on estimates of Commission staff with 
experience in similar matters. Several of the amendments create new 
collection of information requirements. The respondents to these 
collections of information are money market funds, investment advisers 
and other service providers to money market funds, including financial 
intermediaries, as noted below. The currently approved burden for rule 
2a-7 is 517,228 hours.
1. Asset-Backed Securities
    Under the amendments we are adopting today, we are requiring that a 
money market fund treat the sponsors of ABS as guarantors subject to 
rule 2a-7's 10% diversification limit applicable to guarantee and 
demand features, unless the fund's board of directors (or its delegate) 
determines that the fund is not relying on the sponsor's financial 
strength or its ability or willingness to provide liquidity, credit or 
other support to determine the ABS's quality or liquidity.\2205\ The 
board of directors must adopt written procedures requiring periodic 
evaluation of this determination.\2206\ Furthermore, for a period of 
not less than three years from the date when the evaluation was most 
recently made, the fund must preserve and maintain, in an easily 
accessible place, a written record of the evaluation.\2207\ These 
requirements are collections of information under the PRA, and are 
designed to help ensure that the objectives of the diversification 
limitations are achieved. The new collection of information is 
mandatory for money market funds that rely on rule 2a-7, and to the 
extent that the Commission receives confidential information pursuant 
to the collection of information, such information will be kept 
confidential, subject to the provisions of applicable law.\2208\
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    \2205\ See rule 2a-7(a)(18)(ii).
    \2206\ See rule 2a-7(g)(7).
    \2207\ See rule 2a-7(h)(6).
    \2208\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepared by, or on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that 
approximately 183 money market funds held asset-backed securities and 
would have been required to adopt written procedures regarding the 
periodic evaluation of determinations made by the fund as to ABS not 
subject to guarantees. The Commission estimated the one-time burden to 
prepare and adopt these procedures would have been 1,647 hours \2209\ 
at approximately $1.2 million in total time costs for all money market 
funds.\2210\ Amortized over a three-year period, this would have 
resulted in an average annual burden of 549 hours and time costs of 
approximately $400,000 for all money market funds.\2211\ The Commission 
estimated that the average annual burden to prepare materials and 
written records for the boards' required review of new and existing 
determinations would have been 732 burden hours \2212\ and 
approximately $940,071 in total time costs for all money market 
funds.\2213\ Averaging the initial burden plus the average annual 
burdens over three years would have resulted in an average annual 
burden of 1,281 hours and time costs of approximately $1.3 million for 
all money market funds. The Commission estimated in the Proposing 
Release that there would have been no external costs associated with 
this collection of information.
---------------------------------------------------------------------------

    \2209\ This estimate was based on the following calculation: 8 
Burden hours to prepare written procedures + 1 burden hour to adopt 
procedures = 9 burden hours per money market fund required to adopt 
procedures; 9 burden hours per money market fund x 183 funds 
expected to adopt procedures = 1,647 total burden hours.
    \2210\ This estimate was based on the following calculation: 183 
Money market funds x $7,032 in total costs per fund = $1.2 million.
    \2211\ This estimate was based on the following calculations: 
1,647 Burden hours / 3 = 549 average annual burden hours; $1.2 
million burden costs / 3 = $400,000 average annual burden cost.
    \2212\ This estimate was based on the following calculation: 4 
Burden hours per money market fund x 183 funds = 732 total burden 
hours.-
    \2213\ This estimate was based on the following calculation: 183 
Money market funds x $5,137 in total costs per fund = $940,071.
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    The Commission did not receive any comments on the estimated hour 
and cost burdens. The Commission has modified the estimated increase in 
annual burden hours and total time costs that will result from the 
amendment based on updated industry data. The Commission believes that 
the written procedures will be developed for all the money market funds 
in a fund complex by the fund adviser, and that a fund complex will 
have economies of scale to the extent that there may be more than one 
money market fund in a complex. Based on its review of reports on Form 
N-MFP as of February 28, 2014, the Commission estimates that 
approximately 152 money market funds hold asset-backed securities and 
will be required to adopt written procedures regarding the periodic 
evaluation of determinations made by the fund as to ABS not subject to 
guarantees. The Commission continues to estimate that it will take 
approximately eight hours of a fund attorney's time to prepare the 
procedures and one hour for a board to adopt the procedures. Therefore, 
the Commission estimates the one-time burden to prepare and adopt these 
procedures will be approximately nine hours per money market fund, at a 
time cost of $7,440 per fund.\2214\ The Commission further estimates 
the one-time burden to prepare and adopt these procedures will be 1,368 
hours \2215\ at $1,130,880 in total time costs for all money market 
funds.\2216\ Amortized over a three-year period, this will result

[[Page 47936]]

in an average annual burden of 456 hours and time costs of $376,960 for 
all funds.\2217\ The Commission continues to estimate that a money 
market fund that will be required to adopt such written procedures will 
spend, on an annual basis, (i) two hours of a fund attorney's time to 
prepare materials for the board's review of new and existing 
determinations, (ii) one hour for the board to review those materials 
and make the required determinations, and (iii) one hour of a fund 
attorney's time per year, on average, to prepare the written records of 
such determinations.\2218\ Therefore, the Commission estimates that the 
average annual burden to prepare materials and written records for a 
board's required review of new and existing determinations will be 
approximately four hours per fund\2219\ at a time cost of approximately 
$5,540 per fund.\2220\ The Commission therefore estimates the annual 
burden will be 608 burden hours\2221\ and $842,080 in total time costs 
for all money market funds.\2222\ Adding the one-time burden, amortized 
over three years, to prepare and adopt procedures with the annual 
burden to prepare materials for determinations will result in a total 
amortized annual burden of 1,064 hours and time costs of $1,219,040 for 
all funds.\2223\ We estimate that there are no external costs 
associated with this collection of information.
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    \2214\ This estimate is based on the following calculation: (8 
Hours x $380 per hour for an attorney = $3,040) + (1 hour x $4,400 
per hour for a board of 8 directors = $4,400) = $7,440. The staff 
previously estimated in 2009 that the average cost of board of 
director time was $4,000 per hour for the board as a whole, based on 
information received from funds and their counsel. Adjusting for 
inflation, the staff estimates that the current average cost of 
board of director time is approximately $4,400. All other estimated 
wage figures discussed here and throughout section IV of this 
Release are based on published rates have been taken from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
available at http://www.sifma.org/research/item.aspx?id=8589940603, 
modified by Commission staff to account for an 1,800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \2215\ This estimate is based on the following calculation: 8 
Burden hours to prepare written procedures + 1 burden hour to adopt 
procedures = 9 burden hours per money market fund required to adopt 
procedures; 9 burden hours per money market fund x 152 funds 
expected to adopt procedures = 1,368 total burden hours.
    \2216\ This estimate is based on the following calculation: 152 
Money market funds x $7,440 in total costs per fund complex = 
$1,130,880.
    \2217\ This estimate is based on the following calculations: 
1,368 Burden hours / 3 = 456 average annual burden hours; $1,130,880 
burden costs / 3 = $376,960 average annual burden cost.
    \2218\ This estimate includes documenting, if applicable, the 
fund board's determination that the fund is not relying on the fund 
sponsor's financial strength or its ability or willingness to 
provide liquidity or other credit support to determine the ABS's 
quality or liquidity. See rule 2a-7(a)(18)(ii) and rule 2a-7(h)(6).
    \2219\ This estimate is based on the following calculation: 2 
Hours to adopt + 1 hour for board review + 1 hour for record 
preparation = 4 hours per year.
    \2220\ This estimate is based on the following calculations: (3 
Hours x $380 per hour for an attorney = $1,140) + (1 hour x $4,400 
per hour for a board of 8 directors = $4,400) = $5,540.
    \2221\ This estimate is based on the following calculation: 4 
Burden hours per money market fund x 152 funds = 608 total burden 
hours.
    \2222\ This estimate is based on the following calculation: 152 
Money market funds x $5,540 in total costs per fund = $842,080.
    \2223\ This estimate is based on the following calculation: 
(1,368 Burden hours / 3 = 456 average annual burden hours) + 608 
annual burden hours = 1,064 hours; ($1,130,880 burden costs / 3 = 
$376,960 average annual burden cost) + $842,080 annual time costs = 
$1,219,040.
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2. Retail and Government Funds
i. Retail Funds
    Under our floating NAV reform, a retail money market fund--which 
means a money market fund that adopts and implements policies and 
procedures reasonably designed to limit beneficial owners to natural 
persons--will be allowed to continue to maintain a stable NAV through 
the use of amortized cost valuation and/or penny-rounding pricing. The 
requirement that retail money market funds adopt policies and 
procedures is a collection of information under the PRA. The new 
collections of information are mandatory for money market funds that 
seek to qualify as ``retail money market funds'' under rule 2a-7 as 
amended,\2224\ and to the extent that the Commission receives 
confidential information pursuant to this collection of information, 
such information will be kept confidential, subject to the provisions 
of applicable law.\2225\
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    \2224\ See rule 2a-7(a)(25); 2a-7(c)(1)(i).
    \2225\ See supra note 2208.
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    For purposes of the PRA, the Commission estimates that 
approximately 55 money market fund complexes will seek to qualify as 
retail money market funds under rule 2a-7 and therefore be required to 
adopt written policies and procedures reasonably designed to limit 
beneficial owners to natural persons.\2226\ We continue to estimate, as 
we did in the Proposing Release, that it will take approximately 12 
hours of a fund attorney's time to prepare the procedures and one hour 
for a board to adopt the procedures.\2227\ The Commission did not 
receive any comments on the estimated hour and cost burdens. 
Accordingly, we have modified our estimate of the total time cost that 
will result from the amendments based on updated industry data and 
estimate an initial time cost of approximately $8,960 per fund 
complex.\2228\ Therefore, we estimate the one-time burden to prepare 
and adopt these procedures will be approximately 715 hours \2229\ at 
$492,800 in total time costs for all fund complexes.\2230\ Amortized 
over a three year period, this will result in an average annual burden 
of 238 hours and time costs of $164,267 for all funds.\2231\ We 
estimate that there are no external costs associated with this 
collection of information.
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    \2226\ For purposes of the PRA, staff estimates that those money 
market funds that self-reported as ``retail'' funds as of February 
28, 2014 (based on iMoneyNet data) will likely seek to qualify as 
retail money market funds under amended rule 2a-7. Based on 
iMoneyNet data, these 55 fund complexes managed 195 self-reported 
``retail'' money market funds.
    \2227\ Staff believes that the burden associated with drafting 
and adopting policies and procedures reasonably designed to limit 
beneficial ownership to natural persons will be approximately the 
same as the burden that would have been required under our proposal 
(requiring that funds adopt and implement procedures reasonably 
designed to allow the conclusion that the omnibus account holder 
does not permit any beneficial owner, directly or indirectly, to 
redeem more than the daily permitted amount).
    \2228\ This estimate is based on the following calculation: ([12 
Hours x $380 per hour for an attorney = $4,560] + [1 hour x $4,400 
per hour for a board of 8 directors = $4,400] = $8,960).
    \2229\ This estimate is based on the following calculation: 12 
Burden hours to prepare written procedures + 1 burden hour to adopt 
procedures = 13 burden hours per money market fund complex; 13 
burden hours per fund complex x 55 fund complexes = 715 total burden 
hours for all fund complexes.
    \2230\ This estimate is based on the following calculation: 55 
Fund complexes x $8,960 in total costs per fund complex = $492,800.
    \2231\ This estimate is based on the following calculation: 715 
Burden hours / 3 = 238 average annual burden hours; $492,800 burden 
costs / 3 = $164,267 average annual burden cost.
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ii. Government Funds
    Under today's amendments, government money market funds will not be 
required to implement a floating NAV or fees and gates. We define a 
government money market fund to mean a fund that invests at least 99.5% 
of its total assets in cash, government securities, and/or repurchase 
agreements collateralized by cash or government securities. Currently, 
a government money market fund is permitted to invest up to 20% of its 
total assets in non-government assets.\2232\ Under our amendments, a 
government money market fund will no longer be permitted to invest up 
to 20% of its total assets in non-government assets; rather, these 
funds will be permitted a 0.5% de minimis non-conforming basket in 
which the fund may invest in non-government assets. Accordingly, we 
anticipate that government money market funds will need to amend their 
existing policies and procedures to reflect the new 0.5% de minimis 
basket.
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    \2232\ See supra note 628 (defining ``non-government assets''); 
see also supra note 629 (noting that the ``names rule'' effectively 
limits government funds from investing more than 20% of total assets 
in non-government assets).
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    For purposes of the PRA, the Commission estimates that 
approximately 60 money market fund complexes will seek to qualify as 
government money market funds under rule 2a-7 and therefore be required 
to amend their written policies and procedures to reflect the 0.5% de 
minimis basket.\2233\ We estimate that it will take approximately one 
hour of a fund attorney's time to amend the procedures and 0.5 hours 
for a board to adopt the amended procedures. Accordingly, we estimate 
the total initial time cost that will result from the

[[Page 47937]]

amendments will be approximately $2,580 per fund complex.\2234\ 
Therefore, we estimate the one-time burden to amend these procedures 
will be approximately 90 hours \2235\ at $154,800 in total time costs 
for all fund complexes.\2236\ Amortized over a three-year period, this 
will result in an average annual burden of approximately 30 hours and 
time costs of $51,600 for all funds.\2237\ We estimate that there are 
no external costs associated with this collection of information.
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    \2233\ This estimate is based on Form N-MFP data as of February 
28, 2014.
    \2234\ This estimate is based on the following calculation: ([1 
Hours x $380 per hour for an attorney = $380] + [0.5 hours x $4,400 
per hour for a board of 8 directors = $2,200] = $2,580).
    \2235\ This estimate is based on the following calculation: 1 
Burden hours to amend written procedures + 0.5 burden hours to adopt 
procedures = 1.5 burden hours per money market fund complex; 1.5 
burden hours per fund complex x 60 fund complexes = 90 total burden 
hours for all fund complexes.
    \2236\ This estimate is based on the following calculation: 60 
Fund complexes x $2,580 in total costs per fund complex = $154,800.
    \2237\ This estimate is based on the following calculation: 90 
Burden hours / 3 = 30 average annual burden hours; $154,800 burden 
costs / 3 = $51,600 average annual burden cost.
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3. Board Determinations--Fees and Gates
    Under the fees and gates amendments, if a money market fund's 
weekly liquid assets fall below 30% or 10%, respectively, of its total 
assets, the fund's board may be required to make and document a number 
of determinations regarding the imposition of fees and gates,\2238\ 
including (i) whether to impose a liquidity fee, and if so, what the 
amount of the liquidity fee should be (not to exceed 2%); (ii) whether 
to impose a redemption gate; (iii) when to remove a liquidity fee put 
in place (subject to other rule requirements); and (iv) when to lift a 
redemption gate put in place (subject to other rule 
requirements).\2239\ This requirement is a collection of information 
under the PRA, and is designed to ensure that a fund that imposes a fee 
or gate does so when it is in its best interests (as determined by its 
board). This new collection of information is mandatory for money 
market funds that rely on rule 2a-7, and to the extent that the 
Commission receives confidential information pursuant to these 
collections of information, such information will be kept confidential, 
subject to the provisions of applicable law.\2240\
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    \2238\ As discussed in section III.A above, after a fund's 
weekly liquid assets have dropped below 30%, a fund's board may 
determine that it is in the best interests of the fund to impose a 
liquidity fee or redemption gate. After a fund's weekly liquid 
assets have dropped below 10%, a fund must impose a 1% a liquidity 
fee on all redemptions, unless its board determines it is not in the 
best interests of the fund to do so. See rule 2a-7(c)(2)(i) and 
(ii).
    \2239\ See id.
    \2240\ See supra note 2208.
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    As proposed, the fees and gates amendments would have required the 
same collection of information if a money market fund's weekly liquid 
assets fell below 15% of its total assets. As discussed in the 
Proposing Release, Commission staff analysis of Form N-MFP data showed 
that, between March 2011 and October 2012, five prime money market 
funds had weekly liquid assets below 15% of total assets.\2241\ As set 
forth in the Proposing Release, the same Commission staff analysis of 
Form N-MFP data shows that 138 prime money market funds had weekly 
liquid assets below 30% of total assets during this same period.\2242\ 
In the proposal, the Commission estimated approximately 28 annual 
burden hours,\2243\ and a total time cost of $39,580 for all money 
market funds.\2244\ We did not receive any comments on the estimated 
hour and cost burdens related to board determinations under the fees 
and gates amendments.
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    \2241\ See Proposing Release, supra note 25, at 548-49 (showing 
that, during the period, four funds dropped below 15% weekly liquid 
assets and one fund dropped below 10% weekly liquid assets).
    \2242\ See Proposing Release, supra note 25, at 177. This same 
analysis shows that one prime money market fund had weekly liquid 
assets below 10% between March 2011 and October 2012. Because 30% is 
the higher threshold, the fund that dropped below 10% weekly liquid 
assets during the period would also be included within the 138 funds 
that crossed below 30% weekly liquid assets during the period.
    \2243\ This estimate was based on the following calculation: 7 
Burden hours per money market fund x 4 funds = 28 total burden 
hours.
    \2244\ This estimate was based on the following calculation: 4 
Money market funds x $9,895 in total costs per fund complex = 
$39,580.
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    The Commission continues to estimate that the affected money market 
funds that will satisfy the triggering event will spend, on an annual 
basis, (i) four hours of a fund attorney's time to prepare materials 
for the board's determinations, (ii) two hours for the board to review 
those materials and make the required determinations, and (iii) one 
hour of a fund attorney's time per year, on average, to prepare the 
written records of such determinations.\2245\ Therefore, the Commission 
estimates that the average annual burden to prepare materials and 
written records for a board's required determinations will be 
approximately seven hours per fund,\2246\ the same as proposed, at a 
time cost of approximately $10,700 per fund.\2247\ The estimated time 
cost has increased from the proposal, which estimated $9,895 per fund, 
as a result of updated industry data.\2248\ Based on a total of 83 
funds per year that will have weekly liquid assets below 30% of total 
assets,\2249\ the Commission estimates the annual burden will be 
approximately 581 burden hours,\2250\ and $888,100 in total time costs 
for all money market funds.\2251\
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    \2245\ This estimate includes preparing and evaluating materials 
relevant to the determinations required in imposing (and removing) 
either or both liquidity fees and redemption gates. See supra note 
2239.
    \2246\ This estimate is based on the following calculation: 4 
Hours to prepare materials + 2 hours for board review + 1 hour for 
record preparation = 7 hours per year.
    \2247\ This estimate is based on the following calculation: [5 
Hours x $380 per hour for an attorney = $1900] + [2 hours x $4,400 
per hour for a board of 8 directors = $8,800] = $10,700.
    \2248\ The proposal estimated $379 per hour for an attorney 
based on published rates that had been taken from SIFMA's Management 
and Professional Earnings in the Securities Industry 2012, available 
at http://www.sifma.org/research/item.aspx?id=8589940603, modified 
by Commission staff to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. The proposal also estimated that the average 
cost of board of director time was $4,000 per hour for the board as 
a whole based on information received from funds and their counsel. 
Adjusting for inflation, the staff estimates that the current 
average cost of board of director time is approximately $4,400.
    \2249\ This estimate is based on the following calculation: (138 
Funds / 20 months) x 12 months = 83 funds per year.
    \2250\ This estimate is based on the following calculation: 7 
Burden hours per fund x 83 funds = 581 burden hours.
    \2251\ This estimate is based on the following calculation: 
$10,700 In total costs per fund x 83 money market funds = $888,100.
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    The increases in annual burden hours and total time costs from the 
proposal are largely due to the increase in the estimated number of 
funds that will be subject to collection of information (from four to 
83) as a result of the higher weekly liquid assets threshold for 
imposition of fees and gates. We estimate that there are no external 
costs associated with this collection of information.
4. Notice to the Commission
    Our amendments also eliminate, as proposed, the requirements under 
rule 2a-7 relating to notifications money market funds must make to the 
Commission upon the occurrence of certain events. Specifically, the 
amendments eliminate the requirements for money market funds to 
promptly notify the Director of Investment Management or its designee 
by electronic mail (i) of any default or event of insolvency with 
respect to the issuer of one or more portfolio securities (or any 
issuer of a demand feature or guarantee), where immediately before the 
default the securities comprised one

[[Page 47938]]

half of one percent or more of the fund's total assets; \2252\ and (ii) 
of any purchase of a security from the fund by an affiliated person in 
reliance on rule 17a-9 under the Investment Company Act.\2253\ The 
Proposing Release also estimated that approximately 20 money market 
funds per year previously would have been required to provide the 
notification of an event of default or insolvency, and that each such 
notification would entail 0.5 burden hours. The Commission also 
estimated that approximately 25 money market fund complexes per year 
previously would have been required to provide notification of a 
purchase of a portfolio security in reliance on rule 17a-9, and each 
such notification would entail one burden hour. Based on these 
estimates, we calculated that the elimination of these requirements 
would reduce the current annual burden by approximately 10 hours for 
notices of default or insolvency, at a total time cost savings of 
$3,790,\2254\ and by approximately 25 hours for notices of purchases in 
reliance on rule 17a-9, at a total time cost savings of $9,475.\2255\
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    \2252\ See current rule 2a-7(c)(7)(iii)(A) (requiring that the 
notice include a description of the actions the money market fund 
intends to take in response to the event).
    \2253\ See current rule 2a-7(c)(7)(iii)(B) (requiring that the 
notice include identification of the security, its amortized cost, 
the sale price, and the reasons for the purchase).
    \2254\ This estimate was based on the following calculations: 20 
Funds x 0.5 hour reduction in hours per fund = reduction of 10 
hours; 10 burden hours x $379 per hour for an attorney = $3,790.
    \2255\ This estimate was based on the following calculations: 25 
Fund complexes x 1 hour reduction in hours per fund = reduction of 
25 hours; 25 burden hours x $379 per hour for an attorney = $9,475.
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    No commenters addressed the number of money market funds that would 
be affected by the proposal or the estimated reduction in annual burden 
hours or total time cost savings that would result from the proposed 
amendments. Accordingly, the Commission has not modified the estimated 
reduction in annual burden hours associated with the amendments, 
although it has modified its estimate of the total hour burden 
reduction that will result from the amendments based on updated 
industry data. Given these estimates, the amendments will reduce the 
current annual burden by approximately 10 hours for notices of default 
or insolvency, at a total time cost reduction of $3,800,\2256\ and by 
approximately 25 hours for notices of purchases in reliance on rule 
17a-9, at a total time cost reduction of $9,500.\2257\ Therefore, the 
total reduction in burden is 35 hours at a total time cost of 
$13,300.\2258\ We estimate that there are no external costs associated 
with this collection of information.
---------------------------------------------------------------------------

    \2256\ This estimate is based on the following calculations: 20 
Funds x 0.5 hour reduction in hours per fund = reduction of 10 
hours; 10 burden hours x $380 per hour for an attorney = $3,800.
    \2257\ This estimate is based on the following calculations: 25 
Fund complexes x 1 hour reduction in hours per fund = reduction of 
25 hours; 25 burden hours x $380 per hour for an attorney = $9,500.
    \2258\ This estimate is based on the following calculation: 10 
Hours (reduction for notices of default or insolvency) + 25 hours 
(reduction for notices of purchases in reliance on rule 17a-9) = 35 
hours total reduction; $3,800 (reduction for notices of default or 
insolvency) + $9,500 (reduction for notices of purchases in reliance 
on rule 17a-9) = $13,300 total reduction.
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5. Stress Testing
    We are adopting amendments to the stress testing requirements under 
rule 2a-7. Specifically, we are adopting reforms to the current stress 
testing provisions that will require funds to test their ability to 
maintain weekly liquid assets of at least 10% and to minimize principal 
volatility in response to specified hypothetical events that include 
(i) increases in the level of short-term interest rates, (ii) a 
downgrade or default of particular portfolio security positions, each 
representing various portions of the fund's portfolio, and (iii) the 
widening of spreads in various sectors to which the fund's portfolio is 
exposed, each in combination with various increases in shareholder 
redemptions. A written copy of the procedures and any modifications 
thereto, must be maintained and preserved for a period of not less than 
six years following the replacement of such procedures with new 
procedures, the first two years in an easily accessible place.\2259\ In 
addition, the written procedures must provide for a report of the 
stress testing results to be presented to the board of directors at its 
next regularly scheduled meeting (or sooner, if appropriate in light of 
the results).\2260\ These requirements are collections of information 
under the PRA, and are designed, in part, to address disparities in the 
quality and comprehensiveness of stress tests. The collection of 
information is mandatory for money market funds that rely on rule 2a-7, 
and to the extent that the Commission receives confidential information 
pursuant to this collection of information, such information will be 
kept confidential, subject to the provisions of applicable law.\2261\
---------------------------------------------------------------------------

    \2259\ See rule 2a-7(h)(8).
    \2260\ See rule 2a-7(g)(8)(ii).
    \2261\ See supra note 2208.
---------------------------------------------------------------------------

    In the Proposing Release, we noted that we were proposing to amend 
the stress testing provisions of rule 2a-7 to enhance the hypothetical 
events for which a fund (or its adviser) is required to stress test, 
including: (i) Increases (rather than changes) in the general level of 
short-term interest rates; (ii) downgrades or defaults of portfolio 
securities, and the effects these events could have on other securities 
held by the fund; (iii) ``widening or narrowing of spreads among the 
indexes to which interest rates of portfolio securities are tied''; 
(iv) other movements in interest rates that may affect the fund's 
portfolio securities, such as shifts in the yield curve; and (v) 
combinations of these and any other events the adviser deems relevant, 
assuming a positive correlation of risk factors.\2262\ Under our 
proposed amendments, floating NAV money market funds would have been 
required to replace their current stress test for the ability to 
maintain a stable price per share with a test of the fund's ability to 
maintain 15% of its total assets in weekly liquid assets.
---------------------------------------------------------------------------

    \2262\ See proposed (FNAV) rule 2a-7(g)(7).
---------------------------------------------------------------------------

    Based on the proposed amendments to stress testing, the Commission 
estimated in the Proposing Release that each fund that would have been 
required to implement the proposed stress testing changes would have to 
incur an average one-time burden of 92 hours at a time cost of 
$42,688.\2263\ Based on an estimate of 92 funds that would incur this 
one-time burden,\2264\ the Commission estimated that the aggregate one-
time burden for all money market funds to implement the proposed 
amendments to stress testing would have been 8,464 hours at a total 
time cost of $3.9 million.\2265\ Amortized over a three year period, 
this would have resulted in an average annual burden of 2,821 burden 
hours and $1.3

[[Page 47939]]

million total time cost for all funds.\2266\ The Commission estimated 
in the Proposing Release that there would have been no external costs 
associated with this collection of information. The Commission did not 
receive any comments on the estimated hour and cost burdens.
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    \2263\ Staff estimated that these systems modifications would 
include the following costs: (i) Project planning and systems design 
(24 hours x $291 (hourly rate for a senior systems analyst) = 
$6,984); (ii) systems modification integration, testing, 
installation, and deployment (32 hours x $282 (hourly rate for a 
senior programmer) = $9,024); (iii) drafting, integrating, 
implementing procedures and controls (24 hours x $327 (blended 
hourly rate for assistant general counsel ($467), chief compliance 
officer ($441), senior EDP auditor ($273) and operations specialist 
($126)) = $7,848); and (iv) preparation of training materials (8 
hours x $354 (hourly rate for an assistant compliance director) = 
$2,832) + (4 hours (4 hour training session for board of directors) 
x $4,000 (hourly rate for board of 8 directors) = $16,000) = 
$18,832). Therefore, staff estimated an average one-time burden of 
92 hours (24+32+24+8+4), at a total cost per fund of $42,688 
($6,984+$9,024+$7,848+$18,832).
    \2264\ This estimate was based on staff experience and 
discussions with industry.
    \2265\ This estimate was based on the following calculations: 92 
Funds x 92 hours per fund = 8,464 hours; 92 funds x $42,688 = $3.9 
million.
    \2266\ This estimate is based on the following calculations: 
8,464 Hours / 3 = 2,821 burden hours; $3.9 million / 3 = $1.3 
million burden cost.
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    Although we are adopting amendments to the stress testing 
requirements with modifications from the proposal, the Commission does 
not believe that the changes from the proposed amendments will directly 
affect the burden hours or total time costs associated with the 
requirement that money market funds maintain a written copy of their 
stress testing procedures, and any modifications thereto, and preserve 
for a period of not less than six years following the replacement of 
such procedures with new procedures, the first two years in an easily 
accessible place. However, the Commission has modified the estimated 
increase in annual burden hours and total time costs that will result 
from the amendment based on updated industry data.
    We understand that most money market funds, in their normal course 
of risk management, include many of the elements we are adopting in 
their stress testing. Nevertheless, we expect that funds may incur a 
one-time internal burden to reprogram an existing system to provide the 
required reports of stress testing results based on our amendments. We 
believe that the stress testing procedures will be modified for all the 
money market funds in a fund complex by the fund adviser, and that a 
fund complex will have economies of scale to the extent that there may 
be more than one money market fund in a complex. The Commission 
estimates that each fund that will have to implement the stress testing 
changes will incur an average one-time burden of 92 hours at a time 
cost of $43,872.\2267\ Based on an estimate of 559 money market funds 
that will incur this one-time burden,\2268\ the Commission estimates 
that the aggregate one-time burden for all money market funds to 
implement the amendments to stress testing will be 51,428 hours at a 
total time cost of $24,524,448.\2269\ Amortized over a three year 
period, this will result in an average annual burden of approximately 
17,143 burden hours and $8,174,816 total time cost for all funds.\2270\ 
We estimate that there are no external costs associated with this 
collection of information.
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    \2267\ The Commission estimates that these systems modifications 
will include the following costs: (i) Project planning and systems 
design (24 hours x $260 (hourly rate for a senior systems analyst) = 
$6,240); (ii) systems modification integration, testing, 
installation, and deployment (32 hours x $303 (hourly rate for a 
senior programmer) = $9,696); (iii) drafting, integrating, 
implementing procedures and controls (24 hours x $319 (blended 
hourly rate for assistant general counsel ($426), chief compliance 
officer ($485), senior EDP auditor ($241) and operations specialist 
($125)) = $7,656); and (iv) preparation of training materials (8 
hours x $335 (hourly rate for an assistant compliance director) = 
$2,680) + (4 hours (4 hour training session for board of directors) 
x $4,400 (hourly rate for board of 8 directors) = $17,600) = 
$20,280). Therefore, the Commission estimates an average one-time 
burden of 92 hours (24+32+24+8+4), at a total cost per fund of 
$43,872 ($6,240+$9,696+$7,656+$20,280).
    \2268\ We increased the estimated number of funds from the 
Proposing Release based on staff experience and discussions with 
industry.
    \2269\ This estimate is based on the following calculations: 559 
Funds x 92 hours per fund = 51,428 hours; 559 funds x $43,872 = 
$24,524,448
    \2270\ This estimate is based on the following calculations: 
51,428 Hours / 3 = approximately 17,143 burden hours; $24,524,448 / 
3 = $8,174,816.
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    Each report to the board of directors will include an assessment of 
the money market fund's ability to have invested at least 10% of its 
total assets in weekly liquid assets and to minimize principal 
volatility, and an assessment by the fund's adviser of the fund's 
ability to withstand the events that are reasonably likely to occur 
within the following year. Under current rule 2a-7, money market funds 
are required to have written procedures that provide for a report of 
the stress testing results to be presented to the board of directors at 
its next regularly scheduled meeting (or sooner, if appropriate in 
light of the results). However, because we are amending the type of 
information that must be included in the report to the board, we have 
estimated the collection of information burden hours increase and the 
total time cost increase.
    The Commission estimates that it will take on average an 
additional: (i) Two hours of portfolio management time, (ii) one hour 
of compliance time, (iii) one hour of professional legal time and (iv) 
0.5 hours of support staff time, requiring an additional 4.5 burden 
hours at a time cost of approximately $1,302 per fund.\2271\ Under 
normal circumstances, the report must be provided at the next scheduled 
board meeting, and the Commission estimates that the report and the 
adviser's assessment will cover all money market funds in a complex. 
For purposes of these calculations, the Commission assumes that funds 
will conduct stress tests no less than monthly. With an average of six 
board meetings each year, the Commission estimates that the annual 
burden for regularly scheduled reports will be 27 hours per money 
market fund.\2272\ Under the rule, a report must be provided earlier if 
appropriate in light of the results of the test. The Commission 
estimates that as a result of unanticipated changes in market 
conditions or other events, stress testing results are likely to prompt 
additional reports on average four times each year.\2273\ Thus, the 
Commission estimates reports will result in an additional 18 hours for 
an individual fund each year.\2274\ The Commission estimates the total 
annual burden for all money market funds will be an additional 25,155 
hours at a total time cost of $7,278,180.\2275\
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    \2271\ This estimate is based on the following calculation: (2 
Hours x $301 per hour for a portfolio manager = $602) + (1 hour x 
$283 for a compliance manager = $283) + (1 hour x $380 for an 
attorney = $380) + (0.5 hours x $74 per hour for an administrative 
assistant = $37) = $1,302.
    \2272\ This estimate is based on the following calculation: (2 
Hours (portfolio management) + 1 hour (compliance) + 1 hour (legal) 
+ 0.5 hours (support staff)) = 4.5 hours x 6 meetings = 27 hours.
    \2273\ The Commission anticipates that in many years there will 
be no need for special reports, but that in a year in which there is 
severe market stress, a fund may report to the board weekly for a 
period of 3 to 6 months. Such reporting will generate 9 to 18 
reports in addition to the regular monthly reports. Assuming that 
this type of event may occur once every five years, and additional 
reports will be generated for 6 months, a fund will produce an 
average of four additional reports per year (18 additional reports / 
5 = 3.6 reports).
    \2274\ This estimate is based on the following calculation: 4.5 
Hours x 4 = 18 hours.
    \2275\ This estimate is based on the following calculation: (27 
Hours + 18 hours = 45 hours) x 559 money market funds = 25,155 hours 
and ($1,302 x (6 regularly scheduled reports + 4 additional reports 
= 10 reports per year) = $13,020 per fund) x 559 funds = $7,278,180.
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    Adding the one-time burden, amortized over three years, to 
implement the stress testing amendments with the annual burden to 
report the results of the stress tests to the board of will result in a 
total amortized annual burden of 42,298 hours and time costs of 
$15,452,996 for all funds.\2276\ We estimate that there are no external 
costs associated with this collection of information.
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    \2276\ This estimate is based on the following calculation: 
(51,428 Burden hours / 3 = 17,143 average annual burden hours) + 
25,155 annual burden hours = 42,298 hours; ($24,524,448 burden costs 
/ 3 = $8,174,816 average annual burden cost) + $7,278,180 annual 
time costs = $15,452,996.
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6. Web Site Disclosure
    The amendments we are adopting today require money market funds to 
disclose certain additional information on their Web sites. These 
amendments promote transparency to investors of money market funds' 
risks and risk management by:
     Harmonizing the specific portfolio holdings information 
that rule 2a-7 requires a fund to disclose on the fund's

[[Page 47940]]

Web site with the corresponding portfolio holdings information required 
to be reported on Form N-MFP; \2277\
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    \2277\ See rule 2a-7(h)(10)(i).
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     Requiring that a fund disclose on its Web site a schedule, 
chart, graph, or other depiction showing the percentage of the fund's 
total assets that are invested in daily and weekly liquid assets, as 
well as the fund's daily net inflows or outflows, as of the end of each 
business day during the preceding six months (which depiction must be 
updated each business day as of the end of the preceding business day); 
\2278\
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    \2278\ See rule 2a-7(h)(10)(ii).
---------------------------------------------------------------------------

     Requiring that a fund disclose on its Web site a schedule, 
chart, graph, or other depiction showing the fund's daily current NAV 
per share, as of the end of each business day during the preceding six 
months (which depiction must be updated each business day as of the end 
of the preceding business day); \2279\ and
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    \2279\ See rule 2a-7(h)(10)(iii).
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     Requiring a fund to disclose on its Web site certain 
information that the fund is required to report to the Commission on 
Form N-CR regarding the imposition and removal of liquidity fees, the 
suspension and resumption of fund redemptions, and the provision of 
financial support to the fund.\2280\
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    \2280\ See rule 2a-7(h)(10)(v).
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    These new collections of information are mandatory for money market 
funds that rely on rule 2a-7 and are not kept confidential.
a. Disclosure of Portfolio Holdings Information
    We are adopting, largely as proposed, the requirement for a money 
market fund to disclose on its Web site certain portfolio holdings 
information that the fund also will be required to disclose on Form N-
MFP. This requirement will harmonize the holdings information that a 
fund is required to disclose on its Web site with the corresponding 
portfolio holdings information required to be reported on Form N-MFP. 
We anticipate that the burden for each fund to draft and finalize the 
disclosure that appears on its Web site will largely be incurred when 
the fund files Form N-MFP.\2281\ In the Proposing Release, the 
Commission estimated that a fund would incur an additional burden of 
one hour each time that it updates its Web site to include the new 
disclosure. Using an estimate of 586 money market funds that would be 
required to include the proposed new portfolio holdings disclosure on 
the fund's Web site, we estimated that each fund would incur 12 
additional hours of internal staff time per year (one hour per monthly 
filing), at a time cost of $2,484, to update the Web site to include 
the new disclosure, for a total of 7,032 aggregate hours per year, at a 
total aggregate time cost of $1,455,624.
---------------------------------------------------------------------------

    \2281\ See infra section IV.C.
---------------------------------------------------------------------------

    Certain commenters generally noted that complying with the new Web 
site disclosure requirements would add costs for funds, including costs 
to upgrade internal systems and software relevant to the Web site 
disclosure requirements (which possibly could include costs to engage 
third-party service providers for those money market fund managers that 
do not have existing relevant systems).\2282\ One commenter, however, 
noted that the portfolio holdings disclosure requirements should not 
cause a significant cost increase as long as the information is made 
available from relevant accounting systems,\2283\ and another commenter 
stated that the proposed disclosure requirements generally should not 
produce any meaningful costs.\2284\ Another commenter urged the 
Commission to harmonize new disclosure requirements so that funds would 
face lower administrative burdens, and investors would bear 
correspondingly fewer costs.\2285\ As described above, the portfolio 
holdings disclosure requirements we are adopting have changed slightly 
from those that we proposed, in order to conform to modifications we 
are making to the proposed Form N-MFP disclosure requirements.\2286\ 
The Commission estimates that the number of money market funds is 
currently 559 and that the hour burden per fund remains the same as 
previously estimated.\2287\ Because the 2010 money market fund reforms 
already require money market funds to post monthly portfolio 
information on their Web sites,\2288\ funds should not need to upgrade 
their systems and software, or develop relevant systems (either in-
house or with the assistance of a third-party service provider) to 
comply with the new portfolio holdings information disclosure 
requirements. The Commission therefore does not believe that comments 
about the costs required to upgrade relevant systems and software 
should affect its estimates of the burdens and costs associated with 
the portfolio holdings disclosure requirements. Taking this into 
consideration, the Commission has not modified its previous hour burden 
estimates. Although we have slightly revised the portfolio holdings 
disclosure requirements since proposing the requirements, we believe 
that these revisions do not produce additional burdens for funds and 
thus does not affect previous hour burden estimates.
---------------------------------------------------------------------------

    \2282\ See, e.g., UBS Comment Letter (``The SEC also proposed 
additional information regarding the posting of: (i) The categories 
of a money fund's portfolio securities; (ii) maturity date 
information for each of the fund's portfolio securities; and (iii) 
market-based values of the fund's portfolio securities at the same 
time as this information becomes publicly available on Form N-MFP. 
We believe this information is too detailed to be useful to most 
investors and would be cost prohibitive to provide. Complying with 
these new Web site disclosure requirements would add notable costs 
for each money fund that UBS Global AM advises.''); Chamber II 
Comment Letter (``With respect to the Web site disclosure 
requirements, internal systems and software would need to be 
upgraded or, for those MMF managers that do not have existing 
systems, third-party service providers would need to be engaged. The 
costs (which ultimately would be borne by investors through higher 
fees or lower yields) could potentially be significant to an MMF and 
higher than those estimated in the Proposal.''); Dreyfus Comment 
Letter (noting that ``several of the new Form reporting and Web site 
and registration statement disclosure requirements . . . come with . 
. . material cost to funds and their sponsors''); see also Fin. 
Svcs. Roundtable Comment Letter (noting that the disclosure 
requirements would produce ``significant cost to the fund and 
ultimately to the fund's investors''); SSGA Comment Letter (urging 
the Commission to consider the ``substantial administrative, 
operational, and expense burdens'' of the proposed disclosure-
related amendments); Chapin Davis Comment Letter (noting that the 
disclosure- and reporting-related amendments will result in 
increased costs in the form of fund staff salaries, or consultant, 
accountant, and lawyer hourly rates, that will ultimately be borne 
in large part by investors and portfolio issuers).
    \2283\ See State Street Comment Letter.
    \2284\ See HSBC Comment Letter.
    \2285\ See Fin. Svcs. Roundtable Comment Letter.
    \2286\ See supra section III.E.9.h (Costs of harmonization of 
rule 2a-7 and Form N-MFP portfolio holdings disclosure 
requirements).
    \2287\ The estimate regarding the number of money market funds 
is based on a review of reports on Form N-MFP filed with the 
Commission for the month ended on February 28, 2014.
    \2288\ See 2010 Adopting Release, supra note 17, at section 
II.E.1.
---------------------------------------------------------------------------

    Based on an estimate of 559 money market funds posting their 
portfolio holdings on their Web pages, we estimate that, in the 
aggregate, the amendment will result in a total of 6,708 burden hours 
per year,\2289\ at a total aggregate time cost of $1,522,716.\2290\ We 
estimate that there are no external costs associated with this 
collection of information.
---------------------------------------------------------------------------

    \2289\ This estimate is based on the following calculation: 12 
Hours per year x 559 money market funds = 6,708 hours.
    \2290\ This estimate is based on the following calculation: 
6,708 Hours x $227 per hour for a webmaster = $1,522,716.

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[[Page 47941]]

b. Disclosure of Daily Weekly Assets and Weekly Liquid Assets and Net 
Shareholder Flow
    We are adopting, as proposed, the requirement for a money market 
fund to disclose on its Web site a schedule, chart, graph, or other 
depiction showing the percentage of the fund's total assets that are 
invested in daily and weekly liquid assets, as well as the fund's net 
inflows or outflows, as of the end of each business day during the 
preceding six months. The burdens associated with this requirement 
include one-time burdens as well as ongoing burdens. In the Proposing 
Release, the Commission estimated that a money market fund would incur 
a one-time burden of 70 hours, at a time cost of $20,150, to design the 
required schedule, chart, graph, or other depiction, and to make the 
necessary software programming changes to the fund's Web site to 
disclose the percentage of the fund's total assets that are invested in 
daily liquid assets and weekly liquid assets, as well as the fund's net 
inflows or outflows, as of the end of each business day during the 
preceding six months. Using an estimate of 586 money market funds, the 
Commission estimated that money market funds would incur, in aggregate, 
a total one-time burden of 41,020 hours, at a time cost of $11,807,900, 
to comply with these Web site disclosure requirements. We estimated 
that each fund would incur an ongoing annual burden of 32 hours, at a 
time cost of $9,184, to update the depiction of daily and weekly liquid 
assets and the fund's net inflows or outflows on the fund's Web site 
each business day during that year. We further estimated that, in the 
aggregate, money market funds would incur an average ongoing annual 
burden of 18,752 hours, at a time cost of $5,381,824, to comply with 
this disclosure requirement.
    As discussed above, certain commenters generally noted that 
complying with the new Web site disclosure requirements would add costs 
for funds, including costs to upgrade internal systems and software 
relevant to the Web site disclosure requirements (which possibly could 
include costs to engage third-party service providers for those money 
market fund managers that do not have existing relevant systems).\2291\ 
One commenter noted that these costs could potentially be ``significant 
to [a money market fund] and higher than those estimated in the 
Proposing Release.'' \2292\ Another commenter suggested that obtaining 
the daily and weekly liquid asset data for purposes of complying with 
the disclosure requirements would result in additional costs that the 
Commission did not include in its estimate in the Proposing Release, 
namely, the costs associated with the enhanced controls required to 
disseminate this information publicly each day.\2293\ However, one 
commenter stated that the proposed disclosure requirements should not 
produce any meaningful costs.\2294\
---------------------------------------------------------------------------

    \2291\ See UBS Comment Letter (``We do not support these 
changes, because they would require a significant restructuring of 
the money funds' Web sites, which would be expensive to complete and 
maintain.''); see also supra note 2282.
    \2292\ See Chamber II Comment Letter.
    \2293\ See State Street Comment Letter at Appendix A (``Due to 
the inherent risks associated with public disclosure, there will be 
enhanced controls required with respect to the daily public 
dissemination of daily and weekly liquid assets and the risks of 
shareholders making redemption decisions in reliance on that 
information . . . adds to staff to calculate and review the daily 
and weekly liquid assets.'').
    \2294\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    The Commission estimates that the number of money market funds is 
currently 559. We agree that the one-time costs for certain money 
market funds to upgrade internal systems and software, and/or develop 
such systems if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\2295\ Our assumptions in 
estimating one-time hour and cost burdens therefore have not changed 
from those discussed in the Proposing Release. Based on an estimate of 
559 money market funds posting information about their daily and weekly 
liquid assets, as well as their net inflows or outflows, on their Web 
pages, we estimate that, in the aggregate, the amendment will result in 
a total one-time burden of 39,130 hours,\2296\ at a time cost of 
$11,336,520,\2297\ to comply with these Web site disclosure 
requirements. Amortized over a three-year period, this will result in 
an average annual burden of approximately 13,043 hours and time costs 
of approximately $3,778,840 for all money market funds.\2298\
---------------------------------------------------------------------------

    \2295\ See Proposing Release, supra note 25, at n.1044.
    \2296\ This estimate is based on the following calculation: 70 
Hours x 559 money market funds = 39,130 hours.
    \2297\ This estimate is based on the following calculation: 
$20,280 Per fund x 559 money market funds = $11,336,520. The $20,280 
per fund figure is, in turn, based on the following calculations: 
(20 Hours (mid-point of 16 hours and 24 hours for project 
assessment) x $309 (blended hourly rate for a compliance manager 
($283) and a compliance attorney ($334)) = $6,180) + (50 hours (mid-
point of 40 hours and 60 hours for project development, 
implementation, and testing) x $282 (blended hourly rate for a 
senior systems analyst ($260) and a senior programmer ($303)) = 
$14,100) = $20,280 per fund. See Proposing Release, supra note 25, 
at nn.1044 and 1045.
    \2298\ This estimate was based on the following calculations: 
39,130 Burden hours / 3 = 13,043 average annual burden hours; 
$11,336,520 burden costs / 3 = $3,778,840 average annual burden 
cost.
---------------------------------------------------------------------------

    The Commission agrees that money market funds may incur additional 
costs associated with the enhanced controls required to publicly 
disseminate daily and weekly liquid asset data, which costs were not 
estimated in the Proposing Release. Incorporating these additional 
costs into new estimates, we estimate that each fund will incur an 
ongoing annual burden of 36 hours,\2299\ at a time cost of 
$10,274,\2300\ to update the depiction of daily and weekly liquid 
assets and the fund's net inflows or outflows on the fund's Web site 
each business day during that year. Based on an estimate of 559 money 
market funds posting information about their daily and weekly liquid 
assets (as well as their net inflows or outflows) on their Web pages, 
we estimate that the amendment will result in an average aggregate 
ongoing annual burden of

[[Page 47942]]

20,124 hours,\2301\ at a time cost of $5,743,166,\2302\ to comply with 
this disclosure requirement.
---------------------------------------------------------------------------

    \2299\ The Commission estimates that the lower bound of the 
range of the ongoing annual hour burden to update the required Web 
site information will be 21 hours per year (5 minutes per day x 252 
business days in a year = 1,260 minutes, or 21 hours). We estimate 
that the upper bound of the range of the ongoing annual hour burden 
to update the required Web site information will be 42 hours per 
year (10 minutes per day x 252 business days in a year = 2,520 
minutes, or 42 hours).
     Additionally, we estimate that each fund will incur an 
additional ongoing annual hour burden of between 3 hours and 6 hours 
associated with implementing enhanced controls required to publicly 
disseminate the data at issue. Specifically, depending on the 
controls the fund already has in place, the Commission estimates 
that it will take a compliance manager and an attorney between 3 and 
6 hours to review and update (or if necessary, to develop and 
implement) the controls associated with the public dissemination of 
daily liquid asset and weekly liquid asset data each year.
     Because we do not have the information necessary to provide a 
point estimate of the costs to modify a particular fund's systems we 
thus have provided ranges of estimated costs in our economic 
analysis. See supra section III.E.9.h. Likewise, for purposes of our 
estimates for the PRA analysis, we have taken the mid-point of the 
range discussed above (mid-point of 24 hours (21 hours + 3 hours) 
and 48 hours (42 hours + 6 hours) = 36 hours).
    \2300\ This estimate is based on the following calculation: 
(31.5 Hours (mid-point of 21 hours and 42 hours for updating the 
required Web site information) x $282 (blended rate for a senior 
systems analyst and senior programmer) = $8,883) + (4.5 hours (mid-
point of 3 hours and 6 hours for implementing enhanced controls 
associated with public dissemination of data) x $309 (blended rate 
for a compliance manager and a compliance attorney) = $1,391) = 
$10,274 per fund.
    \2301\ This estimate is based on the following calculation: 36 
Hours x 559 money market funds = 20,124 hours.
    \2302\ This estimate is based on the following calculation: 
$10,274 Per fund x 559 money market funds = $5,743,166.
---------------------------------------------------------------------------

    Adding the one-time burden, amortized over three years, to prepare 
and adopt procedures with the annual burden to prepare materials for 
determinations will result in a total amortized annual burden of 33,167 
hours and time costs of $9,522,006 for all funds.\2303\ We estimate 
that there are no external costs associated with this collection of 
information.\2304\
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    \2303\ This estimate is based on the following calculation: 
(39,130 Burden hours / 3 = 13,043 average annual burden hours) + 
20,124 annual burden hours = 33,167 hours; ($11,336,520 burden costs 
/ 3 = $3,778,840 average annual burden cost) + $5,743,166 annual 
time costs = $9,522,006.
    \2304\ While a money market fund could rely on third-party 
service providers to assist in developing systems relevant to the 
Web site disclosure requirements (see supra note 2282 and 
accompanying text; infra note 2305 and accompanying text), a fund 
also could rely on in-house capability to develop such systems. Our 
cost estimates assume that funds will use in-house resources to 
develop such systems except where it is more economical to use 
third-party service providers.
---------------------------------------------------------------------------

c. Disclosure of Daily Current NAV
    We are adopting, as proposed, the requirement for a money market 
fund to disclose on its Web site a schedule, chart, graph, or other 
depiction showing the fund's current NAV per share as of the end of 
each business day during the preceding six months. The burdens 
associated with this requirement include one-time burdens as well as 
ongoing burdens. In the Proposing Release, the Commission estimated 
that a money market fund would incur a one-time burden of 70 hours, at 
a time cost of $20,150, to design the required schedule, chart, graph, 
or other depiction, and to make the necessary software programming 
changes to the fund's Web site to disclose the fund's current NAV per 
share as of the end of each business day during the preceding six 
months. Using an estimate of 586 money market funds, we estimated that 
money market funds would incur, in aggregate, a total one-time burden 
of 41,020 hours, at a time cost of $11,807,900, to comply with these 
Web site disclosure requirements. We estimated that each fund would 
incur an ongoing annual burden of 32 hours, at a time cost of $9,184, 
to update the depiction of the fund's current NAV per share on the 
fund's Web site each business day during that year. We further 
estimated that, in the aggregate, money market funds would incur an 
average ongoing annual burden of 18,752 hours, at a time cost of 
$5,381,824, to comply with this disclosure requirement.
    As discussed above, certain commenters generally noted that 
complying with the new Web site disclosure requirements would add costs 
for funds, including costs to upgrade internal systems and software 
relevant to the Web site disclosure requirements (which possibly could 
include costs to engage third-party service providers for those money 
market fund managers that do not have existing relevant systems).\2305\ 
One commenter noted that these costs could potentially be ``significant 
to [a money market fund] and higher than those estimated in the 
Proposal.'' \2306\ However, another commenter stated that it agrees 
that those money market funds that presently publicize their current 
NAV per share daily on the fund's Web site will incur few additional 
costs to comply with the proposed disclosure requirements, and also 
that it agrees with the Commission's estimates for the ongoing costs of 
providing a depiction of the fund's current NAV each business 
day.\2307\
---------------------------------------------------------------------------

    \2305\ See supra note 2282.
    \2306\ See Chamber II Comment Letter.
    \2307\ See State Street Comment Letter at Appendix A; see also 
HSBC Comment Letter (stating that the proposed disclosure 
requirements should not produce any ``meaningful cost'').
---------------------------------------------------------------------------

    The Commission estimates that the number of money market funds is 
currently 559. We agree that the one-time costs for certain money 
market funds to upgrade internal systems and software, and/or develop 
such systems if a money market fund does not have existing relevant 
systems, could be higher than those average one-time costs estimated in 
the Proposing Release. However, because the estimated one-time costs 
were based on the mid-point of a range of estimated costs, the higher 
costs that may be incurred by certain industry participants have 
already been factored into our estimates.\2308\ Our assumptions in 
estimating one-time hour and cost burdens therefore have not changed 
from those discussed in the Proposing Release. Based on an estimate of 
559 money market funds posting information about their current NAV per 
share on their Web pages, we estimate that, in the aggregate, the 
amendment will result in a total one-time burden of 39,130 hours,\2309\ 
at a time cost of $11,336,520,\2310\ to comply with these Web site 
disclosure requirements. As discussed above, we received no comments 
providing specific suggestions or critiques about our assumptions in 
estimating ongoing hour and cost burdens associated with the disclosure 
of a fund's current NAV per share, and therefore our methods of 
estimating these burdens also have not changed from those discussed in 
the Proposing Release. Based on an estimate of 559 money market funds 
posting information about their daily current NAV per share on their 
Web pages, we estimate that, in the aggregate, the amendment will 
result in an average ongoing annual burden of 17,888 hours,\2311\ at a 
time cost of $5,044,416,\2312\ to comply with this disclosure 
requirement.
---------------------------------------------------------------------------

    \2308\ See Proposing Release, supra note 25 at n.1044.
    \2309\ This estimate is based on the following calculation: 70 
Hours x 559 money market funds = 39,130 hours.
    \2310\ This estimate is based on the following calculation: 
$20,280 Per fund x 559 money market funds = $11,336,520. The $20,280 
per fund figure is, in turn, based on the following calculations: 
(20 Hours (mid-point of 16 hours and 24 hours for project 
assessment) x $309 (blended hourly rate for a compliance manager 
($283) and a compliance attorney ($334)) = $6,180) + (50 hours (mid-
point of 40 hours and 60 hours for project development, 
implementation, and testing) x $282 (blended hourly rate for a 
senior systems analyst ($260) and senior programmer ($303)) = 
$14,100) = $20,280 per fund. See Proposing Release, supra note 25, 
at nn.1044 and 1045.
    \2311\ This estimate is based on the following calculation: 32 
Hours x 559 money market funds = 17,888 hours.
    \2312\ This estimate is based on the following calculation: (32 
Hours x $282 (blended hourly rate for a senior systems analyst 
($260) and a senior programmer ($303)) = $9,024) x 559 money market 
funds = $5,044,416.
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    Amortizing these hourly and cost burdens over three years results 
in an average annual increased burden of 30,931 burden hours \2313\ at 
a time cost of $8,823,256.\2314\ We estimate that there are no external 
costs associated with this collection of information.\2315\ Adding the 
one-time burden, amortized over three years, to prepare and adopt 
procedures with the annual burden to prepare materials for 
determinations will result in a total amortized annual

[[Page 47943]]

burden of 30,931 hours and time costs of $8,823,256 for all 
funds.\2316\
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    \2313\ This estimate is based on the following calculation: 
[(39,130 Initial burden hours + 17,888 annual burden hours (year 1)) 
+ 17,888 burden hours (year 2) + 17,888 burden hours (year 3)] / 3 = 
30,931 hours.
    \2314\ This estimate is based on the following calculation: 
[($11,336,520 Initial monetized burden + $5,044,416 monetized burden 
(year 1)) + $5,044,416 monetized burden (year 2) + $5,044,416 
monetized burden (year 3)] / 3 = $8,823,256.
    \2315\ While a money market fund could rely on third-party 
service providers to assist in developing systems relevant to the 
Web site disclosure requirements (see supra notes 2282 and 2305 and 
accompanying text), a fund also could rely on in-house capability to 
develop such systems. Our cost estimates assume that funds will use 
in-house resources to develop such systems except where it is more 
economical to use third-party service providers.
    \2316\ This estimate is based on the following calculation: 
(39,130 Burden hours / 3 = 13,043 average annual burden hours) + 
17,888 annual burden hours = 30,931 hours; ($11,336,520 burden costs 
/ 3 = $3,778,840 average annual burden cost) + $5,044,416 annual 
time costs = $8,823,256.
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d. Disclosure Regarding Financial Support Received by the Fund, the 
Imposition and Removal of Liquidity Fees, and the Suspension and 
Resumption of Fund Redemptions
    We are adopting, substantially as proposed, the requirement for a 
money market fund to disclose on its Web site certain information that 
the fund is required to report on Form N-CR regarding the provision of 
financial support to the fund, as well as the imposition and removal of 
liquidity fees, and the suspension and resumption of fund 
redemptions.\2317\ In the Proposing Release, the Commission estimated 
that the Commission would receive 40 reports per year filed in response 
to an event specified on Part C (``Provision of financial support to 
Fund'') of Form N-CR. We further estimated that the Commission would 
receive 8 reports per year filed in response to events specified on 
Part E (``Imposition of liquidity fee''), Part F (``Suspension of Fund 
redemptions''), and Part G (``Removal of liquidity fee and/or 
resumption of Fund redemptions''). Using these numbers, we estimated 
that the requirement to disclose information about financial support 
received by a money market fund on the fund's Web site would result in 
a total aggregate burden of 40 hours per year, at a total aggregate 
time cost of $8,280. We further estimated that the requirement to 
disclose information about the imposition and removal of liquidity 
fees, and the suspension and resumption of fund redemptions, on the 
fund's Web site would result in a total aggregate burden of eight hours 
per year, at a total aggregate time cost of $1,656.
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    \2317\ As discussed in section III.E.9, the final amendments 
include certain changes to the Web site disclosure requirements from 
the proposal, largely designed to track the information on the Web 
site with the initial filings that will be provided on Form N-CR.
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    Although certain commenters generally noted, as discussed above, 
that complying with the new Web site disclosure requirements would add 
costs for funds,\2318\ one commenter stated that the costs of 
disclosing liquidity fees and gates and instances of financial support 
on the fund's Web site would be minimal when compared to other 
costs,\2319\ and another commenter stated that the proposed disclosure 
requirements should not produce any meaningful costs.\2320\ As 
described above, we have modified the required time frame for 
disclosing information about financial support received by a fund on 
the fund's Web site, and have also modified the financial support 
disclosure requirement to require a fund to post only a subset of the 
information required to be filed in response to Part C of Form N-CR. 
However, this modification does not produce additional burdens for 
funds because it merely allows more time for the same disclosure and 
thus does not affect previous hour burden estimates. The Commission 
also has determined not to change the assumptions used in our estimates 
in response to the comments we received, as the comments provided no 
specific suggestions or critiques regarding our methods for estimating 
the hour burdens and costs associated with the Form N-CR-linked Web 
site disclosure requirements. We have, however, modified our estimates 
of the number of reports that will be filed each year on Part C, Part 
E, Part F, and Part G of Form N-CR, and these modified estimates have 
affected our estimates of the burdens associated with the related Web 
site disclosure requirements.\2321\ Given these estimates, the 
requirement to disclose information about financial support received by 
a money market fund on the fund's Web site will result in a total 
aggregate burden of 30 hours per year, at a total aggregate time cost 
of $6,810.\2322\ In addition, the requirement to disclose information 
about the imposition and removal of liquidity fees, and the suspension 
and resumption of fund redemptions, on the fund's Web site will result 
in a total aggregate burden of 3.6 hours per year, at a total aggregate 
time cost of $817.\2323\ We estimate that there are no external costs 
associated with this collection of information.
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    \2318\ See supra note 2282.
    \2319\ See State Street Comment Letter.
    \2320\ See HSBC Comment Letter.
    \2321\ See infra section IV.D.2.
    \2322\ This estimate is based on the following calculation: 30 
Hours per year (1 hour per Web site update x 30 total Web site 
updates per year) x $227 per hour for a webmaster = $6,810. Because 
all money market funds are required to have a Web site (see rule 2a-
7(h)(10)), and because the disclosure at issue does not require any 
particular formatting or computational capacity, we assume that 
money market funds will not need to create a Web site or update 
their current systems capability to disclose the relevant 
information, and therefore we estimate that there are no one-time 
costs associated with this disclosure requirement.
    \2323\ This estimate is based on the following calculation: 3.6 
Hours per year (1 hour per Web site update x 3.6 total Web site 
updates per year) x $227 per hour for a webmaster = approximately 
$817. We estimate that there are no one-time costs associated with 
this disclosure requirement.
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e. Change in Burden
    The aggregate additional annual burden associated with the Web site 
disclosure amendments discussed above is 70,840 hours \2324\ at a time 
cost of $19,875,605.\2325\ There is no change in the external cost 
burden associated with this collection of information.
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    \2324\ This estimate is based on the following calculation: 
6,708 Hours (annual aggregate burden for the disclosure of portfolio 
holdings information) + 33,167 (average annual aggregate burden for 
the disclosure of daily liquid assets and weekly liquid assets and 
net shareholder flow) + 30,931 (average annual aggregate burden for 
the disclosure of daily current NAV) + 30 hours (annual aggregate 
burden for the disclosure of financial support provided to money 
market funds) + 3.6 hours (annual aggregate burden for the 
imposition and removal of liquidity fees, and suspension and 
resumption of fund redemptions) = 70,840 hours. This calculation 
reflects hourly burdens that have been amortized over three years, 
where appropriate.
    \2325\ This estimate is based on the following calculation: 
$1,522,716 (Annual aggregate costs associated with the disclosure of 
portfolio holdings information) + $9,522,006 (average annual 
aggregate costs associated with the disclosure of daily liquid 
assets and weekly liquid assets and net shareholder flow) + 
$8,823,256 (average annual aggregate costs associated with the 
disclosure of daily current NAV) + $6,810 (annual aggregate costs 
associated with the disclosure of financial support provided to 
money market funds) + $817 (annual aggregate costs associated with 
the imposition and removal of liquidity fees, and suspension and 
resumption of fund redemptions) = $19,875,605. This calculation 
reflects hourly burdens that have been amortized over three years, 
where appropriate.
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7. Total Burden for Rule 2a-7
    The currently approved burden for rule 2a-7 is 517,228 hours. The 
net aggregate additional burden hours associated with the amendments to 
rule 2a-7 increase the burden estimate to 632,244 hours annually for 
all funds.\2326\
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    \2326\ This estimate is based on the following calculation: 
517,228 Hours (currently approved burden) + 1,064 hours (ABS 
determination & recordkeeping) + 238 hours (retail funds) + 30 hours 
(government funds) + 581 hours (board determinations)-35 hours 
(notice to the Commission) + 42,298 hours (stress testing) + 70,840 
(Web site disclosure) = 632,244 hours.
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B. Rule 22e-3

    As outlined above, rule 22e-3 under the Investment Company Act 
exempts money market funds from section 22(e) of the Act to permit them 
to suspend redemptions and postpone payment of redemption proceeds in 
order to facilitate an orderly liquidation of the fund, provided that 
certain conditions are met. The rule requires a money market fund to 
provide prior notification to the Commission of its decision to suspend 
redemptions and liquidate.\2327\ This requirement is a collection of 
information under the PRA, and is designed to assist Commission staff 
in monitoring a

[[Page 47944]]

money market fund's suspension of redemptions. The collection of 
information is mandatory for any fund that holds itself out as a money 
market fund in reliance on rule 2a-7 and any conduit funds that rely on 
the rule,\2328\ and to the extent that the Commission receives 
confidential information pursuant to this collection of information, 
such information will be kept confidential, subject to the provisions 
of applicable law.
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    \2327\ See rule 22e-3(a)(3).
    \2328\ The rule permits funds that invest in a money market fund 
pursuant to section 12(d)(1)(E) of the Act (``conduit funds'') to 
rely on the rule, and requires the conduit fund to notify the 
Commission of its reliance on the rule. See rule 22e-3(b).
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    To provide shareholders with protections comparable to those 
currently provided by the rule while also updating the rule to make it 
consistent with our amendments to rule 2a-7, we are amending rule 22e-3 
to permit a money market fund to invoke the exemption in rule 22e-3 if 
the fund, at the end of a business day, has invested less than 10% of 
its total assets in weekly liquid assets.\2329\ As under the current 
rule, a money market fund that maintains a stable NAV will continue to 
be able to invoke the exemption in rule 22e-3 if it has broken the buck 
or is about to ``break the buck.'' \2330\
---------------------------------------------------------------------------

    \2329\ See rule 22e-3(a)(1).
    \2330\ See id.; see also supra section III.A.4 (discussing 
amended rule 22e-3).
---------------------------------------------------------------------------

    The amendments to rule 22e-3 are designed to permit a money market 
fund to suspend redemptions when the fund is under significant stress, 
as the funds may do today under rule 22e-3. We do not expect that money 
market funds will invoke the exemption provided by rule 22e-3 more 
frequently under our amendments than they do today. Although the 
amendments change the circumstances under which a money market fund may 
invoke the exemption provided by rule 22e-3, the amended rule still 
will permit a money market fund to invoke the exemption only when the 
fund is under significant stress, and we estimate that a money market 
fund is likely to experience that level of stress and choose to suspend 
redemptions in reliance on rule 22e-3 with the same frequency that 
funds today may do so. Therefore, as we indicated in the Proposing 
Release, we are not revising rule 22e-3's current approved annual 
aggregate collection of information.
    The rule's current approved annual aggregate burden is 
approximately 30 minutes and is based on estimates that: (1) On 
average, one money market fund will break the buck and liquidate every 
six years; \2331\ (2) there are an average of two conduit funds that 
may be invested in a money market fund that breaks the buck; \2332\ and 
(3) each money market fund and conduit fund will spend approximately 
one hour of an in-house attorney's time to prepare and submit the 
notice required by the rule.\2333\ As discussed in the Proposing 
Release, there will be no change in the external cost burden associated 
with this collection of information. We did not receive any comments on 
the estimated hour and cost burdens related to amended rule 22e-3.
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    \2331\ This estimate is based upon the Commission's experience 
with the frequency with which money market funds have historically 
required sponsor support. Although many money market fund sponsors 
have supported their money market funds in times of market distress, 
for purposes of this estimate the Commission conservatively 
estimates that one or more sponsors may not provide support.
    \2332\ These estimates are based on a staff review of filings 
with the Commission. Generally, rule 22e-3 permits conduit funds to 
suspend redemptions in reliance on rule 22e-3 and requires that they 
notify the Commission if they elect to do so.
    \2333\ This estimate is based on the following calculations: (1 
Hour / 6 years) = 10 minutes per year for each fund and conduit fund 
that is required to provide notice under the rule; 10 minutes per 
year x 3 (combined number of affected funds and conduit funds) = 30 
minutes. The estimated cost associated with the estimated burden 
hours ($189) is based on the following calculations: $378/Hour 
(hourly rate for an in-house attorney based on the Securities 
Industry and Financial Markets Association, Management & 
Professional Earnings in the Securities Industry 2011, modified to 
account for an 1,800-hour work year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead.) x 
30 minutes = $189.
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C. Rule 30b1-7 and Form N-MFP

    Rule 30b1-7 under the Investment Company Act currently requires 
money market funds to file electronically a monthly report on Form N-
MFP within five business days after the end of each month. The 
information required by the form must be data-tagged in XML format and 
filed through EDGAR. The rule is designed to improve transparency of 
information about money market funds' portfolio holdings and facilitate 
Commission oversight of money market funds. Preparing a report on Form 
N-MFP is a collection of information under the PRA.\2334\ This 
collection of information will be mandatory for money market funds that 
rely on rule 2a-7 and the information will not be kept confidential.
---------------------------------------------------------------------------

    \2334\ For purposes of the PRA analysis, the current burden 
associated with the requirements of rule 30b1-7 is included in the 
collection of information requirements of Form N-MFP.
---------------------------------------------------------------------------

1. Discussion of Final Amendments
    We are adopting a number of amendments to Form N-MFP which will 
include new and amended collections of information. As discussed in 
more detail in section III.G. above, we have revised the final 
amendments from our proposal in a number of ways in order to reduce 
costs to the extent feasible and still achieve our goals of enhancing 
and improving the monitoring of money market fund risks. While the 
final form amendments differ in some respects from what we proposed, we 
are adopting many of the other proposed amendments unchanged.\2335\
---------------------------------------------------------------------------

    \2335\ We provide a more detailed discussion of our final 
amendments and commenters' comments in section III.G above.
---------------------------------------------------------------------------

    These amendments include:
    Amendments Related to Rule 2a-7 Reforms. As discussed in more 
detail in section III.G. above, we proposed a number of changes to Form 
N-MFP designed to conform it with the general reforms of rule 2a-7. We 
are adopting them largely as proposed, with some revisions to reflect 
the revised approach we are taking to the primary reforms.\2336\
---------------------------------------------------------------------------

    \2336\ See supra section III.G.
---------------------------------------------------------------------------

    New Reporting Requirements. We are also adopting several new items 
to Form N-MFP that we believe will improve the Commission's (and 
investors') ability to monitor money market funds. As discussed in more 
detail in section III.G. above, these final amendments include some, 
but not all, of the new reporting requirements that we had proposed. 
For example, as proposed, the final amendments include additional 
reporting on fair value categorization and LEI information (if 
available).\2337\ We are also adopting, with some changes from the 
proposal, revisions to several other items, including revised 
investment categories for portfolio securities and repurchase agreement 
collateral. However, we are not adopting the lot level portfolio 
security disclosure, top 20 shareholder information, and security 
identifier level reporting on repo collateral that we had proposed.
---------------------------------------------------------------------------

    \2337\ Id.
---------------------------------------------------------------------------

    Clarifying and Other Amendments. We are adopting, as proposed, 
several amendments to clarify current instructions and items of Form N-
MFP.\2338\ We are also making certain other, non-substantive, 
structural changes to Form N-MFP.\2339\
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    \2338\ See supra section III.G for a more detailed discussion of 
these clarifications.
    \2339\ As proposed, the amendments will renumber the items of 
Form N-MFP to separate the items into four separate sections to 
allow the Commission to reference, add, or delete items in the 
future without having to re-number all subsequent items in the form. 
See supra section III.G for a more detailed discussion of this 
restructuring.

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[[Page 47945]]

2. Current Burden
    The current approved collection of information for Form N-MFP is 
45,214 annual aggregate hours and $4,424,480 in external costs.
3. Change in Burden
    The Commission estimates that 559 money market funds are required 
to file reports on Form N-MFP on a monthly basis.\2340\ No commenters 
provided specific data or estimates regarding the cost estimates we 
provided in the Proposing Release for the amendments to Form N-MFP, 
although some suggested that the costs of some aspects of our proposed 
amendments to Form N-MFP could be significant.\2341\ For example, some 
commenters expressed concern that the proposed lot level portfolio 
security disclosure would significantly increase the costs and burdens 
of preparing Form N-MFP.\2342\ After consideration of these comments, 
we believe that our original cost estimates may have understated the 
costs if we had implemented the amendments as proposed. As noted above, 
we have revised the final amendments from our proposal in a number of 
ways in order to reduce costs to the extent feasible and still achieve 
our goals of enhancing and improving the monitoring of money market 
fund risks. In light of these changes, and taking into account other 
commenters' estimates,\2343\ we believe our original cost estimates 
continue to be reasonable. Accordingly, the Commission has not modified 
the estimated annual burden hours associated with the final amendments 
from those we estimated at the proposal. However, the Commission has 
modified its estimates based on updated industry data on time costs as 
well as the updated total number of money market funds that will be 
affected.\2344\
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    \2340\ This estimate is based on a review of reports on Form N-
MFP filed with the Commission for the month ended February 28, 2014.
    \2341\ See, e.g., Fidelity Comment Letter; State Street Comment 
Letter.
    \2342\ See supra note 1477 and accompanying text.
    \2343\ See, e.g., State Street Comment Letter, (estimating that 
``the additional disclosures that will be required will at a minimum 
double the cost of preparing and filing the Form N-MFP. If purchases 
and sales information is also required, it may increase even 
more.''); Dreyfus Comment Letter (estimating that it ``incurred 
several hundreds of thousands of dollars in technology-related costs 
to build systems required to populate the Form N-MFP for (at the 
time) 51 MMFs,'' and that the reprogramming for each round of 
changes to Form N-MFP ``will require several months of time at tens 
of thousands of dollars in cost for each.''). As discussed in more 
detail below, given that we are not adopting certain costlier 
disclosures such as lot level reporting, the Commission estimates 
that the current approved collection of information for Form N-MFP 
of 45,214 aggregate annual hours will almost double to 83,412 
aggregate annual hours, while external costs will rise from 
$4,424,480 to $4,780,736. See supra section IV.C.2 and infra note 
2363 and accompanying discussion.
    \2344\ The updated industry data on time costs reflects salary 
information from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, supra note 2214.
---------------------------------------------------------------------------

    The Commission understands that approximately 35% of the 559 \2345\ 
(for a total of 196\2346\) money market funds that report information 
on Form N-MFP license a software solution from a third party that is 
used to assist the funds to prepare and file the required information. 
The Commission also understands that approximately 65% of the 559 
\2347\ (for a total of 363) money market funds that report information 
on Form N-MFP retain the services of a third party to provide data 
aggregation and validation services as part of the preparation and 
filing of reports on Form N-MFP on behalf of the fund. The Commission 
estimates that, in the first year, each fund (regardless of whether the 
fund licenses the software or uses a third-party service provider, 
given our assumption that these two options are cost-competitive with 
one another) will incur an additional average annual burden of 85 
hours, at a time cost of $22,069 per fund,\2348\ to prepare and file 
the report on Form N-MFP (as amended) and an average of approximately 
60 additional burden hours (five hours per fund, per filing), at a time 
cost of $15,569 per fund \2349\ each year thereafter.\2350\
---------------------------------------------------------------------------

    \2345\ We are estimating that 559 money market funds will be 
affected by our final amendments to Form N-MFP. This estimate is 
based on a review of reports on Form N-MFP filed with the Commission 
for the month ended February 28, 2014. In the Proposing Release we 
estimated 586 funds would be affected by our proposed amendments. 
See Proposing Release supra note 25 at n.688.
    \2346\ The Commission estimated this 35% in the current burden. 
This estimate is based on the following calculation: 559 Funds x 35% 
= 196 funds.
    \2347\ The Commission estimated this 65% in the current burden. 
This estimate is based on the following calculation: 559 Funds x 65% 
= 363 funds.
    \2348\ This estimate is based on the following calculations: [30 
Hours for the initial monthly filing at a total cost of $7,824 per 
fund (8 hours x $232 blended average hourly rate for a financial 
reporting manager ($266 per hour) and fund senior accountant ($198 
per hour) = $1,856 per fund) + (4 hours x $157 per hour for an 
intermediate accountant = $628 per fund) + (6 hours x $312 per hour 
for a senior database administrator = $1872 per fund) + (4 hours x 
$301 for a senior portfolio manager = $1204 per fund) + (8 hours x 
$283 per hour for a compliance manager = $2,264 per fund)] + [55 
hours (5 hours per fund x 11 monthly filings) at a total cost of 
$14,245 per fund ($259 average cost per fund per burden hour x 55 
hours)]. The additional average annual burden per fund for the first 
year is 85 hours (30 hours (initial monthly filing) + 55 hours 
(remaining 11 monthly filings)) and the additional average cost 
burden per fund for the first year is $22,069 ($7,824 (initial 
monthly filing) + $14,245 (remaining 11 monthly filings = $22,069).
    \2349\ This estimate is based on the following calculations: (16 
Hours x $232 blended average hourly rate for a financial reporting 
manager ($266 per hour) and fund senior accountant ($198 per hour) = 
$3,712 per fund) + (9 hours x $157 per hour for an intermediate 
accountant = $1,413 per fund) + (13 hours x $312 per hour for a 
senior database administrator = $4,056 per fund) + (9 hours x $301 
for a senior portfolio manager = $2,709 per fund) + (13 hours x $283 
per hour for a compliance manager = $3,679 per fund) = 60 hours (16 
+ 9 + 13 + 9 + 13) at a total cost of $15,569 per fund ($3,712 + 
$1,413 + $4,056 + $2,709 + $3,679). Therefore, the additional 
average cost per fund per burden hour is approximately $259 ($15,569 
/ 60 burden hours).
    \2350\ In the Proposing Release, we estimated each fund would 
incur an additional average annual burden of 85 hours (30 hours for 
the initial monthly filing and 55 hours for the remaining monthly 
filings (5 hours per fund, per filing x 11 months)), at a time cost 
of $22,045 per fund, to prepare and file the report on Form N-MFP 
(as proposed) and an average of approximately 60 additional burden 
hours (five hours per fund, per filing), at a time cost of $15,562 
per fund each year thereafter. See Proposing Release, supra note 25, 
at nn.1092 and 1093 and accompanying text.
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    In the Proposing Release, we also discussed that software service 
providers (whether provided by a licensor or third-party service 
provider) would be likely to incur additional external costs to modify 
their software and might pass those costs down to money market funds in 
the form of higher annual licensing fees.\2351\ In the Proposing 
Release, although we did not have the information necessary to provide 
a point estimate of the external costs or the extent to which the 
software service providers would pass down any external costs to funds, 
we were able to estimate a range of costs, from 5% to 10% of current 
annual licensing fees.\2352\ We received no specific comments on this 
estimate. While we are making certain changes to the final amendments 
as described above that may reduce costs, we do not believe that these 
changes would significantly alter our estimated range of additional 
external licensing costs.\2353\ Accordingly, as proposed, the 
Commission estimates that 35% of funds (196 funds) will pay $336 in 
additional external licensing costs each year and 65% of funds (363 
funds) will pay $800 in additional external licensing costs each year 
because of our final amendments to Form N-MFP.\2354\
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    \2351\ See Proposing Release, supra note 25, at n.1094 and 
accompanying text.
    \2352\ Id.
    \2353\ Similar to our previous estimates of time costs, we 
believe our original estimates of external costs continue to be 
reasonable in light of certain changes in the final amendments and 
consideration of commenters' comments. See supra note 2343 and 
accompanying discussion.
    \2354\ As proposed, the Commission estimates that the annual 
licensing fee for 35% of money market funds is $3,360: A 5% to 10% 
increase = $168 - $336 in increased costs; the Commission estimates 
that the annual licensing fee for 65% of money market unds is 
$8,000: A 5% to 10% increase = $400 - $800 in increased costs. See 
also, Proposing Release, supra note 25, at n. 1094 and accompanying 
text.

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[[Page 47946]]

    The Commission therefore estimates that our final amendments to 
Form N-MFP will result in a first-year aggregate additional 47,515 
burden hours \2355\ at a total time cost of $12,336,571 \2356\ plus 
$356,256 in total external costs \2357\ for all funds, and 33,540 
burden hours \2358\ at a total time cost of $8,703,071\2359\ plus 
$356,256 in total external costs \2360\ for all funds each year 
hereafter. Amortizing these additional hourly burdens over three years 
results in an average annual aggregate burden of approximately 38,198 
hours at a total time cost of $9,914,238, and $356,256 in total 
external costs for all funds.\2361\ Finally, the Commission estimates 
that our final amendments to Form N-MFP will result in a total 
aggregate annual collection of information burden of 83,412 hours 
\2362\ and $4,780,736 in external costs.\2363\
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    \2355\ This estimate is based on the following calculation: 559 
Funds x 85 hours = 47,515 burden hours in year one.
    \2356\ This estimate is based on the following calculation: 559 
Funds x $22,069 annual cost per fund in the initial year = 
$12,336,571.
    \2357\ This estimate is based on the following calculation: (196 
Funds x $336 additional external costs = $65,856) + (363 funds x 
$800 additional external costs = $290,400) = $356,256.
    \2358\ This estimate is based on the following calculation: 559 
Funds x 60 hours per fund = 33,540 hours.
    \2359\ This estimate is based on the following calculation: 559 
Funds x $15,569 annual cost per fund in subsequent years = 
$8,703,071.
    \2360\ See supra note 2357.
    \2361\ This estimate is based on the following calculation: 
(47,515 Hours in year 1 + 33,540 hours in year 2 + 33,540 hours in 
year 3) / 3 = 38,198 average annual burden hours; ($12,336,571 in 
year 1 + $8,703,071 in year 2 + $8,703,071 in year 3) / 3 = 
$9,914,238 average annual burden costs; ($356,256 in year 1 + 
$356,256 in year 2 + $356,256 in year 3) / 3 = $356,256 average 
external costs.
    \2362\ This estimate is based on the following calculation: 
Current approved burden of 45,214 hours + 38,198 in additional 
burden hours as a result of our amendments = 83,412 hours.
    \2363\ This estimate is based on the following calculation: 
Current approved burden of $4,424,480 in external costs + $356,256 
in additional external costs as a result of our amendments = 
$4,780,736.
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D. Rule 30b1-8 and Form N-CR

1. Discussion of New Reporting Requirements
    Today we are adopting a new requirement that money market funds 
file a current report with us when certain significant events 
occur.\2364\ Generally, a money market fund will be required to file 
Form N-CR if a portfolio security defaults, an affiliate provides 
financial support to the fund, the fund experiences a significant 
decline in its shadow price, or when liquidity fees or redemption gates 
are imposed and when they are lifted.\2365\ In most cases, a money 
market fund will be required to submit a brief summary filing on Form 
N-CR within one business day of the occurrence of the event, and a 
follow up filing within four business days that includes a more 
complete description and information.\2366\ This requirement is a 
collection of information under the PRA. The information provided on 
Form N-CR will enable the Commission to enhance its oversight of money 
market funds and its ability to respond to market events. The 
Commission will be able to use the information provided on Form N-CR in 
its regulatory, disclosure review, inspection, and policymaking roles. 
Requiring funds to report these events on Form N-CR will provide 
important transparency to fund shareholders, and also will provide 
information more uniformly and efficiently to the Commission. It will 
also provide investors and other market observers with better and 
timelier disclosure of potentially important events. This collection of 
information will be mandatory for money market funds that rely on rule 
2a-7 and the information will not be kept confidential.
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    \2364\ As we proposed, this requirement will be implemented 
through our adoption of new rule 30b1-8, which requires funds to 
file a report on new Form N-CR in certain circumstances. See rule 
30b1-8; Form N-CR. For purposes of the PRA analysis, therefore, the 
burden associated with the requirements of rule 30b1-8 is included 
in the collection of information requirements of Form N-CR.
    \2365\ See Form N-CR Parts B-H. More specifically, these events 
include instances of portfolio security default (Form N-CR Part B), 
financial support (Form N-CR Part C), a decline in a stable NAV 
fund's current NAV per share (Form N-CR Part D), a decline in weekly 
liquid assets below 10% of total fund assets (Form N-CR Part E), 
whether a fund has imposed or removed a liquidity fee or gate (Form 
N-CR Parts E, F and G), or any such other event(s) a Fund, in its 
discretion, may wish to disclose (Form N-CR Part H). In addition, 
Form N-CR Part A will also require a fund to report the following 
general information: (i) The date of the report; (ii) the 
registrant's central index key (``CIK'') number; (iii) the EDGAR 
series identifier; (iv) the Securities Act file number; and (v) the 
name, email address, and telephone number of the person authorized 
to receive information and respond to questions about the filing. 
See Form N-CR Part A. While the Commission estimates the burden of 
reporting the information in response to Part A to be minimal, they 
were considered in the estimates of the burdens incurred generally 
in connection with the preparation, formatting and filing of a 
report under any of the other Parts of Form N-CR.
    \2366\ A report on Form N-CR will be made public on EDGAR 
immediately upon filing.
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2. Estimated Burden
a. Overview of Cost and Burden Changes
    Our cost estimates below generally reflect the costs associated 
with an actual filing of Form N-CR.\2367\ The Proposing Release 
estimated that a fund would annually spend on average approximately 
five burden hours and total time costs of $1,708 to prepare, review and 
submit a report under any Part of Form N-CR.\2368\ In the aggregate, 
the Proposing Release estimated that compliance with new rule 30b1-8 
and Form N-CR would result in a total annual burden of approximately 
341 burden hours and total annual time costs of approximately 
$116,429.\2369\ The Proposing Release estimated 586 money market funds 
would be required to comply with new rule 30b1-8 and Form N-CR, \2370\ 
which would have resulted in an average annual burden of approximately 
0.58 burden hours and average annual time costs of approximately $199 
on a per-fund basis. The Proposing Release further estimated that there 
would be no external costs associated with this collection of 
information.\2371\
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    \2367\ We also recognize the possibility for some advance 
industry discussions and preparation in connection with Form N-CR, 
as discussed in more detail in the text following supra note 1363.
    \2368\ See Proposing Release supra note 25 at n.1203 and 
accompanying text.
    \2369\ See Proposing Release supra note 25 at n.1205 and 
accompanying text.
    \2370\ See Proposing Release supra note 25 at n.1206 and 
accompanying text.
    \2371\ See Proposing Release supra note 25 at discussion 
following n.1206.
---------------------------------------------------------------------------

    As discussed in section III.F above, we are making various changes 
from the proposal to our final amendments, a number of which we expect 
to impact the frequency of filings as well as the costs associated with 
filing a report on Form N-CR.\2372\ For example, with respect to Parts 
B, C and D, we are now permitting filers to split their response into 
an initial and follow-up filing,\2373\ similar to what we proposed for 
Parts E and F in the Proposing Release. We believe this change will 
increase total filing costs by increasing the number of filings. In 
addition, although only one commenter provided specific cost 
estimates,\2374\ we also took into account

[[Page 47947]]

commenters' general concerns and suggestions about the timing and 
burdens of Form N-CR.\2375\ For example, commenters cited the 
particular burdens and the role of the board in drafting and reviewing 
the board disclosures in Parts E and F.\2376\ In light of commenters' 
input, we therefore revisited (and typically increased) our prior cost 
estimates. Recognizing the substantive differences between each Part of 
Form N-CR, we are also breaking out our cost estimates for each Part 
individually, rather than providing just one estimate with respect to 
any Part as in the proposal.\2377\ We further expect, in particular 
with respect to the follow-up reports under Parts B through F as well 
as any reports on Part H, that certain funds may engage legal counsel 
to assist with the drafting and review of Form N-CR, thereby incurring 
additional external costs.\2378\ Accordingly, we have added an estimate 
for new Part H and, in the discussion below, we are also updating and 
providing a more nuanced estimate of the costs associated with filing a 
report with respect to each of Parts B though G of Form N-CR.
---------------------------------------------------------------------------

    \2372\ See supra sections III.F.2-5 for a more detailed 
discussion of each of our final amendments.
    \2373\ See supra section III.F.7 (Timing of Form N-CR).
    \2374\ See supra note 1295 and accompanying text. As discussed 
in that section, because today we are allowing funds to file a 
response to the Items discussed by the commenter within four 
business days instead of just one business day, we expect that the 
costs of filing Form N-CR should be significantly reduced from this 
commenter's estimates. Id.
    \2375\ See, e.g., supra sections III.F.7 (Timing of Form N-CR) 
and III.F.8 (Operational Costs: Overview).
    \2376\ See, e.g., IDC Comment Letter (``Any public disclosure 
about a board's decision-making process would require careful and 
thoughtful drafting and multiple layers of review (by board counsel, 
fund counsel, and the directors, among others).''); Stradley Ronon 
Comment Letter; SIFMA Comment Letter.
    \2377\ See supra note 2368 and accompanying text.
    \2378\ See supra note 1347 and accompanying discussion.
---------------------------------------------------------------------------

b. Part B: Default Events
    As proposed,\2379\ we estimate that the Commission would receive, 
in the aggregate, an average of 20 sets \2380\ of initial and follow-up 
reports \2381\ per year in response to Part B. Taking into account a 
blend of legal and financial in-house professionals,\2382\ we estimate 
that a fund would on average spend a total of 13.5 burden hours \2383\ 
and time costs of $4,830 \2384\ for one set of initial and follow-up 
reports in response to Part B. Because some funds may also engage 
outside legal counsel,\2385\ we estimate funds will also incur on 
average external costs of approximately $1,000 for one set of 
reports.\2386\ The Commission therefore estimates that the total annual 
burden for Part B reporting would be 270 burden hours, time costs of 
$96,600, and external costs of $20,000.\2387\
---------------------------------------------------------------------------

    \2379\ See Proposing Release supra note 25 at n. 1107 and 
accompanying text.
    \2380\ This estimate is based on the Commission's current 
estimate of an average of 20 notifications of an event of default or 
insolvency sent via email to the Director of IM pursuant to rule 2a-
7(c)(7)(iii) each year. See Submission for OMB Review, Comment 
Request, Extension: Rule 2a-7, OMB Control No. 3235-0268, Securities 
and Exchange Commission 77 FR 236 (Dec. 7, 2012). We believe that 
this estimate is likely to be high, in particular when markets are 
not in crisis as they were during 2008 or 2011. However, we are 
continuing to use this higher estimate to be conservative in our 
analysis.
    \2381\ A fund must file a report on Form N-CR responding to 
Items B.1 through B.4 on the first business day after the initial 
date on which a default or event of insolvency contemplated in Item 
B occurs. A fund must amend its initial report on Form N-CR to 
respond to Item B.5 by the fourth business day after the initial 
date on which a default or event of insolvency contemplated in Item 
B occurs. See Form N-CR Item B Instructions.
    \2382\ Recognizing that, depending on the particular 
circumstances, different members of a fund's financial team may 
assist with the preparation of Form N-CR in varying degrees, we have 
estimated the time costs for a financial professional to be $255 per 
hour, which is the blended average hourly rate for a senior 
portfolio manager ($301), financial reporting manager ($266), and 
senior accountant ($198). For similar reasons, we have estimated the 
time costs for a legal professional to be $440 per hour, which is 
the blended average hourly rate for a deputy general counsel ($546) 
and compliance attorney ($334). In the Proposing Release, we based 
our estimate of time costs on an in-house attorney and in-house 
accountant only. See Proposing Release supra note 25 at n.1111 and 
accompanying text. As noted in this section, we are making these and 
other changes to provide a more nuanced estimate of the costs 
associated with filing a report on Part B of Form N-CR.
    \2383\ When filing a report, the Commission estimates that a 
fund would spend on average approximately 3 hours of legal 
professional time and 3 hours of financial professional time to 
prepare, review and submit an initial filing. In addition, the 
Commission estimates that a fund would spend on average 
approximately 4.5 hours of legal professional time and 3 hours of 
financial professional time to prepare, review and submit a follow-
up amendment. The estimates of the average legal professional time 
above have already been reduced by the corresponding average amount 
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2386.
    \2384\ This estimate is based on the following calculations: (3 
Hours for the initial filing + 4.5 hours for the follow-up filing) x 
$440 per hour for a legal professional = $3,300) + ((3 hours for the 
initial filing + 3 hours for the follow-up filing) x $255 per hour 
for a financial professional = $1,530) = 13.5 burden hours and time 
costs of $4,830.
    \2385\ We estimate the cost for outside legal counsel to be $400 
per hour. This is based on an estimated $400 per hour cost for 
outside legal services, and is the same estimate used by the 
Commission for these services in the ``Exemptions for Advisers to 
Venture Capital Funds, Private Fund Advisers With Less Than $150 
Million Under Management, and Foreign Private Advisers'' final rule: 
SEC Release No. IA-3222 (June 22, 2011); [76 FR 39646 (July 6, 
2011)].
    \2386\ Commenters provided us with no specific comments that 
would allow us to estimate with any precision to what extent funds 
may engage legal counsel to assist in the preparation of Form N-CR. 
However, for purposes of this PRA, we estimate that in approximately 
half of all instances funds will engage legal counsel to assist in 
the preparation of a set of initial and follow up filings responding 
to Part B of Form N-CR. In such cases, we estimate that 
approximately half of the total legal professional time that in-
house counsel would have otherwise spent on responding to Part B of 
Form N-CR will be shifted to outside counsel. Accordingly, a quarter 
of the total legal professional time that would otherwise have been 
spent on responding to Part B of Form N-CR, or 2.5 hours, will be 
shifted from in-house counsel to outside counsel (\1/2\ of all 
instances x \1/2\ legal professional time = \1/4\ aggregate legal 
professional time). Accordingly, we estimate that funds will incur 
additional external legal costs of $1,000 (2.5 hours x $400 per hour 
for outside counsel) per set of initial and follow-up reports in 
response to Part B.
    \2387\ This estimate is based on the following calculation: 20 
Reports per year x 13.5 burden hours per report = 270 burden hours; 
20 reports per year x $4,830 time cost per report = $96,600 in time 
costs; 20 reports per year x $1,000 external cost per report = 
$20,000 in external costs.
---------------------------------------------------------------------------

c. Part C: Financial Support
    In a change from the proposal, we have made modifications to the 
definition of financial support in Part C of Form N-CR,\2388\ which we 
estimate will impact the frequency of filings on Part C of Form N-CR. 
Accordingly, updating our estimate from the proposal,\2389\ we estimate 
that the Commission will receive, in the aggregate, an average of 30 
sets \2390\ of initial and follow-up reports \2391\ per

[[Page 47948]]

year in response to Part C. Taking into account a blend of legal and 
financial in-house professionals,\2392\ we estimate that a fund will on 
average spend a total of 18.5 burden hours \2393\ and time costs of 
approximately $6,660 \2394\ for one set of initial and follow-up 
reports in response to Part C. We also estimate funds will also incur 
on average external costs of approximately $1,400 for one set of 
reports.\2395\ The Commission therefore estimates that the total annual 
burden for Part C reporting will be 555 burden hours, time costs of 
$199,800, and external costs of $42,000.\2396\
---------------------------------------------------------------------------

    \2388\ See supra section III.F.3 (Definition of Financial 
Support).
    \2389\ See Proposing Release supra note 25 at n.1108 and 
accompanying text (estimating an average of 40 reports per year 
filed in response to an event specified on Part C).
    \2390\ This estimate is based on our current estimate of an 
average of 25 notifications of certain rule 17a-9 security purchases 
that money market funds currently send via email to the Director of 
IM pursuant to rule 2a-7(c)(7)(iii) each year. See Submission for 
OMB Review, Comment Request, Extension: Rule 2a-7, OMB Control No. 
3235-0268, Securities and Exchange Commission 77 FR 236 (Dec. 7, 
2012). Because money market funds will be required to file a report 
in response to Part C of Form N-CR if the fund receives any form of 
financial support from the fund's sponsor or other affiliated person 
(which support includes, but is not limited to, a rule 17a-9 
security purchase), the Commission estimates that the Commission 
will receive a greater number of reports on Form N-CR Part C than 
the number of notifications of rule 17a-9 security purchases that it 
currently receives. In the Proposing Release, we originally 
estimated 40 filings per year under Part C of Form N-CR. See 
Proposing Release supra note 25 at n.735 and accompanying text. As 
discussed in supra section III.F.3, today we are adopting certain 
exclusions from the definition of financial support that will narrow 
the definition to a certain degree. Correspondingly, in anticipation 
of a moderate reduction in instances that meet the definition as 
amended today, we predict an estimated 30 filings per year under 
Part C of Form N-CR. We believe that this estimate is likely to be 
high, in particular when markets are not in crisis as they were 
during 2008 or 2011. However, we are using this higher estimate to 
be conservative in our analysis.
    \2391\ A fund must file a report on Form N-CR responding to 
Items C.1 through C.7 on the first business day after the initial 
date on which any financial support contemplated in Item C is 
provided to the fund. A fund must amend its initial report on Form 
N-CR to respond to Items C.8 through C.10 by the fourth business day 
after the initial date on which any financial support contemplated 
in Item C is provided to the fund. See Form N-CR Item C 
Instructions.
    \2392\ See supra note 2382.
    \2393\ When filing a report, the Commission estimates that a 
fund will spend on average approximately 4.5 hours of legal 
professional time and 4 hours of financial professional time to 
prepare, review and submit an initial filing. In addition, the 
Commission estimates that a fund will spend on average approximately 
6 hours of legal professional time and 4 hours of financial 
professional time to prepare, review and submit a follow-up 
amendment. The estimates of the average legal professional time 
above have already been reduced by the corresponding average amount 
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2395.
    \2394\ This estimate is based on the following calculations: 
((4.5 Hours for the initial filing + 6 hours for the follow-up 
filing) x $440 per hour for a legal professional = $4,620) + ((4 
hours for the initial filing + 4 hours for the follow-up filing) x 
$255 per hour for a financial professional = $2,040) = 18.5 burden 
hours and time costs of $6,660.
    \2395\ Using the same assumptions as with respect to Part B in 
supra note 2386, we estimate that approximately a quarter of the 
total legal professional time that would otherwise have been spent 
on responding to Part C of Form N-CR, or 3.5 hours, will be shifted 
from in-house counsel to outside counsel. Accordingly, we estimate 
that funds will incur additional external legal costs of $1,400 (3.5 
hours x $400 per hour for outside counsel) per set of initial and 
follow-up reports in response to Part C.
    \2396\ This estimate is based on the following calculation: 30 
Reports per year x 18.5 burden hours per report = 555 burden hours; 
30 reports per year x $6,660 time cost per report = $199,800 in time 
costs; 30 reports per year x $1,400 external cost per report = 
$42,000 in external costs.
---------------------------------------------------------------------------

d. Part D: Shadow Price Declines
    In a change from the proposal, we estimate that the Commission will 
receive, in the aggregate, an average of 0.3 sets \2397\ of initial and 
follow-up reports \2398\ per year in response to Part D. Taking into 
account a blend of legal and financial in-house professionals,\2399\ we 
estimate that a fund will on average spend a total of 13.5 burden hours 
\2400\ and time costs of approximately $4,830 \2401\ for one set of 
initial and follow-up reports in response to Part D. We also estimate 
funds will also incur on average external costs of approximately $1,000 
for one set of reports.\2402\ The Commission therefore estimates that 
the total annual burden for Part D reporting will be four burden hours, 
time costs of $1,449, and external costs of $300.\2403\
---------------------------------------------------------------------------

    \2397\ Commission staff analyzed form N-MFP data from November 
2010 to February 2014 and found that only one non-institutional fund 
had a \1/4\ of 1 percent deviation from the stable $1.00 per share 
NAV. 1 fund in over 39 months is equivalent to less than 1 (1 x 12 / 
39 = 0.31) funds per year. See also supra note 1394. In the 
Proposing Release, we had estimated 0.167 reports filed per year in 
respect of Part D. See Proposing Release, supra note 25, at n.1205. 
We revised this estimate to reflect more accurate accounting and 
updated data.
    \2398\ A retail or government money market fund must file a 
report on Form N-CR responding to Items D.1 and D.2 on the first 
business day after the initial date on which the fund's current NAV 
deviates downward from its intended stable price per share by more 
than \1/4\ of 1 percent. A fund must amend its initial report on 
Form N-CR to respond to Item D.3 by the fourth business day after 
the initial date on which the fund's current NAV deviates downward 
from its intended stable price per share by more than \1/4\ of 1 
percent. See Form N-CR Item D Instructions.
    \2399\ See supra note 2382.
    \2400\ When filing a report, the Commission estimates that a 
fund will spend on average approximately 3 hours of legal 
professional time and 3 hours of financial professional time to 
prepare, review and submit an initial filing. In addition, the 
Commission estimates that a fund will spend on average approximately 
4.5 hours of legal professional time and 3 hours of financial 
professional time to prepare, review and submit a follow-up 
amendment. The estimates of the average legal professional time 
above have already been reduced by the corresponding average amount 
of time that we estimate will be shifted in the aggregate from in-
house counsel to outside counsel. See infra note 2402.
    \2401\ This estimate is based on the following calculations: ((3 
Hours for the initial filing + 4.5 hours for the follow-up filing) x 
$440 per hour for a legal professional = $3,300) + ((3 hours for the 
initial filing + 3 hours for the follow-up filing) x $255 per hour 
for a financial professional = $1,530) = 13.5 burden hours and time 
costs of $4,830.
    \2402\ Using the same assumptions as with respect to Part B in 
supra note 2386, we estimate that approximately a quarter of the 
total legal professional time that would otherwise have been spent 
on responding to Part D of Form N-CR, or 2 hours, will be shifted 
from in-house counsel to outside counsel. Accordingly, we estimate 
that funds will incur additional external legal costs of $1,000 (2.5 
hours x $400 per hour for outside counsel) per set of initial and 
follow-up reports in response to Part D.
    \2403\ This estimate is based on the following calculation: 0.3 
Reports per year x 13.5 burden hours per report = 4 burden hours; 
0.3 reports per year x $4,830 time cost per report = $1,449 in time 
costs; 0.3 reports per year x $1,000 external cost per report = $300 
in external costs.
---------------------------------------------------------------------------

e. Part E: Imposition of Liquidity Fees
    In addition to other changes from the proposal,\2404\ we have made 
modifications to the weekly liquid asset thresholds permitting or 
triggering board consideration of a liquidity fee in Part E of Form N-
CR.\2405\ We therefore have updated our estimates of the frequency of 
filings under Part E.\2406\ Moreover, in particular with respect to the 
board disclosures, we expect that most if not all funds may engage 
outside legal counsel to assist with the drafting and review of Form N-
CR, thereby incurring additional external costs.\2407\ Accordingly, we 
estimate that the Commission will receive, in the aggregate, an average 
of 1.2 sets \2408\ of initial and follow-up reports \2409\ per year in 
response to an event specified on Part E. Taking into account a blend 
of legal and financial in-house professionals,\2410\ as well as time 
spent by the board reviewing the

[[Page 47949]]

disclosure,\2411\ we estimate that a fund will on average spend a total 
of 20 burden hours \2412\ and time costs of approximately $10,910 
\2413\ for one set of initial and follow-up reports in response to Part 
E. Because we expect that most, if not all, funds may also engage 
outside legal counsel to assist with the drafting and review of Part 
E,\2414\ we also estimate funds will also incur on average external 
costs of approximately $3,600 per set of reports.\2415\ The Commission 
therefore estimates that the total annual burden for Part E reporting 
will be 24 burden hours, time costs of $13,092, and external costs of 
$4,320.\2416\
---------------------------------------------------------------------------

    \2404\ See supra section III.F.5 for a discussion of all our 
final amendments to Part E. For example, we have made modifications 
to the board disclosure requirements. See supra section III.F.5 
(Board Disclosures). In addition, as noted in supra note 2376, 
commenters cited the particular burdens and the role of the board in 
drafting and reviewing the board disclosures in Parts E and F. 
Accordingly, taking into account these and our other changes to Part 
E, we have increased our cost estimates for Part E.
    \2405\ See supra section III.F.5 (Conforming Changes).
    \2406\ See infra note 2408 and accompanying text.
    \2407\ See supra note 1377 and accompanying discussion.
    \2408\ For purposes of this estimate, the Commission estimates 
that 0.6 funds per year will file a report triggered by the 10% 
weekly liquid asset threshold. See supra section III.F.5 
(Operational Costs of Part E, F, and G: Imposition and Lifting of 
Fees and Gates). In the Proposing Release, we had previously 
estimated a total of 4 reports in response to Parts E and F based on 
the previously proposed higher 15% weekly liquid asset trigger. See 
Proposing Release supra note 25 at n.1202. In addition, the DERA 
Study analyzed the distribution of weekly liquid assets and found 
that 83 prime funds per year had their weekly liquid asset 
percentages fall below 30%. See supra section III.F.5 (Operational 
Costs of Part E, F, and G: Imposition and Lifting of Fees and 
Gates). We are unable to estimate with any specificity how many of 
these 83 prime funds would have decided to impose a discretionary 
liquidity fee upon breaching the 30% weekly liquid asset threshold. 
However, we generally expect relatively few funds will impose a 
discretionary liquidity fee given its voluntary nature and potential 
costs on redeeming shareholders. For purposes of this PRA, we 
estimate that funds will voluntarily impose a liquidity fee at most 
as often as they will be required to consider a liquidity fee based 
on the 10% weekly liquid asset trigger. Accordingly, the Commission 
conservatively estimates that 0.6 additional funds per year will 
file a report in response to Part E because it breached the 30% 
weekly liquid asset threshold and their board determined to impose 
such a discretionary liquidity fee. Together with the filings 
triggered by the 10% weekly liquid asset threshold, this will result 
in a total of 1.2 sets of filings in response to Part E per year. 
Although we believe this estimate is likely to be high, we are using 
this estimate to be conservative in our analysis. See supra section 
III.F.5 (Operational Costs of Part E, F, and G: Imposition and 
Lifting of Fees and Gates).
    \2409\ A fund must file a report on Form N-CR responding to 
Items E.1 through E.4 on the first business day after the initial 
date on which the reporting requirement under Part E was triggered. 
A fund must amend its initial report on Form N-CR to respond to 
Items E.5 and E.6 by the fourth business day after the initial date 
on which the reporting requirement under Part E was triggered. See 
Form N-CR Item E Instructions.
    \2410\ See supra note 2382.
    \2411\ For purposes of this PRA, we estimate time costs of 
$4,400 per hour for a board of 8 directors. See supra note 2214.
    \2412\ When filing a report, the Commission estimates that a 
fund would spend on average approximately 3 hours of legal 
professional time and 4 hours of financial professional time to 
prepare, review and submit an initial filing. In addition, the 
Commission estimates that a fund would spend on average 
approximately 6 hours of legal professional time and 6 hours of 
financial professional time to prepare, review and submit a follow-
up amendment. The Commission also estimates that a fund would spend 
1 hour for a board of directors to review the reports. The estimates 
of the average legal professional time above have already been 
reduced by the corresponding average amount of time that we estimate 
will be shifted in the aggregate from in-house counsel to outside 
counsel. See infra note 2415.
    \2413\ This estimate is based on the following calculations: ((3 
Hours for the initial filing + 6 hours for the follow-up filing) x 
$440 per hour for a legal professional = $3,960) + ((4 hours for the 
initial filing + 6 hours for the follow-up filing) x $255 per hour 
for a financial professional = $2,550) + (1 hour x $4,400 per hour 
for a board of 8 directors = $4,400) = 20 burden hours and time 
costs of $10,910.
    \2414\ Because, for the reason discussed in supra note 1301 and 
accompanying text, the potential imposition of a liquidity fee is 
one of the most significant events that can occur to money market 
funds, to be conservative we estimate that all funds would seek 
outside counsel for purposes of this estimate.
    \2415\ On average, we estimate that approximately half of the 
total legal professional time that in-house counsel would have 
otherwise spent on reviewing and responding to Part E of Form N-CR 
will be shifted to outside counsel. Accordingly, for purposes of 
this PRA, we estimate that a total of 9 hours will be shifted from 
in-house counsel to outside counsel. Accordingly, we estimate that 
funds would incur external legal costs of $3,600 (9 hours x $400 per 
hour for outside counsel) per set of initial and follow-up reports 
in response to Part E.
    \2416\ This estimate is based on the following calculation: 1.2 
Reports per year x 20 burden hours per report = 24 burden hours; 1.2 
reports per year x $10,910 time cost per report = $13,092 in time 
costs; 1.2 reports per year x $3,600 external cost per report = 
$4,320 in external costs.
---------------------------------------------------------------------------

f. Part F: Suspension of Fund Redemptions
    In addition to other changes from the proposal,\2417\ we have 
increased the weekly liquid asset threshold permitting boards to impose 
a discretionary gate.\2418\ We therefore have updated our estimates of 
the frequency of filings under Part F.\2419\ In particular with respect 
to the board disclosures, we expect that most if not all funds may 
engage legal counsel to assist with the drafting and review of Form N-
CR, thereby incurring additional external costs.\2420\ Accordingly, we 
estimate that the Commission will receive, in the aggregate, an average 
of 0.6 sets \2421\ of initial and follow-up reports \2422\ per year in 
response to an event specified on Part F. Taking into account a blend 
of legal and financial in-house professionals,\2423\ as well as time 
spent by the board reviewing the disclosure, we estimate that a fund 
will on average spend a total of 20 burden hours \2424\ and time costs 
of approximately $10,910 \2425\ for one set of initial and follow-up 
reports in response to Part F. Because we expect most if not all funds 
may also engage legal counsel to assist with the drafting and review of 
Form N-CR,\2426\ we estimate funds also further incur on average 
external costs of approximately $3,600 for each set of reports.\2427\ 
The Commission therefore estimates that the total annual burden for 
Part F reporting will be 12 burden hours, time costs of $6,546, and 
external costs of $2,160.\2428\
---------------------------------------------------------------------------

    \2417\ See supra section III.F.5 for a discussion of all our 
final amendments to Part F. For example, we have made modifications 
to the board disclosure requirements. See supra section III.F.5 
(Board Disclosures). In addition, as noted in supra note 2376, 
commenters cited the particular burdens and the role of the board in 
drafting and reviewing the board disclosures in Parts E and F. 
Accordingly, taking into account these and our other changes to Part 
F, we have increased our cost estimates for Part F.
    \2418\ See supra section III.F.5 (Conforming Changes).
    \2419\ See infra note 2421 and accompanying text.
    \2420\ See supra note 1376 and accompanying discussion.
    \2421\ In the Proposing Release, we had previously estimated a 
total of 4 reports in response to Parts E and F based on the 
previously proposed 15% weekly liquid asset trigger. See Proposing 
Release supra note 25 at n.1202. However, we are revising this 
estimate in light of the amended higher 30% weekly liquid asset 
threshold for discretionary gates. In particular, the DERA Study 
found that 83 prime funds per year had their weekly liquid asset 
percentages fall below 30%. See supra section III.F.8 (Operational 
Costs of Part E, F, and G: Imposition and Lifting of Fees and 
Gates). Similar to discretionary liquidity fees, we are unable to 
estimate with any specificity how many of these 83 prime funds would 
have decided to impose a discretionary gate upon breaching the 30% 
weekly liquid asset threshold. Cf. supra note 2408. However, we 
conservatively estimate the number of instances in which a fund 
breached the 30% weekly liquid asset threshold and its board 
determined to impose a voluntary gate to be equal to the number of 
instances in which a fund breached the 30% weekly liquid asset 
threshold and its board determined to impose a voluntary fee. This 
results in an estimate of approximately 0.6 sets of initial and 
follow-up reports filed per year in response to Part F. Although we 
believe this estimate is likely to be high, we are using this 
estimate to be conservative in our analysis. See supra section 
III.F.8 (Operational Costs of Part E, F, and G: Imposition and 
Lifting of Fees and Gates).
    \2422\ A fund must file a report on Form N-CR responding to 
Items F.1 and F.2 on the first business day after the initial date 
on which a fund suspends redemptions. A fund must amend its initial 
report on Form N-CR to respond to Items F.3 and F.4 by the fourth 
business day after the initial date on which a fund suspends 
redemptions. See Form N-CR Item F Instructions.
    \2423\ See supra note 2382.
    \2424\ When filing a report, the Commission estimates that a 
fund would spend on average approximately 3 hours of legal 
professional time and 4 hours of financial professional time to 
prepare, review and submit an initial filing. In addition, the 
Commission estimates that a fund would spend on average 
approximately 6 hours of legal professional time and 6 hours of 
financial professional time to prepare, review and submit a follow-
up amendment. The Commission also estimates that a fund would spend 
1 hour for a board of directors to review the reports. The estimates 
of the average legal professional time above have already been 
reduced by the corresponding average amount of time that we estimate 
will be shifted in the aggregate from in-house counsel to outside 
counsel. See infra note 2427.
    \2425\ This estimate is based on the following calculations: ((3 
Hours for the initial filing + 6 hours for the follow-up filing) x 
$440 per hour for a legal professional = $3,960) + ((4 hours for the 
initial filing + 6 hours for the follow-up filing) x $255 per hour 
for a financial professional = $2,550) + (1 hour x $4,400 per hour 
for a board of 8 directors = $4,400) = 20 burden hours and time 
costs of $10,910.
    \2426\ Because, for the reason discussed in supra note 1301 and 
accompanying text, the potential imposition of a gate is one of the 
most significant events that can occur to money market funds, to be 
conservative we estimate that all funds would seek outside counsel 
for purposes of this estimate.
    \2427\ On average, we estimate that approximately half of the 
total legal professional time that in-house counsel would have 
otherwise spent on reviewing and responding to Part F of Form N-CR 
will be shifted to outside counsel. Accordingly, for purposes of 
this PRA, we estimate that a total of 8 hours will be shifted from 
in-house counsel to outside counsel. Accordingly, we estimate that 
funds will incur external legal costs of $3,600 (9 hours x $400 per 
hour for outside counsel) per set of initial and follow-up reports 
in response to Part F.
    \2428\ This estimate is based on the following calculation: 0.6 
Reports per year x 20 burden hours per report = 12 burden hours; 0.6 
reports per year x $10,910 time cost per report = $6,546 in time 
costs; 0.6 reports per year x $3,600 external cost per report = 
$2,160 in external costs.
---------------------------------------------------------------------------

g. Part G: Removal of Liquidity Fees and/or Resumption of Fund 
Redemptions
    As discussed in the Proposing Release, we continue to believe the 
frequency of filings under Part G on Form N-CR to be closely correlated 
to the frequency of filings under Parts E and F.\2429\ Given our 
revised estimates

[[Page 47950]]

of the number of filings under Parts E and F,\2430\ we are 
correspondingly updating our estimate of the number of filings under 
Part G. We are further updating our estimates for Part G, because the 
Commission expects the cost per filing associated with responding to 
Part G to be lower than for Parts E or F.\2431\ Unlike Parts B through 
F and H, for which we have included estimated external costs to account 
for the possibility that funds may engage legal counsel to assist in 
the preparation and review of Form N-CR,\2432\ we have not done so here 
because of the relative simplicity of Part G. Accordingly, we estimate 
that the Commission will receive, in the aggregate, an average of 1.8 
reports \2433\ per year in response to Part G. Taking into account a 
blend of legal and financial in-house professionals,\2434\ we estimate 
that a fund will on average spend a total of two burden hours \2435\ 
and time costs of approximately $695 \2436\ for a filing in response to 
Part G. The Commission therefore estimates that the total annual burden 
for Part G reporting will be 3.6 burden hours, and time costs of 
$1,251.\2437\
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    \2429\ See, e.g., Proposing Release supra note 25 at n.1202 and 
accompanying discussion. We expect there to be a close correlation 
because Part G requires disclosure of the lifting of any liquidity 
fee or gate imposed in connection with Part E or F.
    \2430\ See supra notes 2408 and 2421.
    \2431\ The Proposing Release estimated that a fund would spend 
on average approximately 5 burden hours and total time costs of 
$1,708 to prepare, review, and submit a report under any Part of 
Form N-CR. See Proposing Release supra note 25 at n.1203 and 
accompanying text. However, we expect a response to Part G to be 
shorter than under Parts E or F, given that Part G only requires 
disclosure of the date on which a fund removed a liquidity fee and/
or resumed Fund redemptions. See Form N-CR Item G.1. In addition, 
unlike Part E or F, Part G would not require any follow-up report.
    \2432\ See supra IV.D.2.g for our discussion of the external 
costs of Parts B through F; see also infra this section for our 
discussion of the external costs of Part H.
    \2433\ As discussed in section III.F, we expect the frequency of 
Part G filings will be closely correlated to any filings under Part 
E of F, given that Part G will disclose the lifting of any liquidity 
fee or gate imposed in connection with Part E or F. See supra 
section III.F.8 (Operational Costs of Part E, F, and G: Imposition 
and Lifting of Fees and Gates). In particular, for purposes of this 
estimate the Commission estimates that 1.8 funds per year will file 
a report in response to Part G, based on the assumption that each 
time a fund files a report under Parts E or F it will also 
eventually file a report under Part G. We believe this to be a high 
estimate given that, among other things, at least some funds that 
impose a liquidity fee or gate will likely to go out of business 
(and thus would never reopen), although we are unable to predict 
with certainty how many would do so.
    \2434\ See supra note 2382.
    \2435\ When filing a report, the Commission estimates that a 
fund will spend on average approximately 1 hour of legal 
professional time and 1 hour of financial professional time to 
prepare, review, and submit a filing in response to Part G.
    \2436\ This estimate is based on the following calculations: (1 
Hour x $440 per hour for a legal professional = $440) + (1 hour x 
$255 per hour for a financial professional = $255) = 2 burden hours 
and time costs of $695.
    \2437\ This estimate is based on the following calculation: 1.8 
Reports per year x 2 burden hours per report = 3.6 burden hours; 1.8 
reports per year x $695 time cost per report = $1,251 in time costs.
---------------------------------------------------------------------------

h. Part H: Other Events
    Given the broad scope and voluntary nature of the optional 
disclosure under Part H of Form N-CR, which is new from the proposal, 
we believe that, in an event of filing, a fund's particular 
circumstances that led it to decide to make such a voluntary disclosure 
will be the predominant factor in determining the time and costs 
associated with filing a report on Part H. To be conservative, we also 
expect that some funds may engage outside legal counsel to assist with 
the drafting and review of Part H, thereby incurring additional 
external costs.\2438\ We estimate that the Commission will receive, in 
the aggregate, approximately 15 reports \2439\ per year in response to 
Part H of Form N-CR. Taking into account a blend of legal and financial 
in-house professionals,\2440\ we estimate that a fund will on average 
spend a total of four burden hours \2441\ and time costs of 
approximately $1,390 \2442\ for one set of initial and follow-up 
reports in response to Part H. We also estimate funds will also incur 
on average external legal costs of approximately $800 per report.\2443\ 
The Commission therefore estimates that the total annual burden for 
Part H reporting will be 60 burden hours, time costs of $20,850, and 
external costs of $12,000.\2444\
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    \2438\ See supra note 2386 and accompanying discussion.
    \2439\ For purposes of this estimate, the Commission 
conservatively estimates that funds will include a disclosure under 
Part H in about a quarter of the instances they submit a follow-up 
filing under Parts B through F, as well as with respect to a quarter 
of all filings under Part G. Because of the timing constraints, we 
generally would not expect that funds will make a Part H disclosure 
in an initial filing. However, given the possibility that funds 
might make a Part H disclosure in the initial filing or on a stand-
alone basis, we conservatively estimate one additional Part H filing 
per year under each scenario. We therefore estimate an annual total 
of approximately 15 filings in response to Part H based on the 
following calculation: (20 sets of Part B filings per year) + (30 
sets of Part C filings per year) + (0.3 sets of Part D filings per 
year) + (1.2 sets of Part E filings per year) + (0.6 sets of Part F 
filings per year) + (1.8 Part G filings per year) = approximately 54 
Parts B-G filings per year. (54 Parts B-G filings per year / 4) + (2 
additional Part H filings per year in an initial filing or on a 
stand-alone basis) = approximately 15 Part H filings per year.
    \2440\ See supra note 2382.
    \2441\ This estimate is derived in part from our current PRA 
estimate for Form 8-K under the Exchange Act. See ``Form 8-K, 
Current Report Pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934'' (OMB Control No. 3235-0060), available at 
http://www.reginfo.gov. In particular, we estimate that Form 8-K 
takes approximately 5 hours per response if rounded up to the next 
whole hour. As an initial step, we conservatively added an 
additional hour, for a total of 6 hours. Of this total, we estimate 
that an average of 2 hours will be shifted to outside legal counsel 
(corresponding to the 2 hours of legal professional time discussed 
immediately below). Accordingly, when filing a report, the 
Commission estimates that a fund would spend on average 
approximately 2 hours of legal professional time and 2 hours of 
financial professional time to prepare, review and submit a response 
to Part H.
    \2442\ This estimate is based on the following calculations: (2 
Hours x $440 per hour for a legal professional = $880) + (2 hours x 
$255 per hour for a financial professional = $510) = 4 burden hours 
and time costs of $1,390.
    \2443\ In particular, we expect that funds are more likely to 
file a report on Part H when there are more complex events that need 
to be addressed, which correspondingly we believe will make it 
significantly more likely that funds will engage legal counsel. To 
be conservative, we estimate that funds would engage outside legal 
counsel in all cases they file a response to Part H. Accordingly, we 
estimate that funds would incur additional external legal costs of 
$800 (2 hours x $400 per hour for outside counsel) per set of 
initial and follow-up reports in response to Part H (with the 
estimated 2 hours of outside counsel time corresponding to the 2 
hours of legal professional time we estimate in supra note 2441).
    \2444\ This estimate is based on the following calculation: 15 
Reports per year x 4 burden hours per report = 60 burden hours; 15 
reports per year x $1,390 time cost per report = $20,850 in time 
costs; 15 reports per year x $800 external cost per report = $12,000 
in external costs.
---------------------------------------------------------------------------

i. Aggregate Burden of Form N-CR
    In the aggregate, we estimate that compliance with Form N-CR will 
result in a total annual burden of approximately 929 burden 
hours,\2445\ total annual time costs of approximately $339,588,\2446\ 
and total external costs of $80,780.\2447\ Given an estimated 559 money 
market funds that will be required to comply with Form N-CR,\2448\ this 
will result in an average annual burden of approximately 1.7 burden 
hours, average annual time costs of approximately $607 on a per-fund 
basis, and average annual external costs of $145.\2449\
---------------------------------------------------------------------------

    \2445\ This estimate is based on the following calculation: 270 
Hours (Part B) + 555 hours (Part C) + 4 hours (Part D) + 24 hours 
(Part E) + 12 hours (Part F) + 3.6 hours (Part G) + 60 hours (Part 
H) = 929 aggregate burden hours.
    \2446\ This estimate is based on the following calculation: 
$96,600 (Part B) + $199,800 (Part C) + $1,449 (Part D) + $13,092 
(Part E) + $6,546 (Part F) + $1,251 (Part G) + $20,850 (Part H) = 
$339,588 aggregate time costs.
    \2447\ This estimate is based on the following calculation: 
$20,000 (Part B) + $42,000 (Part C) + $300 (Part D) + $4,320 (Part 
E) + $2,160 (Part F) + $12,000 (Part H) = $80,780 total external 
costs.
    \2448\ See supra note 2340.
    \2449\ This estimate is based on the following calculation: 929 
Burden hours / 559 funds = 1.7 annual burden hours per fund; 
$339,588 / 559 funds = $607 annual time costs per fund; $80,780 / 
559 funds = $145 annual external costs per fund.
---------------------------------------------------------------------------

E. Rule 34b-1(a)

    Rule 34b-1 under the Investment Company Act is an antifraud 
provision

[[Page 47951]]

governing sales material that accompanies or follows the delivery of a 
statutory prospectus. Among other things, rule 34b-1 deems to be 
materially misleading any advertising material by a money market fund 
required to be filed with the Commission by section 24(b) of the Act 
that includes performance data, unless such advertising also includes 
the rule 482(b)(4) risk disclosures already discussed in section IV.F 
below. In the Proposing Release, the Commission noted that the proposal 
to amend the wording of the rule 482(b)(4) risk disclosures would 
indirectly affect rule 34b-1(a), although the Commission proposed no 
changes to rule 34b-1(a) itself. We also noted that our discussion of 
the amendments to rule 482(b)(4) accounted for the burdens associated 
with the wording changes to the risk disclosures in money market fund 
advertising, and by complying with our amendments to rule 482(b)(4), 
money market funds would also automatically remain in compliance with 
rule 34b-1(a) as affected by these amendments. Therefore, any burdens 
associated with rule 34b-1(a) as a result of our proposed amendments to 
rule 482(b)(4) were already accounted for in the Proposing Release's 
Paperwork Reduction Act analysis of rule 482. No commenters addressed 
rule 34b-1, and we continue to believe that any burdens associated with 
rule 34b-1(a) as a result of the amendments we are adopting to rule 
482(b)(4) are accounted for in section IV.F below.

F. Rule 482

    We are adopting amendments affecting current requirements under 
rule 482 of the Securities Act relating to the information that is 
required to be included in money market funds' advertisements or other 
sales materials. Specifically, the amendments revise the particular 
wording of the current rule 482(b)(4) risk disclosures required to 
appear in advertisements for money market funds (including on the fund 
Web site). The fees and gates amendments, as well as the floating NAV 
amendments, will change the investment expectations and experience of 
money market fund investors. Accordingly, the amended wording of the 
rule 482(b)(4) risk disclosures reflects the particular risks 
associated with the imposition of liquidity fees or gates and/or a 
floating NAV. In the Proposing Release, using an estimate of 586 money 
market funds, the Commission estimated that money market funds would 
incur, in aggregate, a total one-time burden of 3,077 hours, at a time 
cost of $857,904, to comply with the amended requirements of rule 482. 
This collection of information will be mandatory for money market funds 
that rely on rule 2a-7, and the information will not be kept 
confidential.
    Certain commenters generally noted that complying with all of the 
new disclosure requirements, including the amended requirements of rule 
482, would involve additional costs.\2450\ Several commenters provided 
dollar estimates of the initial costs to implement a fees and gates or 
floating NAV framework and noted that these estimates would include the 
costs of related disclosure, but these commenters did not specifically 
break out the disclosure-related costs in their estimates.\2451\ One 
commenter stated that the costs to update Web site disclosures to 
reflect the new floating NAV and fees and gates requirements would be 
``minimal when compared to other costs,'' \2452\ and another commenter 
stated that the proposed disclosure requirements should not produce any 
meaningful costs.\2453\ As described above, we are adopting amendments 
to rule 482 that have been modified from the proposed amendments to 
respond to certain commenters' concerns and other suggestions. The rule 
482 disclosure requirements that we are adopting therefore differ from 
the proposed rule 482 disclosure requirements in content and 
format.\2454\ We believe that these revisions to the proposed 
requirements do not produce additional burdens for funds because the 
revisions only involve changes in the wording and formatting of the 
required disclosure statement and do not impact the measures funds must 
take to effect the disclosure requirements. Taking this into 
consideration, as well as the fact that we received no comments 
providing specific suggestions or critiques about our methods for 
estimating the burdens and costs associated with the rule 482 
amendments, the Commission has not modified its previous hour burden 
estimates.\2455\
---------------------------------------------------------------------------

    \2450\ See, e.g., Fin. Svcs. Roundtable Comment Letter (noting 
that the proposed disclosure requirements generally would produce 
``significant cost to the fund and ultimately to the fund's 
investors''); SSGA Comment Letter (urging the Commission to consider 
the ``substantial administrative, operational, and expense burdens'' 
of the proposed disclosure-related amendments); Chapin Davis Comment 
Letter (noting that the disclosure- and reporting-related amendments 
will result in increased costs in the form of fund staff salaries, 
or consultant, accountant, and lawyer hourly rates, that will 
ultimately be borne in large part by investors and portfolio 
issuers).
    \2451\ See, e.g., Chamber I Comment Letter; Fidelity Comment 
Letter.
    \2452\ See State Street Comment Letter, at Appendix A.
    \2453\ See HSBC Comment Letter.
    \2454\ See supra section III.E.1.
    \2455\ The compliance period for updating rule 482(b)(4) risk 
disclosures to reflect the floating NAV or liquidity fees and gates 
amendments is 2 years. We understand that money market funds 
commonly update and issue new advertising materials on a periodic 
and frequent basis. Accordingly, given the extended compliance 
period proposed, we expect that funds should be able to amend the 
wording of their rule 482(b)(4) risk disclosures as part of one of 
their general updates of their advertising materials. Similarly, we 
believe that funds could update the corresponding disclosure 
statement on their Web sites when performing other periodic Web site 
maintenance. We therefore account only for the incremental change in 
burden that amending the rule 482(b)(4) risk disclosures will cause 
in the context of a larger update to a fund's advertising materials 
or Web site.
---------------------------------------------------------------------------

    Based on an estimate of 559 money market funds that will be 
required to update the risk disclosure included in fund advertisements 
pursuant to rule 482, as amended, we estimate that, in the aggregate, 
the amendments will result in 2,935 total one-time burden hours,\2456\ 
at a total one-time time cost of $818,376.\2457\ Amortized over a 
three-year period, this will result in an average additional annual 
burden of approximately 978 burden hours \2458\ at a total annual time 
cost of approximately $272,792 for all funds.\2459\ Given that the 
amendments are one-time updates to the wording of the risk disclosures 
already required under current rule 482(b)(4), we believe that, once 
funds have made these one-time changes, the amendments to rule 
482(b)(4) will only require money market funds to incur the same costs 
and hour burdens on an ongoing basis as under current rule 482(b)(4).
---------------------------------------------------------------------------

    \2456\ This estimate is based on the following calculation: 5.25 
Hours per year (4 hours to update and review the wording of the rule 
482(b)(4) risk disclosure for each fund's printed advertising and 
sales material, plus 1.25 hours to post and review the wording of 
the rule 482(b)(4) risk disclosures on a fund's Web site) x 559 
money market funds = approximately 2,935 hours.
    \2457\ This estimate is based on the following calculation: 
$1,464 (Total one-time costs per fund) x 559 funds = $818,376. The 
$1,464 per fund figure is, in turn, based on the following 
calculations: (3 hours (spent by a marketing manager to update the 
wording of the risk disclosures for each fund's marketing materials) 
x $254/hour for a marketing manager = $762) + (1 hour (spent by a 
webmaster to update a fund's Web site risk disclosures) x $227/hour 
for a webmaster = $227) + (1.25 hours (spent by an attorney to 
review the amended rule 482(b)(4) risk disclosures) x $380/hour for 
an attorney = $475) = $1,464.
    \2458\ This estimate is based on the following calculation: 
2,935 Hours / 3 = approximately 978 hours. The current approved 
collection of information for Rule 482 is 305,705 hours annually for 
all investment companies. Adding 978 hours to this approved 
collection of information will result in a burden of 306,683 hours 
each year.
    \2459\ This estimate is based on the following calculation: 
$818,376 / 3 = $272,792.

---------------------------------------------------------------------------

[[Page 47952]]

G. Form N-1A

    We are adopting amendments to Form N-1A relating to money market 
funds' disclosure of: (i) Certain of the risks associated with 
liquidity fees and gates and/or a floating NAV; (ii) historical 
occasions on which the fund has considered or imposed liquidity fees or 
gates; and (iii) historical instances in which the fund has received 
financial support from a sponsor or fund affiliate. Specifically, we 
are adopting amendments to Form N-1A that will require funds to include 
certain risk disclosure statements in their prospectuses. We are also 
adopting amendments to Form N-1A that will require money market funds 
(other than government money market funds that have not chosen to 
retain the ability to impose liquidity fees and suspend redemptions) to 
provide disclosure in their SAIs regarding any occasion during the last 
10 years in which: (i) The fund's weekly liquid assets have fallen 
below 10%, and with respect to each occasion, whether the fund's board 
has determined to impose a liquidity fee and/or suspend redemptions; 
and (ii) the fund's weekly liquid assets have fallen below 30%, and the 
fund's board has determined to impose a liquidity fee and/or suspend 
redemptions.\2460\ Finally, we are also adopting amendments to Form N-
1A that will require each money market fund to disclose in its SAI 
historical instances in which the fund has received financial support 
from a sponsor or fund affiliate.\2461\
---------------------------------------------------------------------------

    \2460\ See supra section III.E.5.
    \2461\ See supra section III.E.7.
---------------------------------------------------------------------------

    In addition, the fee and gate requirements we are adopting will 
entail certain additional prospectus and SAI disclosure requirements 
that will not necessitate rule and form amendments. Specifically, 
pursuant to current disclosure requirements, we will expect that money 
market funds (besides government money market funds that have not 
chosen to retain the ability to impose liquidity fees and suspend 
redemptions) will disclose in the statutory prospectus, as well as in 
the SAI, as applicable, the effects that the potential imposition of 
fees and/or gates may have on a shareholder's ability to redeem shares 
of the fund.\2462\ We also expect that, promptly after a money market 
fund imposes a redemption fee or gate, it will inform investors of any 
fees or gates currently in place by means of a post-effective amendment 
or prospectus supplement.\2463\
---------------------------------------------------------------------------

    \2462\ See supra section III.E.4.
    \2463\ See supra section III.E.9.f.
---------------------------------------------------------------------------

    The floating NAV amendments we are adopting will also require 
certain additional prospectus and SAI disclosures, which will not 
necessitate rule and form amendments. Pursuant to current disclosure 
requirements, we expect that floating NAV money market funds will 
include disclosure in their prospectuses about the tax consequences to 
shareholders of buying, holding, exchanging, and selling the shares of 
the floating NAV fund.\2464\ In addition, we expect that a floating NAV 
money market fund will 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.\2465\ We also expect that, at the time a stable NAV money 
market fund transitions to a floating NAV, it will update its 
registration statement to include relevant related disclosure by means 
of a post-effective amendment or prospectus supplement.\2466\ This 
collection of information will be mandatory for money market funds that 
rely on rule 2a-7, and the information will not be kept confidential.
---------------------------------------------------------------------------

    \2464\ See supra section III.E.2.
    \2465\ See supra section III.E.3.
    \2466\ See id.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the 
proposed amendments to Form N-1A relating to the fees and gates 
proposal, the Form N-1A requirements relating to the fees and gates 
proposal that would not necessitate form amendments, and the proposed 
sponsor support disclosure requirements together would result in all 
money market funds incurring an annual increased burden of 1,007 hours, 
at a time cost of $298,072. We also estimated that, under the fees and 
gates alternative, there would be one-time aggregate external costs (in 
the form of printing costs) of $6,269,175 associated with the new Form 
N-1A disclosure requirements. The Commission estimated that the 
proposed amendments to Form N-1A relating to the floating NAV proposal, 
the Form N-1A requirements relating to the floating NAV proposal that 
would not necessitate form amendments, and the proposed sponsor support 
disclosure requirements together would result in all money market funds 
incurring an annual increased burden of 907 hours, at a time cost of 
$268,472. Additionally, we estimated that, under the floating NAV 
alternative, there would be one-time aggregate external costs (in the 
form of printing costs) of $3,134,588 associated with the new Form N-1A 
disclosure requirements.
    Certain commenters generally noted that complying with all of the 
new disclosure requirements, including the Form N-1A disclosure 
requirements, would involve some additional costs.\2467\ Several 
commenters provided dollar estimates of the initial costs to implement 
a fees and gates or floating NAV regime and noted that these estimates 
would include the costs of related disclosure, but these commenters did 
not specifically break out the disclosure-related costs in their 
estimates.\2468\ One commenter stated that the costs to update a fund's 
registration statement to reflect the new fees and gates and floating 
NAV requirements would be ``minimal when compared to other costs,'' 
\2469\ and another commenter stated that the proposed disclosure 
requirements should not produce any meaningful costs.\2470\ As 
described above, we are adopting amendments to the Form N-1A disclosure 
requirements that have been modified from the proposed amendments to 
respond to commenters concerns. The amendments we are adopting to the 
Form N-1A risk disclosure requirements therefore differ from the 
proposed requirements in content and format.\2471\ In addition, the 
amendments we are adopting to require funds to provide disclosure in 
their SAIs about historical occasions on which the fund has considered 
or imposed liquidity fees or gates, as well as historical occasions on 
which the fund has received financial support from a sponsor or fund 
affiliate, have been modified in certain respects from the proposed 
amendments. We believe that these revisions do not produce additional 
burdens for funds \2472\ and

[[Page 47953]]

therefore do not affect the assumptions we used in estimating hour 
burdens and related costs. The comments we received on the new 
disclosure requirements also do not affect the assumptions we used in 
our estimates, as these comments provided no specific suggestions or 
critiques regarding our methods for estimating hour and cost burdens 
associated with the Form N-1A requirements. As described below, 
however, our current estimates reflect the fact that the amendments we 
are adopting today combine the floating NAV and fees and gates proposal 
alternatives into one unified approach.
---------------------------------------------------------------------------

    \2467\ See supra note 2450.
    \2468\ See, e.g., Chamber I Comment Letter; Fidelity Comment 
Letter.
    \2469\ See State Street Comment Letter, at Appendix A.
    \2470\ See HSBC Comment Letter.
    \2471\ See supra section III.E.1.
    \2472\ The revisions to the proposed Form N-1A risk disclosure 
requirements do not produce additional burdens for funds because the 
revisions only involve changes in the wording and formatting of the 
required disclosure statement and do not impact the measures funds 
must take to effect the disclosure requirements. The revisions to 
the proposed SAI historical disclosure requirements do not produce 
additional burdens for funds because the adopted amendments to Form 
N-1A require a fund to disclose less detailed information than that 
which would have been required under the proposed amendments to Form 
N-1A. See supra text following note 975 and text accompanying and 
following note 1019. Furthermore, because the SAI historical 
disclosure overlaps with the information that a fund must disclose 
on Parts C, E, F, and G of Form N-CR (see supra section III.E.8), we 
believe that the burden for a fund to draft and finalize this 
historical disclosure will largely be incurred when the fund files 
Form N-CR, and thus the differences in the Form N-1A historical 
disclosure requirements that we are adopting, compared to those that 
we proposed, should not substantially affect our previous hour 
burden estimates.
---------------------------------------------------------------------------

    The burdens associated with the proposed amendments to Form N-1A 
include one-time burdens as well as ongoing burdens. The Commission 
estimates that each money market fund (except government funds that 
have not chosen to retain the ability to impose liquidity fees and 
suspend redemptions, and floating NAV money market funds) will incur a 
one-time burden of five hours,\2473\ at a time cost of $1,595,\2474\ to 
draft and finalize the required disclosure and amend its registration 
statement. In addition, we estimate that each government fund that has 
not chosen to retain the ability to impose liquidity fees and suspend 
redemptions will incur a one-time burden of two hours,\2475\ at a time 
cost of $638,\2476\ to draft and finalize the required disclosure and 
amend its registration statement. We also estimate that each floating 
NAV money market fund will incur a one-time burden of eight 
hours,\2477\ at a time cost of $2,552,\2478\ to draft and finalize the 
required disclosure and amend its registration statement. In aggregate, 
the Commission estimates that all money market funds will incur a one-
time burden of 2,933 hours,\2479\ at a time cost of $935,627,\2480\ to 
comply with the Form N-1A disclosure requirements. Amortizing the one-
time burden over a three-year period results in an average annual 
burden of 978 hours at a time cost of $311,876.\2481\
---------------------------------------------------------------------------

    \2473\ This estimate is based on the following calculation: 1 
Hour to update the registration statement to include the required 
disclosure statement + 3 hours to update the registration statement 
to include the disclosure about effects that fees/gates may have on 
shareholder redemptions, and the disclosure about historical 
occasions on which the fund has considered or imposed liquidity fees 
or gates + 1 hour to update the registration statement to include 
the disclosure about historical occasions of financial support 
received by the fund = 5 hours.
    \2474\ This estimate is based on the following calculation: (1 
Hour (to update registration statement to include required 
disclosure statement) x $319 (blended hourly rate for a compliance 
attorney ($334) and a senior programmer ($303)) = $319) + (3 hours 
(to update registration statement to include disclosure about 
effects that fees/gates may have on shareholder redemptions, and 
disclosure about historical occasions on which the fund has 
considered or imposed liquidity fees or gates) x $319 (blended 
hourly rate for a compliance attorney ($334) and a senior programmer 
($303)) = $957) + (1 hour (to update registration statement to 
include disclosure about historical occasions of financial support 
received by the fund) x $319 (blended hourly rate for a compliance 
attorney ($334) and a senior programmer ($303)) = $319) = $1,595.
    \2475\ This estimate is based on the following calculation: 1 
Hour to update registration statement to include required disclosure 
statement + 1 hour to update registration statement to include 
disclosure about financial support received by the fund = 2 hours.
    \2476\ This estimate is based on the following calculation: (1 
Hour (to update registration statement to include required 
disclosure statement) x $319 (blended hourly rate for a compliance 
attorney ($334) and a senior programmer ($303)) = $319) + (1 hour 
(to update registration statement to include disclosure about 
financial support received by the fund) x $319 (blended hourly rate 
for a compliance attorney ($334) and a senior programmer ($303)) = 
$319) = $638.
    \2477\ This estimate is based on the following calculation: 1 
Hour to update registration statement to include required disclosure 
statement + 3 hours to update registration statement to include 
disclosure about effects that fees/gates may have on shareholder 
redemptions, and disclosure about historical occasions on which the 
fund has considered or imposed liquidity fees or gates + 3 hours to 
update registration statement to include tax- and operations-related 
disclosure about floating NAV + 1 hour to update registration 
statement to include disclosure about financial support received by 
the fund = 8 hours.
    \2478\ This estimate is based on the following calculation: (1 
Hour (to update registration statement to include required 
disclosure statement) x $319 (blended hourly rate for a compliance 
attorney ($334) and a senior programmer ($303)) = $319) + (3 hours 
(to update registration statement to include disclosure about 
effects that fees/gates may have on shareholder redemptions, and 
disclosure about historical occasions on which the fund has 
considered or imposed liquidity fees or gates) x $319 (blended 
hourly rate for a compliance attorney ($334) and a senior programmer 
($303)) = $957) + (3 hours (to update registration statement to 
include tax- and operations-related disclosure about floating NAV) x 
$319 (blended hourly rate for a compliance attorney ($334) and a 
senior programmer ($303)) = $957) + (1 hour (to update registration 
statement to include disclosure about financial support received by 
the fund) x $319 (blended hourly rate for a compliance attorney 
($334) and a senior programmer ($303)) = $319) = $2,552.
    \2479\ This estimate is based on the following calculations: (5 
Hours x 195 funds (559 money market funds - 205 institutional prime 
funds -159 funds that will rely on the government fund exemption) = 
975 hours) + (2 hours x 159 funds that will rely on the government 
fund exemption = 318 hours) + (8 hours x 205 institutional prime 
funds = 1,640 hours) = 2,933 hours. For purposes of this PRA 
analysis, our calculations of the number of institutional prime 
funds and funds that will rely on the government fund exemption are 
based on Form N-MFP data as of February 28, 2014.
    \2480\ This estimate is based on the following calculation: 
2,933 Hours x $319 (blended hourly rate for a compliance attorney 
($334) and a senior programmer ($303)) = $935,627.
    \2481\ This estimate is based on the following calculation: 
2,933 Burden hours / 3 = 977 average annual burden hours; $935,627 
burden costs / 3 = $311,876 average annual burden cost.
---------------------------------------------------------------------------

    The Commission estimates that each money market fund (except 
government funds that have not chosen to retain the ability to impose 
liquidity fees and suspend redemptions) will incur an ongoing burden of 
one hour, at a time cost of $319,\2482\ each year to: 1) review and 
update the SAI disclosure regarding historical occasions on which the 
fund has considered or imposed liquidity fees or gates; 2) review and 
update the SAI disclosure regarding historical occasions in which the 
fund has received financial support from a sponsor or fund affiliate; 
and 3) inform investors of any fees or gates currently in place (as 
appropriate), or the transition to a floating NAV (as appropriate), by 
means of a prospectus supplement. The Commission also estimates that 
each government money market fund that has not chosen to retain the 
ability to impose liquidity fees and suspend redemptions will incur an 
ongoing burden of 0.5 hours, at a time cost of $160,\2483\ each year to 
review and update the SAI disclosure regarding historical instances in 
which the fund has received financial support from a sponsor or fund 
affiliate. In aggregate, we estimate that all money market funds will 
incur an annual burden of 480 hours,\2484\ at a time cost of 
$153,120,\2485\ to comply with the Form N-1A disclosure requirements.
---------------------------------------------------------------------------

    \2482\ This estimate is based on the following calculation: (0.5 
Hours (to review and update the SAI disclosure regarding historical 
occasions on which the fund has considered or imposed liquidity fees 
or gates, and to inform investors of any fees or gates currently in 
place (as appropriate), or the transition to a floating NAV (as 
appropriate), by means of a prospectus supplement) x $319 (blended 
hourly rate for a compliance attorney ($334) and a senior programmer 
($303)) = $159.5) + (0.5 hours (to review and update the SAI 
disclosure regarding historical instances in which the fund has 
received financial support from a sponsor or fund affiliate) x $319 
(blended hourly rate for a compliance attorney ($334) and a senior 
programmer ($303)) = $159.5) = $319.
    \2483\ This estimate is based on the following calculation: (0.5 
Hours x $319 (blended hourly rate for a compliance attorney ($334) 
and a senior programmer ($303)) = approximately $160.
    \2484\ This estimate is based on the following calculations: (1 
Hour x 400 funds (559 money market funds -159 funds that will rely 
on the government fund exemption) = 400 hours) + (0.5 hours x 159 
funds that will rely on the government fund exemption = 
approximately 80 hours) = 480 hours.
    \2485\ This estimate is based on the following calculation: 480 
Hours x $319 (blended hourly rate for a compliance attorney ($334) 
and a senior programmer ($303)) = $153,120.
---------------------------------------------------------------------------

    Amortizing these one-time and ongoing hour and cost burdens over 
three years results in an average annual increased burden of 2.3 hours 
per fund (other than government funds that have not chosen to retain 
the ability to impose liquidity fees and suspend

[[Page 47954]]

redemptions, and floating NAV money market funds),\2486\ at a time cost 
of $744.\2487\ Government funds that have not chosen to retain the 
ability to impose liquidity fees and suspend redemptions will incur an 
average annual increased burden of 1 hour,\2488\ at a time cost of 
$319,\2489\ to comply with the Form N-1A disclosure requirements. 
Floating NAV money market funds will incur an average annual increased 
burden of 3.3 hours,\2490\ at a time cost of $1,063,\2491\ to comply 
with the Form N-1A disclosure requirements.
---------------------------------------------------------------------------

    \2486\ This estimate is based on the following calculation: 5 
Burden hours (year 1) + 1 burden hour (year 2) + 1 burden hour (year 
3) / 3 = approximately 2.3 burden hours.
    \2487\ This estimate is based on the following calculation: 
$1,595 (Year 1 monetized burden hours) + $319 (year 2 monetized 
burden hours) + $319 (year 3 monetized burden hours) / 3 = 
approximately $744.
    \2488\ This estimate is based on the following calculation: 2 
Burden hours (year 1) + 0.5 burden hours (year 2) + 0.5 burden hours 
(year 3) / 3 = 1 burden hour.
    \2489\ This estimate is based on the following calculation: $638 
(Year 1 monetized burden hours) + $160 (year 2 monetized burden 
hours) + $160 (year 3 monetized burden hours) / 3 = approximately 
$319.
    \2490\ This estimate is based on the following calculation: 8 
Burden hours (year 1) + 1 burden hour (year 2) + 1 burden hour (year 
3) / 3 = approximately 3.3 burden hours.
    \2491\ This estimate is based on the following calculation: 
$2,552 (Year 1 monetized burden hours) + $319 (year 2 monetized 
burden hours) + $319 (year 3 monetized burden hours) / 3 = 
approximately $1,063.
---------------------------------------------------------------------------

    In total, the Commission estimates that all money market funds will 
incur an average annual increased burden of 1,285 hours,\2492\ at a 
time cost of $413,716,\2493\ to comply with the Form N-1A disclosure 
requirements. Additionally, we estimate that there will be annual 
aggregate external costs (in the form of printing costs) of $6,269,175 
associated with the Form N-1A disclosure requirements.\2494\
---------------------------------------------------------------------------

    \2492\ This estimate is based on the following calculation: (2.3 
Hours x 195 funds (559 money market funds - 205 institutional prime 
funds - 159 funds that will rely on the government fund exemption) = 
approximately 449 hours) + (1 hour x 159 funds that will rely on the 
government fund exemption = 159 hours) + (3.3 hours x 205 
institutional prime funds = approximately 677 hours) = 1,285 hours.
     The current approved collection of information for Form N-1A is 
1,578,689 hours annually for all investment companies. Adding 1,285 
hours to this approved collection of information will result in a 
burden of 1,579,974 hours each year.
    \2493\ This estimate is based on the following calculation: 
($744 x 195 Funds (559 money market funds - 205 institutional prime 
funds - 159 funds that will rely on the government fund exemption) = 
$145,080) + ($319 x 159 funds that will rely on the government fund 
exemption = $50,721) + ($1,063 x 205 institutional prime funds = 
$217,915) = $413,716.
    \2494\ We expect that a fund that must include disclosure about 
historical occasions on which the fund has considered or imposed 
liquidity fees or gates, or historical instances in which the fund 
has received financial support from a sponsor or fund affiliate, 
will need to add 2-8 pages of new disclosure to its registration 
statement. Adding this new disclosure will therefore increase the 
number of pages in, and change the printing costs of, the fund's 
registration statement. The Commission calculates the external costs 
associated with the proposed Form N-1A disclosure requirements as 
follows: 5 pages (mid-point of 2 pages and 8 pages) x $0.045 per 
page x 27,863,000 money market fund registration statements printed 
annually = $6,269,175 annual aggregate external costs. Our estimate 
of potential printing ($0.045 per page: $0.035 for ink + $0.010 for 
paper) is based on data provided by Lexecon Inc. in response to 
Investment Company Act Release No. 27182 (Dec. 8, 2005) [70 FR 74598 
(Dec. 15, 2005)]. See Comment Letter of Lexecon Inc. (Feb. 13, 2006) 
(``Lexecon Comment Letter''). For purposes of this analysis, our 
best estimate of the number of money market fund registration 
statements printed annually is based on 27,863,000 money market fund 
shareholder accounts in 2012. See Investment Company Institute, 2013 
Investment Company Fact Book, at 178, available at http://www.ici.org/pdf/2013_factbook.pdf.
---------------------------------------------------------------------------

H. Advisers Act Rule 204(b)-1 and Form PF

    Advisers Act rule 204(b)-1 requires SEC-registered private fund 
advisers that have at least $150 million in private fund assets under 
management to report certain information regarding the private funds 
they advise on Form PF. The rule implements sections 204 and 211 of the 
Advisers Act, as amended by the Dodd-Frank Act, which direct the 
Commission (and the CFTC) to supply FSOC with information for use in 
monitoring potential systemic risk by establishing reporting 
requirements for private fund advisers. Form PF divides respondents 
into groups based on their size and the types of private funds they 
manage, with some groups of advisers required to file more information 
than others or more frequently than others. Large liquidity fund 
advisers--the only group of advisers affected by today's amendments to 
Form PF--must provide information concerning their liquidity funds on 
Form PF each quarter. Form PF contains a collection of information 
under the PRA.\2495\ This new collection of information will be 
mandatory for large liquidity fund advisers, and will be kept 
confidential to the extent discussed above in section III.H. Based on 
data filed on Form PF and Form ADV, the Commission estimates that, as 
of April 30, 2014, there were 28 large liquidity fund advisers subject 
to this quarterly filing requirement that collectively advised 56 
liquidity funds.
---------------------------------------------------------------------------

    \2495\ For purposes of the PRA analysis, the current burden 
associated with the requirements of rule 204(b)-1 is included in the 
collection of information requirements of Form PF.
---------------------------------------------------------------------------

1. Discussion of Amendments
    Under our final amendments, for each liquidity fund it manages, a 
large liquidity fund adviser will be required to provide, quarterly and 
with respect to each portfolio security, certain additional information 
for each month of the reporting period.\2496\ We discuss the additional 
information we are requiring large liquidity fund advisers to provide 
in more detail in section III.H.1 above. Generally, however, this 
additional information is largely the same as the reporting 
requirements for registered money market funds under amended Form N-
MFP, with some modifications to better tailor the reporting to private 
liquidity funds.\2497\ As proposed, the final amendments will also 
remove current Questions 56 and 57 on Form PF, which generally require 
large liquidity fund advisers to provide information about their 
liquidity funds' portfolio holdings broken out by asset class (rather 
than security by security).\2498\ The amendments will also require, as 
proposed, large liquidity fund advisers to identify any money market 
fund advised by the adviser or its related persons that pursues 
substantially the same investment objective and strategy and invests 
side by side in substantially the same positions as a liquidity fund 
the adviser reports about on Form PF.\2499\ In addition, the final 
amendments have been reorganized to minimize system changes and costs 
as much as possible.\2500\ Finally, our changes from the proposal to 
the final amendments to Form PF generally reflect any changes from the 
proposal to the final amendments to Form N-MFP, such as the elimination 
of the proposed lot level reporting.\2501\
---------------------------------------------------------------------------

    \2496\ See Question 63 of Form PF. Advisers will be required to 
file this information with their quarterly liquidity fund filings 
with data for the quarter broken down by month. Advisers will not be 
required to file information on Form PF more frequently as a result 
of today's proposal because large liquidity fund advisers already 
are required to file information each quarter on Form PF. See Form 
PF: Instruction 9.
    \2497\ See supra section IV.H.1 for a more detailed discussion 
of these additional reporting requirements.
    \2498\ See supra section IV.H.1.
    \2499\ See Question 64 to Form PF. See also supra section 
IV.H.1.
    \2500\ By eliminating lot level sale data reporting (proposed 
question 64 of Form PF) and accordingly renumbering proposed 
question 65 (parallel funds) as question 64, we have restructured 
the amendments to Form PF so that the amendments keep the same 
numbering range as the current form. See question 64 of Form PF; 
Axiom Comment Letter (suggesting to reorganize and consolidate the 
questions in the proposed form amendments to minimize the system 
changes necessary to file the form).
    \2501\ See supra section IV.H.1. See also, e.g., supra section 
IV.C.1 (New Reporting Requirements).

---------------------------------------------------------------------------

[[Page 47955]]

2. Current Burden
    The current approved collection of information for Form PF is 
258,000 annual aggregate hours and $25,684,000 in aggregate external 
costs. In estimating these total approved burdens, we estimated that 
the amortized average annual burden of Form PF for large liquidity fund 
advisers in particular would be 290 hours per large liquidity fund 
adviser for each of the first three years, resulting in an aggregate 
amortized annual burden of 23,200 hours for large liquidity fund 
advisers for each of the first three years.\2502\ We estimated that the 
external cost burden would range from $0 to $50,000 per large private 
fund adviser, which resulted in aggregate estimated external costs 
attributable to large liquidity fund advisers of $4,000,000. The 
external cost estimates also included estimates for filing fees, which 
are $150 per annual filing and $150 per quarterly filing, resulting in 
annual filings costs for large liquidity fund advisers of 
$48,000.\2503\
---------------------------------------------------------------------------

    \2502\ See Form PF Adopting Release supra note 1536 (``290 
burden hours on average per year x 80 large liquidity fund advisers 
= 23,200 hours.'').
    \2503\ This estimate is based on the following calculation: 
($150 Quarterly filing fee x 4 quarters) x 80 large liquidity fund 
advisers) = $48,000.
---------------------------------------------------------------------------

3. Change in Burden
    The Commission continues to estimate that, as proposed, the 
paperwork burdens associated with Form N-MFP (as adopted with our final 
amendments) are representative of the burdens that large liquidity fund 
advisers could incur as a result of our final amendments to Form PF 
because advisers will be required to file on Form PF virtually the same 
information money market funds will file on Form N-MFP as amended and 
because, as discussed in section IV.H, virtually all of the 28 large 
liquidity funds advisers affected already manage a money market fund or 
have a related person that manages a money market fund. Therefore, we 
continue to believe that large liquidity fund advisers--when required 
to compile and report for their liquidity funds generally the same 
information virtually all of them already report for their money market 
funds--likely will use the same (or comparable) staff and/or external 
service providers to provide portfolio holdings information on Form N-
MFP and Form PF.
    Commenters provided no concrete cost estimates with respect to our 
amendments to Form PF. As noted in section IV.H above, although one 
commenter asserted that the costs of compliance for Form PF would 
outweigh the benefits,\2504\ most commenters who discussed the Form PF 
amendments generally supported them.\2505\ For the reasons discussed in 
section IV.C, we believe our original cost estimates continue for Form 
N-MFP to be reasonable. Likewise, for the same reasons, the Commission 
generally has not modified from our proposal the cost estimates 
associated with the final amendments to Form PF.\2506\ However, as with 
Form N-MFP, the Commission has modified its estimates for Form PF based 
on updated industry data on time costs as well as the updated total 
number of large liquidity funds that would be affected.
---------------------------------------------------------------------------

    \2504\ See SSGA Comment Letter. See also, e.g., Wells Fargo 
Comment Letter (noting that the ``[t]he burdens associated with 
complying with the proposed amendments to Form PF are substantial'' 
as a reason for why the proposed amendments to Form PF should not 
apply to unregistered liquidity vehicles owned exclusively by 
registered funds and complying with rule 12d1-1 under the Investment 
Company Act.).
    \2505\ See, e.g., Goldman Sachs Comment Letter; ICI Comment 
Letter; Oppenheimer Comment Letter.
    \2506\ Similarly, we estimate that our various other final 
changes to Form PF, such as those referenced in supra note 2497-2500 
and the accompanying discussion, will not significantly alter the 
estimated paperwork burdens.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that our final amendments to 
Form PF will result in paperwork burden hours and external costs as 
follows. First, as discussed in the PRA analysis for our amendments to 
Form N-MFP, the Commission estimates that the average annual amortized 
burdens per money market fund imposed by Form N-MFP as amended are 149 
hours \2507\ and $8,552 in external costs.\2508\ As discussed above, 
the Commission estimates that large liquidity fund advisers generally 
will incur similar burdens for each of their liquidity funds. 
Accordingly, we estimate that large liquidity fund advisers will incur 
a time cost of $38,740 associated with these 149 estimated burden hours 
for each large liquidity fund.\2509\ The Commission therefore estimates 
increased annual burdens per large liquidity fund adviser with two 
large liquidity funds each of 298 burden hours, at a total time cost of 
$79,566, and external costs of $17,104.\2510\ This will result in 
increased aggregate burden hours across all large liquidity fund 
advisers of 8,344 burden hours,\2511\ at a time cost of 
$2,227,848,\2512\ and $478,912 in external costs.\2513\ Finally, the 
aggregate annual, amortized paperwork burden for Form PF as amended 
therefore will be 251,264

[[Page 47956]]

burden hours \2514\ and $23,531,712 in external costs.\2515\
---------------------------------------------------------------------------

    \2507\ As discussed in the PRA analysis for Form N-MFP, the 
Commission estimates that Form N-MFP, as amended, will result in an 
aggregate annual, amortized collection of information burden of 
83,412 hours. See supra note 2343 and accompanying text. Based on 
the Commission's estimated 559 money market fund respondents, this 
results in a per fund annual burden of approximately 149 hours.
    \2508\ As discussed in the PRA analysis for Form N-MFP, the 
Commission estimates that Form N-MFP, as amended, will result in an 
aggregate external cost burden of $4,780,736. See supra note 2363 
and accompanying text. Based on the Commission's estimated 559 money 
market fund respondents, this results in a per fund annual external 
cost burden of approximately $8,552.
    \2509\ The Commission estimates, as discussed above, that large 
liquidity fund advisers are likely to use the same (or comparable) 
staff and/or external service providers to provide portfolio 
holdings information on Form N-MFP and Form PF. Accordingly, the 
Commission estimates that large liquidity fund advisers will use the 
same professionals, and in comparable proportions (conservatively 
based on the proportion of professionals used with respect to our 
final amendments to Form N-MFP as amortized over the first three 
years), for purposes of the Commission's estimate of time costs 
associated with our amendments to Form PF. As discussed in supra 
note 2362 and the accompanying text, amortizing these additional 
hourly and cost burdens of our final amendments to Form N-MFP over 
three years results in an average annual aggregate burden of 
approximately 38,198 hours at a total time cost of $9,914,238, or 
average time costs of approximately $260 per hour. This results in 
the following estimated time cost for the Commission's estimated 149 
hour burdens per liquidity fund: 149 burden hours (per liquidity 
fund for Form PF) x $260 (average per hour time costs) = $38,740 
additional time costs per fund.
    \2510\ This estimate assumes for purposes of the PRA that each 
large liquidity fund adviser advises two large liquidity funds (56 
total liquidity funds / 28 large liquidity fund advisers). Each 
large liquidity fund adviser therefore will incur the following 
burdens: 149 Estimated burden hours per fund x 2 large liquidity 
funds = 298 burden hours per large liquidity fund adviser; $38,740 
estimated time cost per fund x 2 large liquidity funds = $77,480 
time cost per large liquidity fund adviser; and $8,552 estimated 
external costs per fund (based on $4,780,736 in total external costs 
for 559 funds with respect to Form N-MFP) x 2 large liquidity funds 
= $17,104 external costs per large liquidity fund adviser.
    \2511\ This estimate is based on the following calculation: 298 
Estimated additional burden hours per large liquidity fund adviser x 
28 large liquidity fund advisers = 8,344.
    \2512\ This estimate is based on the following calculation: 
$77,480 Estimated time cost per large liquidity fund adviser x 28 
large liquidity fund advisers = $2,169,440.
    \2513\ This estimate is based on the following calculation: 
$17,104 Estimated external costs per large liquidity fund adviser x 
28 large liquidity fund advisers = $478,912.
    \2514\ Form PF's current approved burden includes 23,200 
aggregate burden hours associated with large liquidity fund 
advisers, based on 80 large liquidity fund advisers and an estimated 
290 burden hours per large liquidity fund adviser. As calculated 
below, because we are reducing our estimate of the number of large 
liquidity funds from 80 to 28, our estimates of costs will actually 
decrease on an aggregate basis. However, on a per fund basis, our 
amendments to Form PF will increase the burden hours per large 
liquidity fund adviser by 298 hours, as discussed above, resulting 
in a total of 588 burden hours per large liquidity fund adviser. 
Multiplying 588 by the current estimated number of 28 large 
liquidity fund advisers results in 16,464 burden hours attributable 
to large liquidity fund advisers, a 6,736 reduction from the 
approved burden hours attributable to large liquidity fund advisers. 
This therefore results in 249,300 total burden hours for all of Form 
PF (current approved 258,000 burden hours - 6,736 reduction = 
251,264).
    \2515\ Form PF's current approved burden includes $25,684,000 in 
external costs, which includes $4,000,000 attributable to large 
liquidity fund advisers for certain costs ($50,000 per adviser), and 
$48,000 (or $600 per adviser) for filing fees, in both cases 
assuming 80 large liquidity fund adviser respondents. Form PF's 
approved burden therefore includes a total of $4,048,000 in external 
costs attributable to large liquidity fund advisers. As calculated 
below, because we are reducing our estimate of the number of large 
liquidity funds from 80 to 28, our estimates of external costs will 
actually decrease on an aggregate basis. However, we estimate 
external costs to increase on a per fund basis. Reducing these 
estimates to reflect the Commission's current estimate of 28 large 
liquidity fund adviser respondents results in costs of $1,400,000 
(28 large liquidity fund advisers x $50,000 per adviser) and $16,800 
(28 large liquidity fund advisers x $600), respectively, for an 
aggregate cost of $1,416,800. These costs, plus the additional 
external costs associated with our amendments to Form PF ($478,912 
as estimated above), result in total external costs attributable to 
large liquidity fund advisers of $1,895,712, a reduction of 
$2,152,288 from the currently approved external costs attributable 
to large liquidity fund advisers. This therefore results in total 
external cost for all of Form PF of $23,531,712 (current approved 
external cost burden of $25,684,000 - $2,152,288 reduction = 
$23,531,712).
---------------------------------------------------------------------------

V. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act of 1980 \2516\ 
(``RFA'') requires the Commission to undertake an initial regulatory 
flexibility analysis (``IRFA'') of the proposed rule amendments on 
small entities unless the Commission certifies that the rule, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.\2517\ As stated in the Proposing Release, 
based on information in filings submitted to the Commission, we believe 
that there are no money market funds that are small entities.\2518\ 
Accordingly, the Commission certified, pursuant to section 605(b) of 
the RFA, that new rule 30b1-8 and Form N-CR under the Investment 
Company Act of 1940 and the proposed amendments to rules 2a-7, 12d3-1, 
18f-3, 22e-3, 30b1-7, and 31a-1 and Forms N-MFP and N-1A under the 
Investment Company Act, Form PF under the Investment Advisers Act of 
1940, and rules 482 and 419 under the Securities Act of 1933, if 
adopted would not have a significant economic impact on a substantial 
number of small entities.\2519\ We included this certification in 
section VI of the Proposing Release.\2520\
---------------------------------------------------------------------------

    \2516\ 5 U.S.C. 603(a).
    \2517\ 5 U.S.C. 605(b).
    \2518\ See Proposing Release, supra note 25, at n.1249 and 
accompanying text.
    \2519\ 5 U.S.C. 605(b).
    \2520\ See Proposing Release supra note 25, section VI.
---------------------------------------------------------------------------

    We encouraged written comments regarding this certification.\2521\ 
One commenter responded.\2522\ Among other things, this commenter 
argued that, while our certification evaluated the impact of our 
amendments on money market funds to which the amendments directly 
apply, we did not account for the ``impact on numerous smaller entities 
that are investors in money market funds or that do business with money 
market funds. . . .'' \2523\ This RFA certification is properly based 
on the economic impact of the amended rule on the entities that are 
subject to the requirements of the amended rule.\2524\ The numerous 
other entities suggested by the commenter are not subject to the 
requirements of the amended rule and also are not included in the 
definition of ``small business'' or ``small organization'' for purposes 
of the RFA under the Investment Company Act,\2525\ Investment Advisers 
Act \2526\ or Securities Act.\2527\ We recognize, however, that 
entities other than those subject to the requirements of the amended 
rule may be affected by the amendments we adopt today. As such, we have 
discussed in the appropriate sections of this Release the effects of 
today's amendments on entities other than those subject to the 
requirements of the amended rule.\2528\
---------------------------------------------------------------------------

    \2521\ See Id.
    \2522\ See Federated X Comment Letter.
    \2523\ Id.
    \2524\ In advancing the argument, the commenter relies on 
Aeronautical Repair Station Association v. Federal Aviation 
Administration, 494 F.3d 161 (D.C. Cir. 2007). This case is 
inapposite, however, because there the agency's own rulemaking 
release expressly stated that the rule imposed responsibilities 
directly on certain small business contractors. The court reaffirmed 
its prior holdings that the RFA limits its application to small 
entities ``which will be subject to the proposed regulation--that 
is, those small entities to which the proposed rule will apply.'' 
Id. at 176 (emphasis and internal quotations omitted). See also 
Cement Kiln Recycling Coal v. EPA, 255F. 3d 855, 869 (D.C. Cir. 
2001).
    \2525\ See rule 0-10 of the Investment Company Act, which 
defines the term ``small business'' or ``small organization'' for 
purposes of rules under the Act to mean an investment company that, 
together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less 
as of the end of its most recent fiscal year.
    \2526\ See rule 0-07 of the Investment Advisers Act, which 
defines the term ``small business'' or ``small organization'' for 
purposes of rules under the Act to mean an investment adviser that, 
among other things, has assets under management of less than $25 
million. Our changes to rule 204(b)-1 and Form PF would only apply 
to certain large liquidity fund advisers with at least $1 billion in 
combined liquidity fund and money market fund assets, well above the 
$25 million threshold in rule 0-7 under the Investment Advisers Act.
    \2527\ See rule 157 of the Securities Act, which, with respect 
to investment companies, adopts the definition of rule 0-10 of the 
Investment Company Act. We also note that our changes to rule 482 
under the Securities Act will only apply to advertisements by money 
market funds and not by any other issuers, whereas we are making 
only technical, conforming amendments to rule 419 under the 
Securities Act.
    \2528\ See, e.g., supra sections III.A.5, III.B.8, III.C and 
III.K.
---------------------------------------------------------------------------

    The commenter also noted that our RFA analysis fails to consider 
money market funds that have yet to enter the industry and may need to 
begin their operations as ``small entities.'' \2529\ We believe that 
the commenter misconstrues the RFA, which contemplates that an agency 
shall calculate the number of small businesses that currently would be 
affected by its proposed regulation.\2530\
---------------------------------------------------------------------------

    \2529\ See Federated X Comment Letter.
    \2530\ For example, the Office of Advocacy for the United States 
Small Business Administration (``SBA'') publishes a guide for 
government agencies regarding how to comply with the RFA, which 
contains an example of an appropriate RFA certification. This 
example has an agency calculate the number of small businesses that 
currently would be affected by a proposed regulation. See ``A Guide 
for Government Agencies: How to Comply with the Regulatory 
Flexibility Act,'' available at http://www.sba.gov/sites/default/files/rfaguide_0512_0.pdf.
---------------------------------------------------------------------------

    For the reasons described above, the Commission again certifies 
that the amendments to new rule 30b1-8 and Form N-CR under the 
Investment Company Act of 1940 and the amendments to rules 2a-7, 12d3-
1, 18f-3, 22e-3, 30b1-7, and 31a-1 and Forms N-MFP and N-1A under the 
Investment Company Act, Form PF under the Investment Advisers Act of 
1940, and rules 482 and 419 under the Securities Act of 1933, would 
not, if adopted have a significant economic impact on a substantial 
number of small entities.

VI. Update To Codification of Financial Reporting Policies

    The Commission amends the ``Codification of Financial Reporting 
Policies'' announced in Financial Reporting Release No. 1 (April 15, 
1982) [47 FR 21028] as follows:
    1. By adding new Section 220 ``Cash Equivalents'' and including the 
text of the second and third paragraphs of

[[Page 47957]]

Section III.A.7 and the third paragraph of Section III.B.6.b of this 
Release.
    2. By adding a new Section 404.05.c ``Guidance on the Amortized 
Cost Method of Valuation and Other Valuation Concerns'' and including 
the first two introductory paragraphs before Section III.D.1., except 
for the phrase ``After further consideration, and as suggested by a 
number of commenters,'' and except for footnote 870.
    a. By adding the subject heading ``1. Use of Amortized Cost 
Valuation'', and including the first, third and fourth paragraphs, 
except for footnote 874, of Section III.D.1.
    b. By adding the subject heading ``2. Other Valuation Matters'' and 
including the first sentence of the first paragraph of Section III.D.2.
    c. By adding the subject heading ``Fair Value for Thinly Traded 
Securities'' and including below the subject heading, the fourth and 
fifth paragraphs of Section III.D.2.
    d. By adding the subject heading ``Use of Pricing Services'' and 
including below the subject heading, the first sentence of the sixth 
paragraph except for the phrase ``As noted above,'' and the seventh, 
eighth and ninth paragraphs of Section III.D.2.
    The Codification is a separate publication of the Commission. It 
will not be published in the Federal Register or Code of Federal 
Regulations. For more information on the Codification of Financial 
Reporting Policies, contact the Commission's Public Reference Room at 
202-551-5850.

VII. Statutory Authority

    The Commission is adopting amendments to rule 419 under the 
rulemaking authority set forth in sections 3, 4, 5, 7, and 19 of the 
Securities Act [15 U.S.C. 77c, 77d, 77e, 77g, and 77s]. The Commission 
is adopting amendments to rule 482 pursuant to authority set forth in 
sections 5, 10(b), 19(a), and 28 of the Securities Act [15 U.S.C. 77e, 
77j(b), 77s(a), and 77z-3] and sections 24(g) and 38(a) of the 
Investment Company Act [15 U.S.C. 80a-24(g) and 80a-37(a)]. The 
Commission is adopting amendments to rule 2a-7 under the exemptive and 
rulemaking authority set forth in sections 6(c), 8(b), 22(c), 35(d), 
and 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a-6(c), 
80a-8(b), 80a-22(c), 80a-34(d), and 80a-37(a)]. The Commission is 
adopting amendments to rule 12d3-1 pursuant to the authority set forth 
in sections 6(c) and 38(a) of the Investment Company Act [15 U.S.C. 
80a-6(c) and 80a-37(a)]. The Commission is adopting amendments to rule 
18f-3 pursuant to the authority set forth in sections 6(c) and 38(a) of 
the Investment Company Act [15 U.S.C. 80a-6(c) and 80a-37(a)]. The 
Commission is adopting amendments to rule 22e-3 pursuant to the 
authority set forth in sections 6(c), 22(e) and 38(a) of the Investment 
Company Act [15 U.S.C. 80a-6(c), 80a-22(e), and 80a-37(a)]. The 
Commission is adopting amendments to rule 30b1-7 and Form N-MFP 
pursuant to authority set forth in Sections 8(b), 30(b), 31(a), and 
38(a) of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 
80a-30(a), and 80a-37(a)]. The Commission is adopting new rule 30b1-8 
and Form N-CR pursuant to authority set forth in Sections 8(b), 30(b), 
31(a), and 38(a) of the Investment Company Act [15 U.S.C. 80a-8(b), 
80a-29(b), 80a-30(a), and 80a-37(a)]. The Commission is adopting 
amendments to rule 31a-1 pursuant to authority set forth in sections 
6(c) and 38(a)] of the Investment Company Act [15 U.S.C. 80a-6(c) and 
80a-37(a)]. The Commission is adopting amendments to Form N-1A pursuant 
to authority set forth in Sections 5, 6, 7, 10, and 19(a) of the 
Securities Act [15 U.S.C. 77e, 77f, 77g, 77j and 77s(a)] and Sections 
8, 24(a), 24(g), 30, and 38 of the Investment Company Act [15 U.S.C. 
80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. The Commission is 
adopting amendments to Form PF pursuant to authority set forth in 
Sections 204(b) and 211(e) of the Advisers Act [15 U.S.C. 80b-4(b) and 
80b-11(e)].

List of Subjects in 17 CFR Parts 230, 239, 270, 274, and 279

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rules and Forms

    For reasons set out in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f, 
77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 
78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *

0
2. Section 230.419(b)(2)(iv)(B) is amended by removing the phrase 
``paragraphs (c)(2), (c)(3), and (c)(4)'' and adding in its place 
``paragraph (d)''.
0
3. Section 230.482 is amended:
0
a. In paragraph (b)(3)(i) by adding after ``An advertisement for a 
money market fund'' the phrase ``that is a government money market 
fund, as defined in Sec.  270.2a-7(a)(16) of this chapter, or a retail 
money market fund, as defined in Sec.  270.2a-7(a)(25) of this 
chapter''.
0
b. By revising paragraph (b)(4) to read as follows:


Sec.  230.482  Advertising by an investment company as satisfying 
requirements of section 10.

* * * * *
    (b) * * *
    (4) Money market funds. (i) An advertisement for an investment 
company that holds itself out to be a money market fund, that is not a 
government money market fund, as defined in Sec.  270.2a-7(a)(16) of 
this chapter, or a retail money market fund, as defined in Sec.  
270.2a-7(a)(25) of this chapter, must include the following statement:

    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may 
be worth more or less than what you originally paid for them. The 
Fund may impose a fee upon sale of your shares or may temporarily 
suspend your ability to sell shares if the Fund's liquidity falls 
below required minimums because of market conditions or other 
factors. 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.

    (ii) An advertisement for an investment company that holds itself 
out to be a money market fund, that is a government money market fund, 
as defined in Sec.  270.2a-7(a)(16) of this chapter or a retail money 
market fund, as defined in Sec.  270.2a-7(a)(25) of this chapter, and 
that is subject to the requirements of Sec.  270.2a-7(c)(2)(i) and/or 
(ii) of this chapter (or is not subject to the requirements of Sec.  
270.2a-7(c)(2)(i) and/or (ii) of this chapter pursuant to Sec.  270.2a-
7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to 
impose liquidity fees and suspend redemptions consistent with the 
requirements of Sec.  270.2a-7(c)(2)(i) and/or (ii)), must include the 
following statement:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. The Fund may impose a fee upon 
sale of your

[[Page 47958]]

shares or may temporarily suspend your ability to sell shares if the 
Fund's liquidity falls below required minimums because of market 
conditions or other factors. 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.

    (iii) An advertisement for an investment company that holds itself 
out to be a money market fund, that is a government money market fund, 
as defined in Sec.  270.2a-7(a)(16) of this chapter, that is not 
subject to the requirements of Sec.  270.2a-7(c)(2)(i) and/or (ii) of 
this chapter pursuant to Sec.  270.2a-7(c)(2)(iii) of this chapter, and 
that has not chosen to rely on the ability to impose liquidity fees and 
suspend redemptions consistent with the requirements of Sec.  270.2a-
7(c)(2)(i) and/or (ii)), must include the following statement:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. 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.


    Note to paragraph (b)(4).  If an affiliated person, promoter, or 
principal underwriter of the Fund, or an affiliated person of such a 
person, has contractually committed to provide financial support to 
the Fund, the statement may omit the last sentence (``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.'') for the term of the 
agreement. For purposes of this Note, the term ``financial support'' 
includes any capital contribution, purchase of a security from the 
Fund in reliance on Sec.  270.17a-9 of this chapter, purchase of any 
defaulted or devalued security at par, execution of letter of credit 
or letter of indemnity, capital support agreement (whether or not 
the Fund ultimately received support), performance guarantee, or any 
other similar action reasonably intended to increase or stabilize 
the value or liquidity of the fund's portfolio; however, the term 
``financial support'' excludes any routine waiver of fees or 
reimbursement of fund expenses, routine inter-fund lending, routine 
inter-fund purchases of fund shares, or any action that would 
qualify as financial support as defined above, that the board of 
directors has otherwise determined not to be reasonably intended to 
increase or stabilize the value or liquidity of the fund's 
portfolio.

* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
4. The authority citation for Part 270 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *

0
5. Section 270.2a-7 is revised to read as follows:


Sec.  270.2a-7  Money market funds.

    (a) Definitions--(1) Acquisition (or acquire) means any purchase or 
subsequent rollover (but does not include the failure to exercise a 
demand feature).
    (2) Amortized cost method of valuation means the method of 
calculating an investment company's net asset value whereby portfolio 
securities are valued at the fund's acquisition cost as adjusted for 
amortization of premium or accretion of discount rather than at their 
value based on current market factors.
    (3) Asset-backed security means a fixed income security (other than 
a government security) issued by a special purpose entity (as defined 
in this paragraph (a)(3)), substantially all of the assets of which 
consist of qualifying assets (as defined in this paragraph (a)(3)). 
Special purpose entity means a trust, corporation, partnership or other 
entity organized for the sole purpose of issuing securities that 
entitle their holders to receive payments that depend primarily on the 
cash flow from qualifying assets, but does not include a registered 
investment company. Qualifying assets means financial assets, either 
fixed or revolving, that by their terms convert into cash within a 
finite time period, plus any rights or other assets designed to assure 
the servicing or timely distribution of proceeds to security holders.
    (4) Business day means any day, other than Saturday, Sunday, or any 
customary business holiday.
    (5) Collateralized fully has the same meaning as defined in Sec.  
270.5b-3(c)(1) except that Sec.  270.5b-3(c)(1)(iv)(C) and (D) shall 
not apply.
    (6) Conditional demand feature means a demand feature that is not 
an unconditional demand feature. A conditional demand feature is not a 
guarantee.
    (7) Conduit security means a security issued by a municipal issuer 
(as defined in this paragraph (a)(7)) involving an arrangement or 
agreement entered into, directly or indirectly, with a person other 
than a municipal issuer, which arrangement or agreement provides for or 
secures repayment of the security. Municipal issuer means a state or 
territory of the United States (including the District of Columbia), or 
any political subdivision or public instrumentality of a state or 
territory of the United States. A conduit security does not include a 
security that is:
    (i) Fully and unconditionally guaranteed by a municipal issuer;
    (ii) Payable from the general revenues of the municipal issuer or 
other municipal issuers (other than those revenues derived from an 
agreement or arrangement with a person who is not a municipal issuer 
that provides for or secures repayment of the security issued by the 
municipal issuer);
    (iii) Related to a project owned and operated by a municipal 
issuer; or
    (iv) Related to a facility leased to and under the control of an 
industrial or commercial enterprise that is part of a public project 
which, as a whole, is owned and under the control of a municipal 
issuer.
    (8) Daily liquid assets means:
    (i) Cash;
    (ii) Direct obligations of the U.S. Government;
    (iii) Securities that will mature, as determined without reference 
to the exceptions in paragraph (i) of this section regarding interest 
rate readjustments, or are subject to a demand feature that is 
exercisable and payable, within one business day; or
    (iv) Amounts receivable and due unconditionally within one business 
day on pending sales of portfolio securities.
    (9) Demand feature means a feature permitting the holder of a 
security to sell the security at an exercise price equal to the 
approximate amortized cost of the security plus accrued interest, if 
any, at the later of the time of exercise or the settlement of the 
transaction, paid within 397 calendar days of exercise.
    (10) Demand feature issued by a non-controlled person means a 
demand feature issued by:
    (i) A person that, directly or indirectly, does not control, and is 
not controlled by or under common control with the issuer of the 
security subject to the demand feature (control means ``control'' as 
defined in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)); or
    (ii) A sponsor of a special purpose entity with respect to an 
asset-backed security.
    (11) Designated NRSRO means any one of at least four nationally 
recognized statistical rating organizations, as that term is defined in 
section 3(a)(62) of the Securities

[[Page 47959]]

Exchange Act of 1934 (15 U.S.C. 78c(a)(62)), that:
    (i) The money market fund's board of directors:
    (A) Has designated as an NRSRO whose credit ratings with respect to 
any obligor or security or particular obligors or securities will be 
used by the fund to determine whether a security is an eligible 
security; and
    (B) Determines at least once each calendar year issues credit 
ratings that are sufficiently reliable for such use;
    (ii) Is not an ``affiliated person,'' as defined in section 
2(a)(3)(C) of the Act (15 U.S.C. 80a-2(a)(3)(C)), of the issuer of, or 
any insurer or provider of credit support for, the security; and
    (iii) The fund discloses in its statement of additional information 
is a designated NRSRO, including any limitations with respect to the 
fund's use of such designation.
    (12) Eligible security means:
    (i) A rated security with a remaining maturity of 397 calendar days 
or less that has received a rating from the requisite NRSROs in one of 
the two highest short-term rating categories (within which there may be 
sub-categories or gradations indicating relative standing); or
    (ii) An unrated security that is of comparable quality to a 
security meeting the requirements for a rated security in paragraph 
(a)(12)(i) of this section, as determined by the money market fund's 
board of directors; provided, however, that: A security that at the 
time of issuance had a remaining maturity of more than 397 calendar 
days but that has a remaining maturity of 397 calendar days or less and 
that is an unrated security is not an eligible security if the security 
has received a long-term rating from any designated NRSRO that is not 
within the designated NRSRO's three highest long-term ratings 
categories (within which there may be sub-categories or gradations 
indicating relative standing), unless the security has received a long-
term rating from the requisite NRSROs in one of the three highest 
rating categories.
    (iii) In addition, in the case of a security that is subject to a 
demand feature or guarantee:
    (A) The guarantee has received a rating from a designated NRSRO or 
the guarantee is issued by a guarantor that has received a rating from 
a designated NRSRO with respect to a class of debt obligations (or any 
debt obligation within that class) that is comparable in priority and 
security to the guarantee, unless:
    (1) The guarantee is issued by a person that, directly or 
indirectly, controls, is controlled by or is under common control with 
the issuer of the security subject to the guarantee (other than a 
sponsor of a special purpose entity with respect to an asset-backed 
security);
    (2) The security subject to the guarantee is a repurchase agreement 
that is collateralized fully; or
    (3) The guarantee is itself a government security; and
    (B) The issuer of the demand feature or guarantee, or another 
institution, has undertaken promptly to notify the holder of the 
security in the event the demand feature or guarantee is substituted 
with another demand feature or guarantee (if such substitution is 
permissible under the terms of the demand feature or guarantee).
    (13) Event of insolvency has the same meaning as defined in Sec.  
270.5b-3(c)(2).
    (14) First tier security means any eligible security that:
    (i) Is a rated security that has received a short-term rating from 
the requisite NRSROs in the highest short-term rating category for debt 
obligations (within which there may be sub-categories or gradations 
indicating relative standing);
    (ii) Is an unrated security that is of comparable quality to a 
security meeting the requirements for a rated security in paragraph 
(a)(14)(i) of this section, as determined by the fund's board of 
directors;
    (iii) Is a security issued by a registered investment company that 
is a money market fund; or
    (iv) Is a government security.
    (15) Floating rate security means a security the terms of which 
provide for the adjustment of its interest rate whenever a specified 
interest rate changes and that, at any time until the final maturity of 
the instrument or the period remaining until the principal amount can 
be recovered through demand, can reasonably be expected to have a 
market value that approximates its amortized cost.
    (16) Government money market fund means a money market fund that 
invests 99.5 percent or more of its total assets in cash, government 
securities, and/or repurchase agreements that are collateralized fully.
    (17) Government security has the same meaning as defined in section 
2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
    (18) Guarantee:
    (i) Means an unconditional obligation of a person other than the 
issuer of the security to undertake to pay, upon presentment by the 
holder of the guarantee (if required), the principal amount of the 
underlying security plus accrued interest when due or upon default, or, 
in the case of an unconditional demand feature, an obligation that 
entitles the holder to receive upon the later of exercise or the 
settlement of the transaction the approximate amortized cost of the 
underlying security or securities, plus accrued interest, if any. A 
guarantee includes a letter of credit, financial guaranty (bond) 
insurance, and an unconditional demand feature (other than an 
unconditional demand feature provided by the issuer of the security).
    (ii) The sponsor of a special purpose entity with respect to an 
asset-backed security shall be deemed to have provided a guarantee with 
respect to the entire principal amount of the asset-backed security for 
purposes of this section, except paragraphs (a)(12)(iii) (definition of 
eligible security), (d)(2)(iii) (credit substitution), (d)(3)(iv)(A) 
(fractional guarantees) and (e) (guarantees not relied on) of this 
section, unless the money market fund's board of directors has 
determined that the fund is not relying on the sponsor's financial 
strength or its ability or willingness to provide liquidity, credit or 
other support to determine the quality (pursuant to paragraph (d)(2) of 
this section) or liquidity (pursuant to paragraph (d)(4) of this 
section) of the asset-backed security, and maintains a record of this 
determination (pursuant to paragraphs (g)(7) and (h)(6) of this 
section).
    (19) Guarantee issued by a non-controlled person means a guarantee 
issued by:
    (i) A person that, directly or indirectly, does not control, and is 
not controlled by or under common control with the issuer of the 
security subject to the guarantee (control means ``control'' as defined 
in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9))); or
    (ii) A sponsor of a special purpose entity with respect to an 
asset-backed security.
    (20) Illiquid security means a security that cannot be sold or 
disposed of in the ordinary course of business within seven calendar 
days at approximately the value ascribed to it by the fund.
    (21) Penny-rounding method of pricing means the method of computing 
an investment company's price per share for purposes of distribution, 
redemption and repurchase whereby the current net asset value per share 
is rounded to the nearest one percent.
    (22) Rated security means a security that meets the requirements of 
paragraphs (a)(22)(i) or (ii) of this section, in each case subject to 
paragraph (a)(22)(iii) of this section:
    (i) The security has received a short-term rating from a designated 
NRSRO, or has been issued by an issuer that has

[[Page 47960]]

received a short-term rating from a designated NRSRO with respect to a 
class of debt obligations (or any debt obligation within that class) 
that is comparable in priority and security with the security; or
    (ii) The security is subject to a guarantee that has received a 
short-term rating from a designated NRSRO, or a guarantee issued by a 
guarantor that has received a short-term rating from a designated NRSRO 
with respect to a class of debt obligations (or any debt obligation 
within that class) that is comparable in priority and security with the 
guarantee; but
    (iii) A security is not a rated security if it is subject to an 
external credit support agreement (including an arrangement by which 
the security has become a refunded security) that was not in effect 
when the security was assigned its rating, unless the security has 
received a short-term rating reflecting the existence of the credit 
support agreement as provided in paragraph (a)(22)(i) of this section, 
or the credit support agreement with respect to the security has 
received a short-term rating as provided in paragraph (a)(22)(ii) of 
this section.
    (23) Refunded security has the same meaning as defined in Sec.  
270.5b-3(c)(4).
    (24) Requisite NRSROs means:
    (i) Any two designated NRSROs that have issued a rating with 
respect to a security or class of debt obligations of an issuer; or
    (ii) If only one designated NRSRO has issued a rating with respect 
to such security or class of debt obligations of an issuer at the time 
the fund acquires the security, that designated NRSRO.
    (25) Retail money market fund means a money market fund that has 
policies and procedures reasonably designed to limit all beneficial 
owners of the fund to natural persons.
    (26) Second tier security means any eligible security that is not a 
first tier security.
    (27) Single state fund means a tax exempt fund that holds itself 
out as seeking to maximize the amount of its distributed income that is 
exempt from the income taxes or other taxes on investments of a 
particular state and, where applicable, subdivisions thereof.
    (28) Tax exempt fund means any money market fund that holds itself 
out as distributing income exempt from regular federal income tax.
    (29) Total assets means, with respect to a money market fund using 
the Amortized Cost Method, the total amortized cost of its assets and, 
with respect to any other money market fund, means the total value of 
the money market fund's assets, as defined in section 2(a)(41) of the 
Act (15 U.S.C. 80a-2(a)(41)) and the rules thereunder.
    (30) Unconditional demand feature means a demand feature that by 
its terms would be readily exercisable in the event of a default in 
payment of principal or interest on the underlying security or 
securities.
    (31) United States dollar-denominated means, with reference to a 
security, that all principal and interest payments on such security are 
payable to security holders in United States dollars under all 
circumstances and that the interest rate of, the principal amount to be 
repaid, and the timing of payments related to such security do not vary 
or float with the value of a foreign currency, the rate of interest 
payable on foreign currency borrowings, or with any other interest rate 
or index expressed in a currency other than United States dollars.
    (32) Unrated security means a security that is not a rated 
security.
    (33) Variable rate security means a security the terms of which 
provide for the adjustment of its interest rate on set dates (such as 
the last day of a month or calendar quarter) and that, upon each 
adjustment until the final maturity of the instrument or the period 
remaining until the principal amount can be recovered through demand, 
can reasonably be expected to have a market value that approximates its 
amortized cost.
    (34) Weekly liquid assets means:
    (i) Cash;
    (ii) Direct obligations of the U.S. Government;
    (iii) Government securities that are issued by a person controlled 
or supervised by and acting as an instrumentality of the government of 
the United States pursuant to authority granted by the Congress of the 
United States that:
    (A) Are issued at a discount to the principal amount to be repaid 
at maturity without provision for the payment of interest; and
    (B) Have a remaining maturity date of 60 days or less.
    (iv) Securities that will mature, as determined without reference 
to the exceptions in paragraph (i) of this section regarding interest 
rate readjustments, or are subject to a demand feature that is 
exercisable and payable, within five business days; or
    (v) Amounts receivable and due unconditionally within five business 
days on pending sales of portfolio securities.
    (b) Holding out and use of names and titles--(1) Holding out. It 
shall be an untrue statement of material fact within the meaning of 
section 34(b) of the Act (15 U.S.C. 80a-33(b)) for a registered 
investment company, in any registration statement, application, report, 
account, record, or other document filed or transmitted pursuant to the 
Act, including any advertisement, pamphlet, circular, form letter, or 
other sales literature addressed to or intended for distribution to 
prospective investors that is required to be filed with the Commission 
by section 24(b) of the Act (15 U.S.C. 80a-24(b)), to hold itself out 
to investors as a money market fund or the equivalent of a money market 
fund, unless such registered investment company complies with this 
section.
    (2) Names. It shall constitute the use of a materially deceptive or 
misleading name or title within the meaning of section 35(d) of the Act 
(15 U.S.C. 80a-34(d)) for a registered investment company to adopt the 
term ``money market'' as part of its name or title or the name or title 
of any redeemable securities of which it is the issuer, or to adopt a 
name that suggests that it is a money market fund or the equivalent of 
a money market fund, unless such registered investment company complies 
with this section.
    (3) Titles. For purposes of paragraph (b)(2) of this section, a 
name that suggests that a registered investment company is a money 
market fund or the equivalent thereof includes one that uses such terms 
as ``cash,'' ``liquid,'' ``money,'' ``ready assets'' or similar terms.
    (c) Pricing and Redeeming Shares--(1) Share price calculation.
    (i) The current price per share, for purposes of distribution, 
redemption and repurchase, of any redeemable security issued by a 
government money market fund or retail money market fund, 
notwithstanding the requirements of section 2(a)(41) of the Act (15 
U.S.C. 80a-2(a)(41)) and of Sec. Sec.  270.2a-4 and 270.22c-1 
thereunder, may be computed by use of the amortized cost method and/or 
the penny-rounding method. To use these methods, the board of directors 
of the government or retail money market fund must determine, in good 
faith, that it is in the best interests of the fund and its 
shareholders to maintain a stable net asset value per share or stable 
price per share, by virtue of either the amortized cost method and/or 
the penny-rounding method. The government or retail money market fund 
may continue to use such methods only so long as the board of directors 
believes that they fairly reflect the market-based net asset value per 
share and the fund complies with the other requirements of this 
section.
    (ii) Any money market fund that is not a government money market 
fund or

[[Page 47961]]

a retail money market fund must compute its price per share for 
purposes of distribution, redemption and repurchase by rounding the 
fund's current net asset value per share to a minimum of the fourth 
decimal place in the case of a fund with a $1.0000 share price or an 
equivalent or more precise level of accuracy for money market funds 
with a different share price (e.g. $10.000 per share, or $100.00 per 
share).
    (2) Liquidity fees and temporary suspensions of redemptions. Except 
as provided in paragraphs (c)(2)(iii) and (v) of this section, and 
notwithstanding sections 22(e) and 27(i) of the Act (15 U.S.C. 80a-
22(e) and 80a-27(i)) and Sec.  270.22c-1:
    (i) Discretionary liquidity fees and temporary suspensions of 
redemptions. If, at any time, the money market fund has invested less 
than thirty percent of its total assets in weekly liquid assets, the 
fund may institute a liquidity fee (not to exceed two percent of the 
value of the shares redeemed) or suspend the right of redemption 
temporarily, subject to paragraphs (c)(i)(A) and (B) of this section, 
if the fund's board of directors, including a majority of the directors 
who are not interested persons of the fund, determines that the fee or 
suspension of redemptions is in the best interests of the fund.
    (A) Duration and application of discretionary liquidity fee. Once 
imposed, a discretionary liquidity fee must be applied to all shares 
redeemed and must remain in effect until the money market fund's board 
of directors, including a majority of the directors who are not 
interested persons of the fund, determines that imposing such liquidity 
fee is no longer in the best interests of the fund. Provided however, 
that if, at the end of a business day, the money market fund has 
invested thirty percent or more of its total assets in weekly liquid 
assets, the fund must cease charging the liquidity fee, effective as of 
the beginning of the next business day.
    (B) Duration of temporary suspension of redemptions. The temporary 
suspension of redemptions must apply to all shares and must remain in 
effect until the fund's board of directors, including a majority of the 
directors who are not interested persons of the fund, determines that 
the temporary suspension of redemptions is no longer in the best 
interests of the fund. Provided, however, that the fund must restore 
the right of redemption on the earlier of:
    (1) The beginning of the next business day following a business day 
that ended with the money market fund having invested thirty percent or 
more of its total assets in weekly liquid assets; or
    (2) The beginning of the next business day following ten business 
days after suspending redemptions. The money market fund may not 
suspend the right of redemption pursuant to this section for more than 
ten business days in any rolling ninety calendar day period.
    (ii) Default liquidity fees. If, at the end of a business day, the 
money market fund has invested less than ten percent of its total 
assets in weekly liquid assets, the fund must institute a liquidity 
fee, effective as of the beginning of the next business day, as 
described in paragraphs (c)(2)(ii)(A) and (B) of this section, unless 
the fund's board of directors, including a majority of the directors 
who are not interested persons of the fund, determines that imposing 
the fee is not in the best interests of the fund.
    (A) Amount of default liquidity fee. The default liquidity fee 
shall be one percent of the value of shares redeemed unless the money 
market fund's board of directors, including a majority of the directors 
who are not interested persons of the fund, determines, at the time of 
initial imposition or later, that a higher or lower fee level is in the 
best interests of the fund. A liquidity fee may not exceed two percent 
of the value of the shares redeemed.
    (B) Duration and application of default liquidity fee. Once 
imposed, the default liquidity fee must be applied to all shares 
redeemed and shall remain in effect until the money market fund's board 
of directors, including a majority of the directors who are not 
interested persons of the fund, determines that imposing such liquidity 
fee is not in the best interests of the fund. Provided however, that 
if, at the end of a business day, the money market fund has invested 
thirty percent or more of its total assets in weekly liquid assets, the 
fund must cease charging the liquidity fee, effective as of the 
beginning of the next business day.
    (iii) Government money market funds. The requirements of paragraphs 
(c)(2)(i) and (ii) of this section shall not apply to a government 
money market fund. A government money market fund may, however, choose 
to rely on the ability to impose liquidity fees and suspend redemptions 
consistent with the requirements of paragraph (c)(2)(i) and/or (ii) of 
this section and any other requirements that apply to liquidity fees 
and temporary suspensions of redemptions (e.g., Item 4(b)(1)(ii) of 
Form N-1A (Sec.  274.11A of this chapter)).
    (iv) Variable contracts. Notwithstanding section 27(i) of the Act 
(15 U.S.C. 80a-27(i)), a variable insurance contract issued by a 
registered separate account funding variable insurance contracts or the 
sponsoring insurance company of such separate account may apply a 
liquidity fee or temporary suspension of redemptions pursuant to 
paragraph (c)(2) of this section 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.
    (v) Master feeder funds. Any money market fund (a ``feeder fund'') 
that owns, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C. 80a-
12(d)(1)(E)), shares of another money market fund (a ``master fund'') 
may not impose liquidity fees or temporary suspensions of redemptions 
under paragraphs (c)(2)(i) and (ii) of this section, provided however, 
that if a master fund, in which the feeder fund invests, imposes a 
liquidity fee or temporary suspension of redemptions pursuant to 
paragraphs (c)(2)(i) and (ii) of this section, then the feeder fund 
shall pass through to its investors the fee or redemption suspension on 
the same terms and conditions as imposed by the master fund.
    (d) Risk-limiting conditions--(1) Portfolio maturity. The money 
market fund must maintain a dollar-weighted average portfolio maturity 
appropriate to its investment objective; provided, however, that the 
money market fund must not:
    (i) Acquire any instrument with a remaining maturity of greater 
than 397 calendar days;
    (ii) Maintain a dollar-weighted average portfolio maturity 
(``WAM'') that exceeds 60 calendar days; or
    (iii) Maintain a dollar-weighted average portfolio maturity that 
exceeds 120 calendar days, determined without reference to the 
exceptions in paragraph (i) of this section regarding interest rate 
readjustments (``WAL'').
    (2) Portfolio quality--(i) General. The money market fund must 
limit its portfolio investments to those United States dollar-
denominated securities that the fund's board of directors determines 
present minimal credit risks (which determination must be based on 
factors pertaining to credit quality in addition to any rating assigned 
to such securities by a designated NRSRO) and that are at the time of 
acquisition eligible securities.
    (ii) Second tier securities. No money market fund may acquire a 
second tier security with a remaining maturity of greater than 45 
calendar days, determined without reference to the exceptions in 
paragraph (i) of this section regarding interest rate

[[Page 47962]]

readjustments. Immediately after the acquisition of any second tier 
security, a money market fund must not have invested more than three 
percent of its total assets in second tier securities.
    (iii) Securities subject to guarantees. A security that is subject 
to a guarantee may be determined to be an eligible security or a first 
tier security based solely on whether the guarantee is an eligible 
security or first tier security, as the case may be.
    (iv) Securities subject to conditional demand features. A security 
that is subject to a conditional demand feature (``underlying 
security'') may be determined to be an eligible security or a first 
tier security only if:
    (A) The conditional demand feature is an eligible security or first 
tier security, as the case may be;
    (B) At the time of the acquisition of the underlying security, the 
money market fund's board of directors has determined that there is 
minimal risk that the circumstances that would result in the 
conditional demand feature not being exercisable will occur; and
    (1) The conditions limiting exercise either can be monitored 
readily by the fund or relate to the taxability, under federal, state 
or local law, of the interest payments on the security; or
    (2) The terms of the conditional demand feature require that the 
fund will receive notice of the occurrence of the condition and the 
opportunity to exercise the demand feature in accordance with its 
terms; and
    (C) The underlying security or any guarantee of such security (or 
the debt securities of the issuer of the underlying security or 
guarantee that are comparable in priority and security with the 
underlying security or guarantee) has received either a short-term 
rating or a long-term rating, as the case may be, from the requisite 
NRSROs within the NRSROs' two highest short-term or long-term rating 
categories (within which there may be sub-categories or gradations 
indicating relative standing) or, if unrated, is determined to be of 
comparable quality by the money market fund's board of directors to a 
security that has received a rating from the requisite NRSROs within 
the NRSROs' two highest short-term or long-term rating categories, as 
the case may be.
    (3) Portfolio diversification--(i) Issuer diversification. The 
money market fund must be diversified with respect to issuers of 
securities acquired by the fund as provided in paragraphs (d)(3)(i) and 
(d)(3)(ii) of this section, other than with respect to government 
securities and securities subject to a guarantee issued by a non-
controlled person.
    (A) Taxable and national funds. Immediately after the acquisition 
of any security, a money market fund other than a single state fund 
must not have invested more than:
    (1) Five percent of its total assets in securities issued by the 
issuer of the security, provided, however, that such a fund may invest 
up to twenty-five percent of its total assets in the first tier 
securities of a single issuer for a period of up to three business days 
after the acquisition thereof; provided, further, that the fund may not 
invest in the securities of more than one issuer in accordance with the 
foregoing proviso in this paragraph at any time; and
    (2) Ten percent of its total assets in securities issued by or 
subject to demand features or guarantees from the institution that 
issued the demand feature or guarantee.
    (B) Single state funds. Immediately after the acquisition of any 
security, a single state fund must not have invested:
    (1) With respect to seventy-five percent of its total assets, more 
than five percent of its total assets in securities issued by the 
issuer of the security; and
    (2) With respect to all of its total assets, more than ten percent 
of its total assets in securities issued by or subject to demand 
features or guarantees from the institution that issued the demand 
feature or guarantee.
    (C) Second tier securities. Immediately after the acquisition of 
any second tier security, a money market fund must not have invested 
more than one half of one percent of its total assets in the second 
tier securities of any single issuer, and must not have invested more 
than 2.5 percent of its total assets in second tier securities issued 
by or subject to demand features or guarantees from the institution 
that issued the demand feature or guarantee.
    (ii) Issuer diversification calculations. For purposes of making 
calculations under paragraph (d)(3)(i) of this section:
    (A) Repurchase agreements. The acquisition of a repurchase 
agreement may be deemed to be an acquisition of the underlying 
securities, provided the obligation of the seller to repurchase the 
securities from the money market fund is collateralized fully and the 
fund's board of directors has evaluated the seller's creditworthiness.
    (B) Refunded securities. The acquisition of a refunded security 
shall be deemed to be an acquisition of the escrowed government 
securities.
    (C) Conduit securities. A conduit security shall be deemed to be 
issued by the person (other than the municipal issuer) ultimately 
responsible for payments of interest and principal on the security.
    (D) Asset-backed securities--(1) General. An asset-backed security 
acquired by a fund (``primary ABS'') shall be deemed to be issued by 
the special purpose entity that issued the asset-backed security, 
provided, however:
    (i) Holdings of primary ABS. Any person whose obligations 
constitute ten percent or more of the principal amount of the 
qualifying assets of the primary ABS (``ten percent obligor'') shall be 
deemed to be an issuer of the portion of the primary ABS such 
obligations represent; and
    (ii) Holdings of secondary ABS. If a ten percent obligor of a 
primary ABS is itself a special purpose entity issuing asset-backed 
securities (``secondary ABS''), any ten percent obligor of such 
secondary ABS also shall be deemed to be an issuer of the portion of 
the primary ABS that such ten percent obligor represents.
    (2) Restricted special purpose entities. A ten percent obligor with 
respect to a primary or secondary ABS shall not be deemed to have 
issued any portion of the assets of a primary ABS as provided in 
paragraph (d)(3)(ii)(D)(1) of this section if that ten percent obligor 
is itself a special purpose entity issuing asset-backed securities 
(``restricted special purpose entity''), and the securities that it 
issues (other than securities issued to a company that controls, or is 
controlled by or under common control with, the restricted special 
purpose entity and which is not itself a special purpose entity issuing 
asset-backed securities) are held by only one other special purpose 
entity.
    (3) Demand features and guarantees. In the case of a ten percent 
obligor deemed to be an issuer, the fund must satisfy the 
diversification requirements of paragraph (d)(3)(iii) of this section 
with respect to any demand feature or guarantee to which the ten 
percent obligor's obligations are subject.
    (E) Shares of other money market funds. A money market fund that 
acquires shares issued by another money market fund in an amount that 
would otherwise be prohibited by paragraph (d)(3)(i) of this section 
shall nonetheless be deemed in compliance with this section if the 
board of directors of the acquiring money market fund reasonably 
believes that the fund in which it has invested is in compliance with 
this section.
    (F) Treatment of certain affiliated entities--(1) General. The 
money market fund, when calculating the amount of its total assets 
invested in securities issued by any particular issuer for purposes of

[[Page 47963]]

paragraph (d)(3)(i) of this section, must treat as a single issuer two 
or more issuers of securities owned by the money market fund if one 
issuer controls the other, is controlled by the other issuer, or is 
under common control with the other issuer, provided that ``control'' 
for this purpose means ownership of more than 50 percent of the 
issuer's voting securities.
    (2) Equity owners of asset-backed commercial paper special purpose 
entities. The money market fund is not required to aggregate an asset-
backed commercial paper special purpose entity and its equity owners 
under paragraph (d)(3)(ii)(F)(1) of this section provided that a 
primary line of business of its equity owners is owning equity 
interests in special purpose entities and providing services to special 
purpose entities, the independent equity owners' activities with 
respect to the SPEs are limited to providing management or 
administrative services, and no qualifying assets of the special 
purpose entity were originated by the equity owners.
    (3) Ten percent obligors. For purposes of determining ten percent 
obligors pursuant to paragraph (d)(3)(ii)(D)(1)(i) of this section, the 
money market fund must treat as a single person two or more persons 
whose obligations in the aggregate constitute ten percent or more of 
the principal amount of the qualifying assets of the primary ABS if one 
person controls the other, is controlled by the other person, or is 
under common control with the person, provided that ``control'' for 
this purpose means ownership of more than 50 percent of the person's 
voting securities.
    (iii) Diversification rules for demand features and guarantees. The 
money market fund must be diversified with respect to demand features 
and guarantees acquired by the fund as provided in paragraphs 
(d)(3)(iii) and (d)(3)(iv) of this section, other than with respect to 
a demand feature issued by the same institution that issued the 
underlying security, or with respect to a guarantee or demand feature 
that is itself a government security.
    (A) General. Immediately after the acquisition of any demand 
feature or guarantee, any security subject to a demand feature or 
guarantee, or a security directly issued by the issuer of a demand 
feature or guarantee, a money market fund must not have invested more 
than ten percent of its total assets in securities issued by or subject 
to demand features or guarantees from the institution that issued the 
demand feature or guarantee, subject to paragraphs (d)(3)(iii)(B) and 
(d)(3)(iii)(C) of this section.
    (B) Tax exempt funds. Immediately after the acquisition of any 
demand feature or guarantee, any security subject to a demand feature 
or guarantee, or a security directly issued by the issuer of a demand 
feature or guarantee (any such acquisition, a ``demand feature or 
guarantee acquisition''), a tax exempt fund, with respect to eighty-
five percent of its total assets, must not have invested more than ten 
percent of its total assets in securities issued by or subject to 
demand features or guarantees from the institution that issued the 
demand feature or guarantee; provided that any demand feature or 
guarantee acquisition in excess of ten percent of the fund's total 
assets in accordance with this paragraph must be a demand feature or 
guarantee issued by a non-controlled person.
    (C) Second tier demand features or guarantees. Immediately after 
the acquisition of any demand feature or guarantee, any security 
subject to a demand feature or guarantee, a security directly issued by 
the issuer of a demand feature or guarantee, or a security after giving 
effect to the demand feature or guarantee, in all cases that is a 
second tier security, a money market fund must not have invested more 
than 2.5 percent of its total assets in securities issued by or subject 
to demand features or guarantees from the institution that issued the 
demand feature or guarantee.
    (iv) Demand feature and guarantee diversification calculations--(A) 
Fractional demand features or guarantees. In the case of a security 
subject to a demand feature or guarantee from an institution by which 
the institution guarantees a specified portion of the value of the 
security, the institution shall be deemed to guarantee the specified 
portion thereof.
    (B) Layered demand features or guarantees. In the case of a 
security subject to demand features or guarantees from multiple 
institutions that have not limited the extent of their obligations as 
described in paragraph (d)(3)(iv)(A) of this section, each institution 
shall be deemed to have provided the demand feature or guarantee with 
respect to the entire principal amount of the security.
    (v) Diversification safe harbor. A money market fund that satisfies 
the applicable diversification requirements of paragraphs (d)(3) and 
(e) of this section shall be deemed to have satisfied the 
diversification requirements of section 5(b)(1) of the Act (15 U.S.C. 
80a-5(b)(1)) and the rules adopted thereunder.
    (4) Portfolio liquidity. The money market fund must hold securities 
that are sufficiently liquid to meet reasonably foreseeable shareholder 
redemptions in light of the fund's obligations under section 22(e) of 
the Act (15 U.S.C. 80a-22(e)) and any commitments the fund has made to 
shareholders; provided, however, that:
    (i) Illiquid securities. The money market fund may not acquire any 
illiquid security if, immediately after the acquisition, the money 
market fund would have invested more than five percent of its total 
assets in illiquid securities.
    (ii) Minimum daily liquidity requirement. The money market fund may 
not acquire any security other than a daily liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than ten percent of its total assets in daily liquid assets. This 
provision does not apply to tax exempt funds.
    (iii) Minimum weekly liquidity requirement. The money market fund 
may not acquire any security other than a weekly liquid asset if, 
immediately after the acquisition, the fund would have invested less 
than thirty percent of its total assets in weekly liquid assets.
    (e) Demand features and guarantees not relied upon. If the fund's 
board of directors has determined that the fund is not relying on a 
demand feature or guarantee to determine the quality (pursuant to 
paragraph (d)(2) of this section), or maturity (pursuant to paragraph 
(i) of this section), or liquidity of a portfolio security (pursuant to 
paragraph (d)(4) of this section), and maintains a record of this 
determination (pursuant to paragraphs (g)(3) and (h)(7) of this 
section), then the fund may disregard such demand feature or guarantee 
for all purposes of this section.
    (f) Downgrades, defaults and other events--(1) Downgrades.
    (i) General. Upon the occurrence of either of the events specified 
in paragraphs (f)(1)(i)(A) and (B) of this section with respect to a 
portfolio security, the board of directors of the money market fund 
shall reassess promptly whether such security continues to present 
minimal credit risks and shall cause the fund to take such action as 
the board of directors determines is in the best interests of the money 
market fund:
    (A) A portfolio security of a money market fund ceases to be a 
first tier security (either because it no longer has the highest rating 
from the requisite NRSROs or, in the case of an unrated security, the 
board of directors of the money market fund determines that it is no 
longer of comparable quality to a first tier security); and

[[Page 47964]]

    (B) The money market fund's investment adviser (or any person to 
whom the fund's board of directors has delegated portfolio management 
responsibilities) becomes aware that any unrated security or second 
tier security held by the money market fund has, since the security was 
acquired by the fund, been given a rating by a designated NRSRO below 
the designated NRSRO's second highest short-term rating category.
    (ii) Securities to be disposed of. The reassessments required by 
paragraph (f)(1)(i) of this section shall not be required if the fund 
disposes of the security (or it matures) within five business days of 
the specified event and, in the case of events specified in paragraph 
(f)(1)(i)(B) of this section, the board is subsequently notified of the 
adviser's actions.
    (iii) Special rule for certain securities subject to demand 
features. In the event that after giving effect to a rating downgrade, 
more than 2.5 percent of the fund's total assets are invested in 
securities issued by or subject to demand features from a single 
institution that are second tier securities, the fund shall reduce its 
investment in securities issued by or subject to demand features from 
that institution to no more than 2.5 percent of its total assets by 
exercising the demand features at the next succeeding exercise date(s), 
absent a finding by the board of directors that disposal of the 
portfolio security would not be in the best interests of the money 
market fund.
    (2) Defaults and other events. Upon the occurrence of any of the 
events specified in paragraphs (f)(2)(i) through (iv) of this section 
with respect to a portfolio security, the money market fund shall 
dispose of such security as soon as practicable consistent with 
achieving an orderly disposition of the security, by sale, exercise of 
any demand feature or otherwise, absent a finding by the board of 
directors that disposal of the portfolio security would not be in the 
best interests of the money market fund (which determination may take 
into account, among other factors, market conditions that could affect 
the orderly disposition of the portfolio security):
    (i) The default with respect to a portfolio security (other than an 
immaterial default unrelated to the financial condition of the issuer);
    (ii) A portfolio security ceases to be an eligible security;
    (iii) A portfolio security has been determined to no longer present 
minimal credit risks; or
    (iv) An event of insolvency occurs with respect to the issuer of a 
portfolio security or the provider of any demand feature or guarantee.
    (3) Notice to the Commission. The money market fund must notify the 
Commission of the occurrence of certain material events, as specified 
in Form N-CR (Sec.  274.222 of this chapter).
    (4) Defaults for purposes of paragraphs (f)(2) and (3) of this 
section. For purposes of paragraphs (f)(2) and (3) of this section, an 
instrument subject to a demand feature or guarantee shall not be deemed 
to be in default (and an event of insolvency with respect to the 
security shall not be deemed to have occurred) if:
    (i) In the case of an instrument subject to a demand feature, the 
demand feature has been exercised and the fund has recovered either the 
principal amount or the amortized cost of the instrument, plus accrued 
interest;
    (ii) The provider of the guarantee is continuing, without protest, 
to make payments as due on the instrument; or
    (iii) The provider of a guarantee with respect to an asset-backed 
security pursuant to paragraph (a)(18)(ii) of this section is 
continuing, without protest, to provide credit, liquidity or other 
support as necessary to permit the asset-backed security to make 
payments as due.
    (g) Required procedures. The money market fund's board of directors 
must adopt written procedures including the following:
    (1) Funds using amortized cost. In the case of a government or 
retail money market fund that uses the amortized cost method of 
valuation, in supervising the money market fund's operations and 
delegating special responsibilities involving portfolio management to 
the money market fund's investment adviser, the money market fund's 
board of directors, as a particular responsibility within the overall 
duty of care owed to its shareholders, shall establish written 
procedures reasonably designed, taking into account current market 
conditions and the money market fund's investment objectives, to 
stabilize the money market fund's net asset value per share, as 
computed for the purpose of distribution, redemption and repurchase, at 
a single value.
    (i) Specific procedures. Included within the procedures adopted by 
the board of directors shall be the following:
    (A) Shadow pricing. Written procedures shall provide:
    (1) That the extent of deviation, if any, of the current net asset 
value per share calculated using available market quotations (or an 
appropriate substitute that reflects current market conditions) from 
the money market fund's amortized cost price per share, shall be 
calculated at least daily, and at such other intervals that the board 
of directors determines appropriate and reasonable in light of current 
market conditions;
    (2) For the periodic review by the board of directors of the amount 
of the deviation as well as the methods used to calculate the 
deviation; and
    (3) For the maintenance of records of the determination of 
deviation and the board's review thereof.
    (B) Prompt consideration of deviation. In the event such deviation 
from the money market fund's amortized cost price per share exceeds \1/
2\ of 1 percent, the board of directors shall promptly consider what 
action, if any, should be initiated by the board of directors.
    (C) Material dilution or unfair results. Where the board of 
directors believes the extent of any deviation from the money market 
fund's amortized cost price per share may result in material dilution 
or other unfair results to investors or existing shareholders, it shall 
cause the fund to take such action as it deems appropriate to eliminate 
or reduce to the extent reasonably practicable such dilution or unfair 
results.
    (ii) [Reserved]
    (2) Funds using penny rounding. In the case of a government or 
retail money market fund that uses the penny rounding method of 
pricing, in supervising the money market fund's operations and 
delegating special responsibilities involving portfolio management to 
the money market fund's investment adviser, the money market fund's 
board of directors, as a particular responsibility within the overall 
duty of care owed to its shareholders, must establish written 
procedures reasonably designed, taking into account current market 
conditions and the money market fund's investment objectives, to assure 
to the extent reasonably practicable that the money market fund's price 
per share as computed for the purpose of distribution, redemption and 
repurchase, rounded to the nearest one percent, will not deviate from 
the single price established by the board of directors.
    (3) Securities for which maturity is determined by reference to 
demand features. In the case of a security for which maturity is 
determined by reference to a demand feature, written procedures shall 
require ongoing review of the security's continued minimal credit 
risks, and that review must be based on, among other things, financial 
data for the most recent fiscal year of the issuer of the demand 
feature and, in the case of a security subject to a

[[Page 47965]]

conditional demand feature, the issuer of the security whose financial 
condition must be monitored under paragraph (d)(2)(iv) of this section, 
whether such data is publicly available or provided under the terms of 
the security's governing documentation.
    (4) Securities subject to demand features or guarantees. In the 
case of a security subject to one or more demand features or guarantees 
that the fund's board of directors has determined that the fund is not 
relying on to determine the quality (pursuant to paragraph (d)(2) of 
this section), maturity (pursuant to paragraph (i) of this section) or 
liquidity (pursuant to paragraph (d)(4) of this section) of the 
security subject to the demand feature or guarantee, written procedures 
must require periodic evaluation of such determination.
    (5) Adjustable rate securities without demand features. In the case 
of a variable rate or floating rate security that is not subject to a 
demand feature and for which maturity is determined pursuant to 
paragraph (i)(1), (i)(2) or (i)(4) of this section, written procedures 
shall require periodic review of whether the interest rate formula, 
upon readjustment of its interest rate, can reasonably be expected to 
cause the security to have a market value that approximates its 
amortized cost value.
    (6) Ten percent obligors of asset-backed securities. In the case of 
an asset-backed security, written procedures must require the fund to 
periodically determine the number of ten percent obligors (as that term 
is used in paragraph (d)(3)(ii)(D) of this section) deemed to be the 
issuers of all or a portion of the asset-backed security for purposes 
of paragraph (d)(3)(ii)(D) of this section; provided, however, written 
procedures need not require periodic determinations with respect to any 
asset-backed security that a fund's board of directors has determined, 
at the time of acquisition, will not have, or is unlikely to have, ten 
percent obligors that are deemed to be issuers of all or a portion of 
that asset-backed security for purposes of paragraph (d)(3)(ii)(D) of 
this section, and maintains a record of this determination.
    (7) Asset-backed securities not subject to guarantees. In the case 
of an asset-backed security for which the fund's board of directors has 
determined that the fund is not relying on the sponsor's financial 
strength or its ability or willingness to provide liquidity, credit or 
other support in connection with the asset-backed security to determine 
the quality (pursuant to paragraph (d)(2) of this section) or liquidity 
(pursuant to paragraph (d)(4) of this section) of the asset-backed 
security, written procedures must require periodic evaluation of such 
determination.
    (8) Stress Testing. Written procedures must provide for:
    (i) General. The periodic stress testing, at such intervals as the 
board of directors determines appropriate and reasonable in light of 
current market conditions, of the money market fund's ability to have 
invested at least ten percent of its total assets in weekly liquid 
assets, and the fund's ability to minimize principal volatility (and, 
in the case of a money market fund using the amortized cost method of 
valuation or penny rounding method of pricing as provided in paragraph 
(c)(1) of this section, the fund's ability to maintain the stable price 
per share established by the board of directors for the purpose of 
distribution, redemption and repurchase), based upon specified 
hypothetical events that include, but are not limited to:
    (A) Increases in the general level of short-term interest rates, in 
combination with various levels of an increase in shareholder 
redemptions;
    (B) A downgrade or default of particular portfolio security 
positions, each representing various portions of the fund's portfolio 
(with varying assumptions about the resulting loss in the value of the 
security), in combination with various levels of an increase in 
shareholder redemptions;
    (C) A widening of spreads compared to the indexes to which 
portfolio securities are tied in various sectors in the fund's 
portfolio (in which a sector is a logically related subset of portfolio 
securities, such as securities of issuers in similar or related 
industries or geographic region or securities of a similar security 
type), in combination with various levels of an increase in shareholder 
redemptions; and
    (D) Any additional combinations of events that the adviser deems 
relevant.
    (ii) A report on the results of such testing to be provided to the 
board of directors at its next regularly scheduled meeting (or sooner, 
if appropriate in light of the results), which report must include:
    (A) The date(s) on which the testing was performed and an 
assessment of the money market fund's ability to have invested at least 
ten percent of its total assets in weekly liquid assets and to minimize 
principal volatility (and, in the case of a money market fund using the 
amortized cost method of valuation or penny rounding method of pricing 
as provided in paragraph (c)(1) of this section to maintain the stable 
price per share established by the board of directors); and
    (B) An assessment by the fund's adviser of the fund's ability to 
withstand the events (and concurrent occurrences of those events) that 
are reasonably likely to occur within the following year, including 
such information as may reasonably be necessary for the board of 
directors to evaluate the stress testing conducted by the adviser and 
the results of the testing. The fund adviser must include a summary of 
the significant assumptions made when performing the stress tests.
    (h) Recordkeeping and reporting--(1) Written procedures. For a 
period of not less than six years following the replacement of existing 
procedures with new procedures (the first two years in an easily 
accessible place), a written copy of the procedures (and any 
modifications thereto) described in this section must be maintained and 
preserved.
    (2) Board considerations and actions. For a period of not less than 
six years (the first two years in an easily accessible place) a written 
record must be maintained and preserved of the board of directors' 
considerations and actions taken in connection with the discharge of 
its responsibilities, as set forth in this section, to be included in 
the minutes of the board of directors' meetings.
    (3) Credit risk analysis. For a period of not less than three years 
from the date that the credit risks of a portfolio security were most 
recently reviewed, a written record of the determination that a 
portfolio security presents minimal credit risks and the designated 
NRSRO ratings (if any) used to determine the status of the security as 
an eligible security, first tier security or second tier security shall 
be maintained and preserved in an easily accessible place.
    (4) Determinations with respect to adjustable rate securities. For 
a period of not less than three years from the date when the assessment 
was most recently made, a written record must be preserved and 
maintained, in an easily accessible place, of the determination 
required by paragraph (g)(5) of this section (that a variable rate or 
floating rate security that is not subject to a demand feature and for 
which maturity is determined pursuant to paragraph (i)(1), (i)(2) or 
(i)(4) of this section can reasonably be expected, upon readjustment of 
its interest rate at all times during the life of the instrument, to 
have a market value that approximates its amortized cost).
    (5) Determinations with respect to asset-backed securities. For a 
period of not less than three years from the date when the 
determination was most recently made, a written record must be

[[Page 47966]]

preserved and maintained, in an easily accessible place, of the 
determinations required by paragraph (g)(6) of this section (the number 
of ten percent obligors (as that term is used in paragraph 
(d)(3)(ii)(D) of this section) deemed to be the issuers of all or a 
portion of the asset-backed security for purposes of paragraph 
(d)(3)(ii)(D) of this section). The written record must include:
    (i) The identities of the ten percent obligors (as that term is 
used in paragraph (d)(3)(ii)(D) of this section), the percentage of the 
qualifying assets constituted by the securities of each ten percent 
obligor and the percentage of the fund's total assets that are invested 
in securities of each ten percent obligor; and
    (ii) Any determination that an asset-backed security will not have, 
or is unlikely to have, ten percent obligors deemed to be issuers of 
all or a portion of that asset-backed security for purposes of 
paragraph (d)(3)(ii)(D) of this section.
    (6) Evaluations with respect to asset-backed securities not subject 
to guarantees. For a period of not less than three years from the date 
when the evaluation was most recently made, a written record must be 
preserved and maintained, in an easily accessible place, of the 
evaluation required by paragraph (g)(7) of this section (regarding 
asset-backed securities not subject to guarantees).
    (7) Evaluations with respect to securities subject to demand 
features or guarantees. For a period of not less than three years from 
the date when the evaluation was most recently made, a written record 
must be preserved and maintained, in an easily accessible place, of the 
evaluation required by paragraph (g)(4) of this section (regarding 
securities subject to one or more demand features or guarantees).
    (8) Reports with respect to stress testing. For a period of not 
less than six years (the first two years in an easily accessible 
place), a written copy of the report required under paragraph 
(g)(8)(ii) of this section must be maintained and preserved.
    (9) Inspection of records. The documents preserved pursuant to 
paragraph (h) of this section are subject to inspection by the 
Commission in accordance with section 31(b) of the Act (15 U.S.C. 80a-
30(b)) as if such documents were records required to be maintained 
pursuant to rules adopted under section 31(a) of the Act (15 U.S.C. 
80a-30(a)).
    (10) Web site disclosure of portfolio holdings and other fund 
information. The money market fund must post prominently on its Web 
site the following information:
    (i) For a period of not less than six months, beginning no later 
than the fifth business day of the month, a schedule of its 
investments, as of the last business day or subsequent calendar day of 
the preceding month, that includes the following information:
    (A) With respect to the money market fund and each class of 
redeemable shares thereof:
    (1) The WAM; and
    (2) The WAL.
    (B) With respect to each security held by the money market fund:
    (1) Name of the issuer;
    (2) Category of investment (indicate the category that identifies 
the instrument from among the following: U.S. Treasury Debt; U.S. 
Government Agency Debt; Non-U.S. Sovereign, Sub-Sovereign and Supra-
National debt; Certificate of Deposit; Non-Negotiable Time Deposit; 
Variable Rate Demand Note; Other Municipal Security; Asset Backed 
Commercial Paper; Other Asset Backed Securities; U.S. Treasury 
Repurchase Agreement, if collateralized only by U.S. Treasuries 
(including Strips) and cash; U.S. Government Agency Repurchase 
Agreement, collateralized only by U.S. Government Agency securities, 
U.S. Treasuries, and cash; Other Repurchase Agreement, if any 
collateral falls outside Treasury, Government Agency and cash; 
Insurance Company Funding Agreement; Investment Company; Financial 
Company Commercial Paper; and Non-Financial Company Commercial Paper. 
If Other Instrument, include a brief description);
    (3) CUSIP number (if any);
    (4) Principal amount;
    (5) The maturity date determined by taking into account the 
maturity shortening provisions in paragraph (i) of this section (i.e., 
the maturity date used to calculate WAM under paragraph (d)(1)(ii) of 
this section);
    (6) The maturity date determined without reference to the 
exceptions in paragraph (i) of this section regarding interest rate 
readjustments (i.e., the maturity used to calculate WAL under paragraph 
(d)(1)(iii) of this section);
    (7) Coupon or yield; and
    (8) Value.
    (ii) A schedule, chart, graph, or other depiction, which must be 
updated each business day as of the end of the preceding business day, 
showing, as of the end of each business day during the preceding six 
months:
    (A) The percentage of the money market fund's total assets invested 
in daily liquid assets;
    (B) The percentage of the money market fund's total assets invested 
in weekly liquid assets; and
    (C) The money market fund's net inflows or outflows.
    (iii) A schedule, chart, graph, or other depiction showing the 
money market fund's net asset value per share (which the fund must 
calculate based on current market factors before applying the amortized 
cost or penny-rounding method, if used), rounded to the fourth decimal 
place in the case of funds with a $1.000 share price or an equivalent 
level of accuracy for funds with a different share price (e.g., $10.00 
per share), as of the end of each business day during the preceding six 
months, which must be updated each business day as of the end of the 
preceding business day.
    (iv) A link to a Web site of the Securities and Exchange Commission 
where a user may obtain the most recent 12 months of publicly available 
information filed by the money market fund pursuant to Sec.  270.30b1-
7.
    (v) For a period of not less than one year, beginning no later than 
the same business day on which the money market fund files an initial 
report on Form N-CR (Sec.  274.222 of this chapter) in response to the 
occurrence of any event specified in Parts C, E, F, or G of Form N-CR, 
the same information that the money market fund is required to report 
to the Commission on Part C (Items C.1, C.2, C.3, C.4, C.5, C.6, and 
C.7), Part E (Items E.1, E.2, E.3, and E.4), Part F (Items F.1 and 
F.2), or Part G of Form N-CR concerning such event, along with the 
following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's Internet 
site at http://www.sec.gov.''
    (11) Processing of transactions. A government money market fund and 
a retail money market fund (or its transfer agent) must have the 
capacity to redeem and sell securities issued by the fund at a price 
based on the current net asset value per share pursuant to Sec.  
270.22c-1. Such capacity must include the ability to redeem and sell 
securities at prices that do not correspond to a stable price per 
share.
    (i) Maturity of portfolio securities. For purposes of this section, 
the maturity of a portfolio security shall be deemed to be the period 
remaining (calculated from the trade date or such other date on which 
the fund's interest in the

[[Page 47967]]

security is subject to market action) until the date on which, in 
accordance with the terms of the security, the principal amount must 
unconditionally be paid, or in the case of a security called for 
redemption, the date on which the redemption payment must be made, 
except as provided in paragraphs (i)(1) through (i)(8) of this section:
    (1) Adjustable rate government securities. A government security 
that is a variable rate security where the variable rate of interest is 
readjusted no less frequently than every 397 calendar days shall be 
deemed to have a maturity equal to the period remaining until the next 
readjustment of the interest rate. A government security that is a 
floating rate security shall be deemed to have a remaining maturity of 
one day.
    (2) Short-term variable rate securities. A variable rate security, 
the principal amount of which, in accordance with the terms of the 
security, must unconditionally be paid in 397 calendar days or less 
shall be deemed to have a maturity equal to the earlier of the period 
remaining until the next readjustment of the interest rate or the 
period remaining until the principal amount can be recovered through 
demand.
    (3) Long-term variable rate securities. A variable rate security, 
the principal amount of which is scheduled to be paid in more than 397 
calendar days, that is subject to a demand feature, shall be deemed to 
have a maturity equal to the longer of the period remaining until the 
next readjustment of the interest rate or the period remaining until 
the principal amount can be recovered through demand.
    (4) Short-term floating rate securities. A floating rate security, 
the principal amount of which, in accordance with the terms of the 
security, must unconditionally be paid in 397 calendar days or less 
shall be deemed to have a maturity of one day, except for purposes of 
determining WAL under paragraph (d)(1)(iii) of this section, in which 
case it shall be deemed to have a maturity equal to the period 
remaining until the principal amount can be recovered through demand.
    (5) Long-term floating rate securities. A floating rate security, 
the principal amount of which is scheduled to be paid in more than 397 
calendar days, that is subject to a demand feature, shall be deemed to 
have a maturity equal to the period remaining until the principal 
amount can be recovered through demand.
    (6) Repurchase agreements. A repurchase agreement shall be deemed 
to have a maturity equal to the period remaining until the date on 
which the repurchase of the underlying securities is scheduled to 
occur, or, where the agreement is subject to demand, the notice period 
applicable to a demand for the repurchase of the securities.
    (7) Portfolio lending agreements. A portfolio lending agreement 
shall be treated as having a maturity equal to the period remaining 
until the date on which the loaned securities are scheduled to be 
returned, or where the agreement is subject to demand, the notice 
period applicable to a demand for the return of the loaned securities.
    (8) Money market fund securities. An investment in a money market 
fund shall be treated as having a maturity equal to the period of time 
within which the acquired money market fund is required to make payment 
upon redemption, unless the acquired money market fund has agreed in 
writing to provide redemption proceeds to the investing money market 
fund within a shorter time period, in which case the maturity of such 
investment shall be deemed to be the shorter period.
    (j) Delegation. The money market fund's board of directors may 
delegate to the fund's investment adviser or officers the 
responsibility to make any determination required to be made by the 
board of directors under this section other than the determinations 
required by paragraphs (a)(11)(i) (designation of NRSROs), (c)(1) 
(board findings), (c)(2)(i) and (ii) (determinations related to 
liquidity fees and temporary suspensions of redemptions), (f)(2) 
(defaults and other events), (g)(1) and (g)(2) (amortized cost and 
penny rounding procedures), and (g)(8) (stress testing procedures) of 
this section.
    (1) Written guidelines. The board of directors must establish and 
periodically review written guidelines (including guidelines for 
determining whether securities present minimal credit risks as required 
in paragraph (d)(2) of this section) and procedures under which the 
delegate makes such determinations.
    (2) Oversight. The board of directors must take any measures 
reasonably necessary (through periodic reviews of fund investments and 
the delegate's procedures in connection with investment decisions and 
prompt review of the adviser's actions in the event of the default of a 
security or event of insolvency with respect to the issuer of the 
security or any guarantee or demand feature to which it is subject that 
requires notification of the Commission under paragraph (f)(3) of this 
section by reference to Form N-CR (Sec.  274.222 of this chapter)) to 
assure that the guidelines and procedures are being followed.

0
6. Section 270.12d3-1(d)(7)(v) is amended by removing ``Sec. Sec.  
270.2a-7(a)(8) and 270.2a-7(a)(15)'' and adding in its place 
``Sec. Sec.  270.2a-7(a)(9) and 270.2a-7(a)(18)''.

0
7. Section 270.18f-3(c)(2)(i) is amended by removing the phrase ``that 
determines net asset value using the amortized cost method permitted by 
Sec.  270.2a-7'' and adding in its place ``that operates in compliance 
with Sec.  270.2a-7''.

0
8. Section Sec.  270.22e-3 is amended by revising paragraph (a)(1) and 
adding paragraph (d).
    The revisions and additions read as follows.


Sec.  270.22e-3  Exemption for liquidation of money market funds.

    (a) * * *
    (1) The fund, at the end of a business day, has invested less than 
ten percent of its total assets in weekly liquid assets or, in the case 
of a fund that is a government money market fund, as defined in Sec.  
270.2a-7(a)(16) or a retail money market fund, as defined in Sec.  
270.2a-7(a)(25), the fund's price per share as computed for the purpose 
of distribution, redemption and repurchase, rounded to the nearest one 
percent, has deviated from the stable price established by the board of 
directors or the fund's board of directors, including a majority of 
directors who are not interested persons of the fund, determines that 
such a deviation is likely to occur;
* * * * *
    (d) Definitions. Each of the terms business day, total assets, and 
weekly liquid assets has the same meaning as defined in Sec.  270.2a-7.

0
9. Section 270.30b1-7 is revised to read as follows:


Sec.  270.30b1-7  Monthly report for money market funds.

    Every registered open-end management investment company, or series 
thereof, that is regulated as a money market fund under Sec.  270.2a-7 
must file with the Commission a monthly report of portfolio holdings on 
Form N-MFP (Sec.  274.201 of this chapter), current as of the last 
business day or any subsequent calendar day of the preceding month, no 
later than the fifth business day of each month.

0
10. Section 270.30b1-8 is added to read as follows:


Sec.  270.30b1-8  Current report for money market funds.

    Every registered open-end management investment company, or series 
thereof, that is regulated as a money market fund under Sec.  270.2a-7,

[[Page 47968]]

that experiences any of the events specified on Form N-CR (274.222 of 
this chapter), must file with the Commission a current report on Form 
N-CR within the period specified in that form.

0
11. Section 270.31a-1(b)(1) is amended by removing ``Sec.  270.2a-
7(a)(8) or Sec.  270.2a-7(a)(15)'' and adding in its place ``Sec.  
270.2a-7(a)(9) or Sec.  270.2a-7(a)(18)''.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
12. The authority citation for Part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7, 78o-7 note, 78u-5, 78w(a), 
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 
80a-26, 80a-29, 80a-30, 80a-37, and Pub. L. 111-203, sec. 939A, 124 
Stat. 1376 (2010), unless otherwise noted.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
13. The authority citation for Part 274 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *

0
14. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is amended 
by:
0
a. Revising paragraph 2(b) of the instructions to Item 3;
0
b. Revising paragraph (b)(1)(ii) of Item 4; and
0
c. Adding a paragraph (g) to Item 16.
    The additions and revisions read as follows:

    Note:  The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 3. Risk/Return Summary: Fee Table

* * * * *
    Instructions.
* * * * *
    2. Shareholder Fees.
* * * * *
    (b) ``Redemption Fee'' includes a fee charged for any redemption of 
the Fund's shares, but does not include a deferred sales charge (load) 
imposed upon redemption, and, if the Fund is a Money Market Fund, does 
not include a liquidity fee imposed upon the sale of Fund shares in 
accordance with rule 2a-7(c)(2).
* * * * *

Item 4. Risk/Return Summary: Investments, Risks, and Performance

* * * * *
    (b) * * *
    (1) * * *
    (ii) (A) If the Fund is a Money Market Fund that is not a 
government Money Market Fund, as defined in Sec.  270.2a-7(a)(16) or a 
retail Money Market Fund, as defined in Sec.  270.2a-7(a)(25), include 
the following statement:

    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may 
be worth more or less than what you originally paid for them. The 
Fund may impose a fee upon sale of your shares or may temporarily 
suspend your ability to sell shares if the Fund's liquidity falls 
below required minimums because of market conditions or other 
factors. 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.

    (B) If the Fund is a Money Market Fund that is a government Money 
Market Fund, as defined in Sec.  270.2a-7(a)(16), or a retail Money 
Market Fund, as defined in Sec.  270.2a-7(a)(25), and that is subject 
to the requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii) of this 
chapter (or is not subject to the requirements of Sec. Sec.  270.2a-
7(c)(2)(i) and/or (ii) of this chapter pursuant to Sec.  270.2a-
7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to 
impose liquidity fees and suspend redemptions consistent with the 
requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii)), include the 
following statement:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. The Fund may impose a fee upon 
sale of your shares or may temporarily suspend your ability to sell 
shares if the Fund's liquidity falls below required minimums because 
of market conditions or other factors. 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.
    (C) If the Fund is a Money Market Fund that is a government Money 
Market Fund, as defined in Sec.  270.2a-7(a)(16), that is not subject 
to the requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii) of this 
chapter pursuant to Sec.  270.2a-7(c)(2)(iii) of this chapter, and that 
has not chosen to rely on the ability to impose liquidity fees and 
suspend redemptions consistent with the requirements of Sec. Sec.  
270.2a-7(c)(2)(i) and/or (ii)), include the following statement:

    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, 
it cannot guarantee it will do so. 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.
    Instruction. If an affiliated person, promoter, or principal 
underwriter of the Fund, or an affiliated person of such a person, has 
contractually committed 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 statement 
specified in Item 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item 
4(b)(1)(ii)(C) may omit the last sentence (``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.''). For purposes of this Instruction, the term 
``financial support'' includes any capital contribution, purchase of a 
security from the Fund in reliance on Sec.  270.17a-9, purchase of any 
defaulted or devalued security at par, execution of letter of credit or 
letter of indemnity, capital support agreement (whether or not the Fund 
ultimately received support), performance guarantee, or any other 
similar action reasonably intended to increase or stabilize the value 
or liquidity of the fund's portfolio; however, the term ``financial 
support'' excludes any routine waiver of fees or reimbursement of fund 
expenses, routine inter-fund lending, routine inter-fund purchases of 
fund shares, or any action that would qualify as financial support as 
defined above, that the board of directors has otherwise determined not 
to be reasonably intended to increase or stabilize the value or 
liquidity of the fund's portfolio.
* * * * *

Item 16. Description of the Fund and Its Investments and Risks

* * * * *
    (g) Money Market Fund Material Events. If the Fund is a Money 
Market Fund (except any Money Market Fund

[[Page 47969]]

that is not subject to the requirements of Sec. Sec.  270.2a-7(c)(2)(i) 
and/or (ii) of this chapter pursuant to Sec.  270.2a-7(c)(2)(iii) of 
this chapter, and has not chosen to rely on the ability to impose 
liquidity fees and suspend redemptions consistent with the requirements 
of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii)) disclose, as applicable, 
the following events:
    (1) Imposition of Liquidity Fees and Temporary Suspensions of Fund 
Redemptions.
    (i) During the last 10 years, any occasion on which the Fund has 
invested less than ten percent of its total assets in weekly liquid 
assets (as provided in Sec.  270.2a-7(c)(2)(ii)), and with respect to 
each such occasion, whether the Fund's board of directors determined to 
impose a liquidity fee pursuant to Sec.  270.2a-7(c)(2)(ii) and/or 
temporarily suspend the Fund's redemptions pursuant to Sec.  270.2a-
7(c)(2)(i).
    (ii) During the last 10 years, any occasion on which the Fund has 
invested less than thirty percent, but more than ten percent, of its 
total assets in weekly liquid assets (as provided in Sec.  270.2a-
7(c)(2)(i)) and the Fund's board of directors has determined to impose 
a liquidity fee pursuant to Sec.  270.2a-7(c)(2)(i) and/or temporarily 
suspend the Fund's redemptions pursuant to Sec.  270.2a-7(c)(2)(i).
Instructions
    1. With respect to each such occasion, disclose: the dates and 
length of time for which the Fund invested less than ten percent (or 
thirty percent, as applicable) of its total assets in weekly liquid 
assets; the dates and length of time for which the Fund's board of 
directors determined to impose a liquidity fee pursuant to Sec.  
270.2a-7(c)(2)(i) or Sec.  270.2a-7(c)(2)(ii), and/or temporarily 
suspend the Fund's redemptions pursuant to Sec.  270.2a-7(c)(2)(i); and 
the size of any liquidity fee imposed pursuant to Sec.  270.2a-
7(c)(2)(i) or Sec.  270.2a-7(c)(2)(ii).
    2. The disclosure required by Item 16(g)(1) should incorporate, as 
appropriate, any information that the Fund is required to report to the 
Commission on Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR 
[17 CFR 274.222].
    3. The disclosure required by Item 16(g)(1) should conclude with 
the following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's Internet 
site at http://www.sec.gov.''
    (2) Financial Support Provided to Money Market Funds. During the 
last 10 years, any occasion on which an affiliated person, promoter, or 
principal underwriter of the Fund, or an affiliated person of such a 
person, provided any form of financial support to the Fund, including a 
description of the nature of support, person providing support, brief 
description of the relationship between the person providing support 
and the Fund, date support provided, amount of support, security 
supported (if applicable), and the value of security supported on date 
support was initiated (if applicable).
Instructions
    1. The term ``financial support'' includes any capital 
contribution, purchase of a security from the Fund in reliance on Sec.  
270.17a-9, purchase of any defaulted or devalued security at par, 
execution of letter of credit or letter of indemnity, capital support 
agreement (whether or not the Fund ultimately received support), 
performance guarantee, or any other similar action reasonably intended 
to increase or stabilize the value or liquidity of the Fund's 
portfolio; excluding, however, any routine waiver of fees or 
reimbursement of Fund expenses, routine inter-fund lending, routine 
inter-fund purchases of Fund shares, or any action that would qualify 
as financial support as defined above, that the board of directors has 
otherwise determined not to be reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio.
    2. If during the last 10 years, the Fund has participated in one or 
more mergers with another investment company (a ``merging investment 
company''), provide the information required by Item 16(g)(2) with 
respect to any merging investment company as well as with respect to 
the Fund; for purposes of this instruction, the term ``merger'' means a 
merger, consolidation, or purchase or sale of substantially all of the 
assets between the Fund and a merging investment company. If the person 
or entity that previously provided financial support to a merging 
investment company is not currently an affiliated person, promoter, or 
principal underwriter of the Fund, the Fund need not provide the 
information required by Item 16(g)(2) with respect to that merging 
investment company.
    3. The disclosure required by Item 16(g)(2) should incorporate, as 
appropriate, any information that the Fund is required to report to the 
Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR 
[17 CFR 274.222].
    4. The disclosure required by Item 16(g)(2) should conclude with 
the following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's Internet 
site at http://www.sec.gov.''

0
15. Form N-MFP (referenced in Sec.  274.201) is revised to read as 
follows:

    Note: The text of Form N-MFP does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-MFP

Monthly Schedule of Portfolio Holdings of Money Market Funds

    Form N-MFP is to be used by registered open-end management 
investment companies, or series thereof, that are regulated as money 
market funds pursuant to rule 2a-7 under the Investment Company Act of 
1940 (``Act'') (17 CFR 270.2a-7) (``money market funds''), to file 
reports with the Commission pursuant to rule 30b1-7 under the Act (17 
CFR 270.30b1-7). The Commission may use the information provided on 
Form N-MFP in its regulatory, disclosure review, inspection, and 
policymaking roles.

General Instructions

A. Rule as to Use of Form N-MFP

    Form N-MFP is the public reporting form that is to be used for 
monthly reports of money market funds required by section 30(b) of the 
Act and rule 30b1-7 under the Act (17 CFR 270.30b1-7). A money market 
fund must report information about the fund and its portfolio holdings 
as of the last business day or any subsequent calendar day of the 
preceding month. The Form N-MFP must be filed with the Commission no 
later than the fifth business day of each month, but may be filed any 
time beginning on the first business day of the month. Each money 
market fund, or series of a money market fund, is required to file a 
separate form. If the money market fund does not have any classes, the 
fund must provide the information required by Part B for the series.
    A money market fund may file an amendment to a previously filed 
Form N-MFP at any time, including an amendment to correct a mistake or 
error in a previously filed form. A fund that

[[Page 47970]]

files an amendment to a previously filed form must provide information 
in response to all items of Form N-MFP, regardless of why the amendment 
is filed.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form under 
the Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form, except 
that any provision in the form or in these instructions shall be 
controlling.

C. Filing of Form N-MFP

    A money market fund must file Form N-MFP in accordance with rule 
232.13 of Regulation S-T. Form N-MFP must be filed electronically using 
the Commission's EDGAR system.

D. Paperwork Reduction Act Information

    A registrant is not required to respond to the collection of 
information contained in Form N-MFP unless the Form displays a 
currently valid Office of Management and Budget (``OMB'') control 
number. Please direct comments concerning the accuracy of the 
information collection burden estimate and any suggestions for reducing 
the burden to the Secretary, Securities and Exchange Commission, 100 F 
Street NE., Washington, DC 20549-1090. The OMB has reviewed this 
collection of information under the clearance requirements of 44 U.S.C. 
3507.

E. Definitions

    References to sections and rules in this Form N-MFP are to the 
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act''), unless otherwise indicated. Terms used in this Form N-
MFP have the same meaning as in the Investment Company Act or related 
rules, unless otherwise indicated.
    As used in this Form N-MFP, the terms set out below have the 
following meanings:
    ``Cash'' means demand deposits in depository institutions and cash 
holdings in custodial accounts.
    ``Class'' means a class of shares issued by a Multiple Class Fund 
that represents interests in the same portfolio of securities under 
rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple 
Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 
18(g), and 18(i)].
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-MFP specifically applies to a 
Registrant or a Series, those terms will be used.
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' assigned by or on behalf of an internationally recognized 
standards setting body and required for reporting purposes by the U.S. 
Department of the Treasury's Office of Financial Research or a 
financial regulator. In the case of a financial institution, if a 
``legal entity identifier'' has not been assigned, then LEI means the 
RSSD ID assigned by the National Information Center of the Board of 
Governors of the Federal Reserve System, if any.
    ``Master-Feeder Fund'' means a two-tiered arrangement in which one 
or more Funds (or registered or unregistered pooled investment 
vehicles) (each a ``Feeder Fund''), holds shares of a single Fund (the 
``Master Fund'') in accordance with section 12(d)(1)(E) [15 U.S.C. 80a-
12(d)(1)(E)].
    ``Money Market Fund'' means a Fund that holds itself out as a money 
market fund and meets the requirements of rule 2a-7 [17 CFR 270.2a-7].
    ``Securities Act'' means the Securities Act of 1933 [15 U.S.C. 77a-
aa].
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) [17 CFR 
270.18f-2(a)].
    ``Value'' has the meaning defined in section 2(a)(41) of the Act 
(15 U.S.C. 80a-2(a)(41)).

United States Securities and Exchange Commission Washington, DC 20549

Form N-MFP

Monthly Schedule of Portfolio Holdings of Money Market Funds

General Information

Item 1. Report for [mm/dd/yyyy].
Item 2. CIK Number of Registrant.
Item 3. LEI of Registrant (if available) (See General Instructions E.)
Item 4. EDGAR Series Identifier.
Item 5. Total number of share classes in the series.
Item 6. Do you anticipate that this will be the fund's final filing on 
Form N-MFP? [Y/N] If Yes, answer Items 6.a-6.c.
    a. Is the fund liquidating? [Y/N]
    b. Is the fund merging with, or being acquired by, another fund? 
[Y/N]
    c. If applicable, identify the successor fund by CIK, Securities 
Act file number, and EDGAR series identifier.
Item 7. Has the fund acquired or merged with another fund since the 
last filing? [Y/N] If Yes, answer Item 7.a.
    a. Identify the acquired or merged fund by CIK, Securities Act file 
number, and EDGAR series identifier.
Item 8. Provide the name, email address, and telephone number of the 
person authorized to receive information and respond to questions about 
this Form N-MFP.

Part A: Series-Level Information about the Fund

Item A.1 Securities Act File Number.
Item A.2 Investment Adviser.
    a. SEC file number of investment adviser.
Item A.3 Sub-Adviser. If a fund has one or more sub-advisers, disclose 
the name of each sub-adviser.
    a. SEC file number of each sub-adviser.
Item A.4 Independent Public Accountant.
    a. City and state of independent public accountant.
Item A.5 Administrator. If a fund has one or more administrators, 
disclose the name of each administrator.
Item A.6 Transfer Agent.
    a. CIK Number.
    b. SEC file number of transfer agent.
Item A.7 Master-Feeder Funds. Is this a Feeder Fund? [Y/N] If Yes, 
answer Items A.7.a-7.c.
    a. Identify the Master Fund by CIK or, if the fund does not have a 
CIK, by name.
    b. Securities Act file number of the Master Fund.
    c. EDGAR series identifier of the Master Fund.
Item A.8 Master-Feeder Funds. Is this a Master Fund? [Y/N] If Yes, 
answer Items A.8.a-8.c.
    a. Identify all Feeder Funds by CIK or, if the fund does not have a 
CIK, by name.
    b. Securities Act file number of each Feeder Fund.
    c. EDGAR series identifier of each Feeder Fund.
Item A.9 Is this series primarily used to fund insurance company 
separate accounts? [Y/N]
Item A.10 Category. Indicate the category that identifies the money 
market fund from among the following: Treasury, Government/Agency, 
Exempt Government, Prime, Single State, or Other Tax Exempt.
    a. Is this fund an exempt retail fund as defined in 270.2a-
7(a)(25)[Y/N]?

[[Page 47971]]

Item A.11 Dollar-weighted average portfolio maturity (``WAM'' as 
defined in rule 2a-7(d)(1)(ii)).
Item A.12 Dollar-weighted average life maturity (``WAL'' as defined in 
rule 2a-7(d)(1)(iii)). Calculate WAL without reference to the 
exceptions in rule 2a-7(d) regarding interest rate readjustments.
Item A.13 Liquidity. Provide the following, as of the close of business 
on each Friday during the month reported (if the reporting date falls 
on a holiday or other day on which the fund does not calculate the 
daily or weekly liquidity, provide the value as of the close of 
business on the date in that week last calculated):
    a. Total Value of Daily Liquid Assets to the nearest cent:
    i. Friday, week 1:
    ii. Friday, week 2:
    iii. Friday, week 3:
    iv. Friday, week 4:
    v. Friday, week 5 (if applicable):
    b. Total Value of Weekly Liquid Assets (including Daily Liquid 
Assets) to the nearest cent:
    i. Friday, week 1:
    ii. Friday, week 2:
    iii. Friday, week 3:
    iv. Friday, week 4:
    v. Friday, week 5 (if applicable):
    c. Percentage of Total Assets invested in Daily Liquid Assets:
    i. Friday, week 1:
    ii. Friday, week 2:
    iii. Friday, week 3:
    iv. Friday, week 4:
    v. Friday, week 5 (if applicable):
    d. Percentage of Total Assets invested in Weekly Liquid Assets 
(including Daily Liquid Assets):
    i. Friday, week 1:
    ii. Friday, week 2:
    iii. Friday, week 3:
    iv. Friday, week 4:
    v. Friday, week 5 (if applicable):
Item A.14 Provide the following, to the nearest cent:
    a. Cash. (See General Instructions E.)
    b. Total Value of portfolio securities. (See General Instructions 
E.)
    i. If any portfolio securities are valued using amortized cost, the 
total value of the portfolio securities valued at amortized cost.
    c. Total Value of other assets (excluding amounts provided in 
A.14.a-c.)
Item A.15 Total value of liabilities, to the nearest cent.
Item A.16 Net assets of the series, to the nearest cent.
Item A.17 Number of shares outstanding, to the nearest hundredth.
Item A.18 If the fund seeks to maintain a stable price per share, state 
the price the fund seeks to maintain.
Item A.19 7-day gross yield. Based on the 7 days ended on the last day 
of the prior month, calculate the fund's yield by determining the net 
change, exclusive of capital changes and income other than investment 
income, in the value of a hypothetical pre-existing account having a 
balance of one share at the beginning of the period and dividing the 
difference by the value of the account at the beginning of the base 
period to obtain the base period return, and then multiplying the base 
period return by (365/7) with the resulting yield figure carried to the 
nearest hundredth of one percent. The 7-day gross yield should not 
reflect a deduction of shareholders fees and fund operating expenses. 
For master funds and feeder funds, report the 7-day gross yield at the 
master-fund level.
Item A.20 Net asset value per share. Provide the net asset value per 
share, calculated using available market quotations (or an appropriate 
substitute that reflects current market conditions) rounded to the 
fourth decimal place in the case of a fund with a $1.0000 share price 
(or an equivalent level of accuracy for funds with a different share 
price), as of the close of business on each Friday during the month 
reported (if the reporting date falls on a holiday or other day on 
which the fund does not calculate the net asset value per share, 
provide the value as of the close of business on the date in that week 
last calculated):
    a. Friday, week 1:
    b. Friday, week 2:
    c. Friday, week 3:
    d. Friday, week 4:
    e. Friday, week 5 (if applicable):

Part B: Class-Level Information About the Fund

    For each Class of the Series (regardless of the number of shares 
outstanding in the Class), disclose the following:

Item B.1 EDGAR Class identifier.
Item B.2 Minimum initial investment.
Item B.3 Net assets of the Class, to the nearest cent.
Item B.4 Number of shares outstanding, to the nearest hundredth.
Item B.5 Net asset value per share. Provide the net asset value per 
share, calculated using available market quotations (or an appropriate 
substitute that reflects current market conditions), rounded to the 
fourth decimal place in the case of a fund with a $1.0000 share price 
(or an equivalent level of accuracy for funds with a different share 
price), as of the close of business on each Friday during the month 
reported (if the reporting date falls on a holiday or other day on 
which the fund does not calculate the net asset value per share, 
provide the value as of the close of business on the date in that week 
last calculated):
    a. Friday, week 1:
    b. Friday, week 2:
    c. Friday, week 3:
    d. Friday, week 4:
    Friday, week 5 (if applicable):
Item B.6 Net shareholder flow. Provide the aggregate weekly gross 
subscriptions (including dividend reinvestments) and gross redemptions, 
rounded to the nearest cent, as of the close of business on each Friday 
during the month reported (if the reporting date falls on a holiday or 
other day on which the fund does not calculate the gross subscriptions 
or gross redemptions, provide the value as of the close of business on 
the date in that week last calculated):
    a. Friday, week 1:
    i. Weekly gross subscriptions (including dividend reinvestments):
    ii. Weekly gross redemptions:
    b. Friday, week 2:
    i. Weekly gross subscriptions (including dividend reinvestments):
    ii. Weekly gross redemptions:
    c. Friday, week 3:
    i. Weekly gross subscriptions (including dividend reinvestments):
    ii. Weekly gross redemptions:
    d. Friday, week 4:
    i. Weekly gross subscriptions (including dividend reinvestments):
    ii. Weekly gross redemptions:
    e. Friday, week 5 (if applicable):
    i. Weekly gross subscriptions (including dividend reinvestments):
    ii. Weekly gross redemptions:
    f. Total for the month reported:
    i. Monthly gross subscriptions (including dividend reinvestments):
    ii. Monthly gross redemptions:
Item B.7 7-day net yield, as calculated under Item 26(a)(1) of Form N-
1A (Sec.  274.11A of this chapter).
Item B.8 During the reporting period, did any Person pay for, or waive 
all or part of the fund's operating expenses or management fees? [Y/N] 
If Yes, answer Item B.8.a.
    a. Provide the name of the Person and describe the nature and 
amount of the expense payment or fee waiver, or both (reported in 
dollars).

[[Page 47972]]

Part C: Schedule of Portfolio Securities

    For each security held by the money market fund, disclose the 
following:

Item C.1 The name of the issuer.
Item C.2 The title of the issue (including coupon, if applicable).
Item C.3 The CUSIP.
Item C.4 The LEI (if available). (See General Instruction E.).
Item C.5 Other identifier. In addition to CUSIP and LEI, provide at 
least one of the following other identifiers, if available:
    a. The ISIN;
    b. The CIK; or
    c. Other unique identifier.
Item C.6 The category of investment. Indicate the category that most 
closely identifies the instrument from among the following: U.S. 
Treasury Debt; U.S. Government Agency Debt; Non-U.S. Sovereign, Sub-
Sovereign and Supra-National debt; Certificate of Deposit; Non-
Negotiable Time Deposit; Variable Rate Demand Note; Other Municipal 
Security; Asset Backed Commercial Paper; Other Asset Backed Securities; 
U.S. Treasury Repurchase Agreement, if collateralized only by U.S. 
Treasuries (including Strips) and cash; U.S. Government Agency 
Repurchase Agreement, collateralized only by U.S. Government Agency 
securities, U.S. Treasuries, and cash; Other Repurchase Agreement, if 
any collateral falls outside Treasury, Government Agency and cash; 
Insurance Company Funding Agreement; Investment Company; Financial 
Company Commercial Paper; Non-Financial Company Commercial Paper; or 
Tender Option Bond. If Other Instrument, include a brief description.
Item C.7 If the security is a repurchase agreement, is the fund 
treating the acquisition of the repurchase agreement as the acquisition 
of the underlying securities (i.e., collateral) for purposes of 
portfolio diversification under rule 2a-7? [Y/N]
Item C.8 For all repurchase agreements, specify whether the repurchase 
agreement is ``open'' (i.e., the repurchase agreement has no specified 
end date and, by its terms, will be extended or ``rolled'' each 
business day (or at another specified period) unless the investor 
chooses to terminate it), and describe the securities subject to the 
repurchase agreement (i.e., collateral).
    a. Is the repurchase agreement ``open''? [Y/N]
    b. The name of the collateral issuer.
    c. LEI (if available).
    d. Maturity date.
    e. Coupon or yield.
    f. The principal amount, to the nearest cent.
    g. Value of collateral, to the nearest cent.
    h. The category of investments that most closely represents the 
collateral, selected from among the following:
Asset-Backed Securities; Agency Collateralized Mortgage Obligations; 
Agency Debentures and Agency Strips; Agency Mortgage-Backed Securities; 
Private Label Collateralized Mortgage Obligations; Corporate Debt 
Securities; Equities; Money Market; U.S. Treasuries (including strips); 
Other Instrument. If Other Instrument, include a brief description, 
including, if applicable, whether it is a collateralized debt 
obligation, municipal debt, whole loan, or international debt.
If multiple securities of an issuer are subject to the repurchase 
agreement, the securities may be aggregated, in which case disclose: 
(a) The total principal amount and value and (b) the range of maturity 
dates and interest rates.
Item C.9 Rating. Indicate whether the security is a rated First Tier 
Security, rated Second Tier Security, an Unrated Security, or no longer 
an Eligible Security.
Item C.10 Name of each Designated NRSRO.
    a. For each Designated NRSRO, disclose the credit rating given by 
the Designated NRSRO. If the instrument and its issuer are not rated by 
the Designated NRSRO, indicate ``NR.''
Item C.11 The maturity date determined by taking into account the 
maturity shortening provisions of rule 2a-7(i) (i.e., the maturity date 
used to calculate WAM under rule 2a-7(d)(1)(ii)).
Item C.12 The maturity date determined without reference to the 
exceptions in rule 2a-7(i) regarding interest rate readjustments (i.e., 
the maturity date used to calculate WAL under rule 2a-7(d)(1)(iii)).
Item C.13 The maturity date determined without reference to the 
maturity shortening provisions of rule 2a-7(i) (i.e., the ultimate 
legal maturity date on which, in accordance with the terms of the 
security without regard to any interest rate readjustment or demand 
feature, the principal amount must unconditionally be paid).
Item C.14 Does the security have a Demand Feature on which the fund is 
relying to determine the quality, maturity or liquidity of the 
security? [Y/N] If Yes, answer Items C.14.a--14.f. Where applicable, 
provide the information required in Items C.14b--14.f in the order that 
each Demand Feature issuer was reported in Item C.14.a.
    a. The identity of the Demand Feature issuer(s).
    b. Designated NRSRO(s) for the Demand Feature(s) or provider(s) of 
the Demand Feature(s).
    c. For each Designated NRSRO, disclose the credit rating given by 
the Designated NRSRO. If there is no rating given by the Designated 
NRSRO, indicate ``NR.''
    d. The amount (i.e., percentage) of fractional support provided by 
each Demand Feature issuer.
    e. The period remaining until the principal amount of the security 
may be recovered through the Demand Feature.
    f. Is the demand feature conditional? [Y/N]
Item C.15 Does the security have a Guarantee (other than an 
unconditional letter of credit disclosed in item C.14 above) on which 
the fund is relying to determine the quality, maturity or liquidity of 
the security? [Y/N] If Yes, answer Items C.15.a-15.d. Where applicable, 
provide the information required in Item C.15.b-15.d in the order that 
each Guarantor was reported in Item C.15.a.
    a. The identity of the Guarantor(s).
    b. Designated NRSRO(s) for the Guarantee(s) or Guarantor(s).
    c. For each Designated NRSRO, disclose the credit rating given by 
the Designated NRSRO. If there is no rating given by the Designated 
NRSRO, indicate ``NR.''
    d. The amount (i.e., percentage) of fractional support provided by 
each Guarantor.
Item C.16 Does the security have any enhancements, other than those 
identified in Items C.14 and C.15 above, on which the fund is relying 
to determine the quality, maturity or liquidity of the security? [Y/N] 
If Yes, answer Items C.16.a-16.e. Where applicable, provide the 
information required in Items C.16.b-16.e in the order that each 
enhancement provider was reported in Item C.16.a.
    a. The identity of the enhancement provider(s).

[[Page 47973]]

    b. The type of enhancement(s).
    c. Designated NRSRO(s) for the enhancement(s) or enhancement 
provider(s).
    d. For each Designated NRSRO, disclose the credit rating given by 
the Designated NRSRO. If there is no rating given by the Designated 
NRSRO, indicate ``NR.''
    e. The amount (i.e., percentage) of fractional support provided by 
each enhancement provider.
Item C.17 The yield of the security as of the reporting date.
Item C.18 The total Value of the fund's position in the security, to 
the nearest cent: (See General Instruction E.)
    a. Including the value of any sponsor support:
    b. Excluding the value of any sponsor support:
Item C.19 The percentage of the money market fund's net assets invested 
in the security, to the nearest hundredth of a percent.
Item C.20 Is the security categorized at level 3 in the fair value 
hierarchy under U.S. Generally Accepted Accounting Principles (ASC 820, 
Fair Value Measurement) [Y/N]?
Item C.21 Is the security a Daily Liquid Asset? [Y/N]
Item C.22 Is the security a Weekly Liquid Asset? [Y/N]
Item C.23 Is the security an Illiquid Security? [Y/N]
Item C.24 Explanatory notes. Disclose any other information that may be 
material to other disclosures related to the portfolio security. If 
none, leave blank.

Signatures

    Pursuant to the requirements of the Investment Company Act of 1940, 
the registrant has duly caused this report to be signed on its behalf 
by the undersigned hereunto duly authorized.

-----------------------------------------------------------------------
(Registrant)

-----------------------------------------------------------------------
Date

-----------------------------------------------------------------------
(Signature)*

*Print name and title of the signing officer under his/her signature.

0
16. Section 274.222 and Form N-CR are added to read as follows:


Sec.  274.222  Form N-CR, Current report of money market fund material 
events.

    This form shall be used by registered investment companies that are 
regulated as money market funds under Sec.  270.2a-7 of this chapter to 
file current reports pursuant to Sec.  270.30b1-8 of this chapter 
within the time periods specified in the form.

    Note: The text of Form N-CR will not appear in the Code of 
Federal Regulations.

Form N-CR

Current Report

Money Market Fund Material Events

    Form N-CR is to be used by registered open-end management 
investment companies, or series thereof, that are regulated as money 
market funds pursuant to rule 2a-7 under the Investment Company Act of 
1940 (``Investment Company Act'') (17 CFR 270.2a-7) (``money market 
funds''), to file current reports with the Commission pursuant to rule 
30b1-8 under the Investment Company Act (17 CFR 270.30b1-8). The 
Commission may use the information provided on Form N-CR in its 
regulatory, disclosure review, inspection, and policymaking roles.

General Instructions

A. Rule as to Use of Form N-CR

    Form N-CR is the public reporting form that is to be used for 
current reports of money market funds required by section 30(b) of the 
Act and rule 30b1-8 under the Act. A money market fund must file a 
report on Form N-CR upon the occurrence of any one or more of the 
events specified in Parts B-H of this form. Unless otherwise specified, 
a report is to be filed within one business day after occurrence of the 
event, and will be made public immediately upon filing. If the event 
occurs on a Saturday, Sunday, or holiday on which the Commission is not 
open for business, then the report is to be filed on the first business 
day thereafter.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form under 
the Act. These general requirements should be carefully read and 
observed in the preparation and filing of reports on this form, except 
that any provision in the form or in these instructions shall be 
controlling.

C. Information To Be Included in Report Filed on Form N-CR

    Upon the occurrence of any one or more of the events specified in 
Parts B-H of Form N-CR, a money market fund must file a report on Form 
N-CR that includes information in response to each of the items in Part 
A of the form, as well as each of the items in the applicable Parts B-H 
of the form.

D. Filing of Form N-CR

    A money market fund must file Form N-CR in accordance with rule 
232.13 of Regulation S-T. Form N-CR must be filed electronically using 
the Commission's EDGAR system.

E. Paperwork Reduction Act Information

    A registrant is not required to respond to the collection of 
information contained in Form N-CR unless the form displays a currently 
valid Office of Management and Budget (``OMB'') control number. Please 
direct comments concerning the accuracy of the information collection 
burden estimate and any suggestions for reducing the burden to the 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090. The OMB has reviewed this collection of 
information under the clearance requirements of 44 U.S.C. 3507.

F. Definitions

    References to sections and rules in this Form N-CR are to the 
Investment Company Act (15 U.S.C. 80a), unless otherwise indicated. 
Terms used in this Form N-CR have the same meaning as in the Investment 
Company Act or rule 2a-7 under the Investment Company Act, unless 
otherwise indicated. In addition, as used in this Form N-CR, the term 
``fund'' means the registrant or a separate series of the registrant.

United States Securities and Exchange Commission Washington, DC 20549

Form N-CR

Current Report Money Market Fund Material Events

Part A: General Information

Item A.1 Report for [mm/dd/yyyy].
Item A.2 CIK Number of registrant.
Item A.3 EDGAR Series Identifier.
Item A.4 Securities Act File Number.
Item A.5 Provide the name, email address, and telephone number of the 
person authorized to receive information and respond to questions about 
this Form N-CR.

Part B: Default or Event of Insolvency of Portfolio Security Issuer

    If the issuer of one or more of the fund's portfolio securities, or 
the issuer of a demand feature or guarantee to which one of the fund's 
portfolio securities is subject, and on which the fund is relying to 
determine the quality, maturity, or liquidity of a portfolio security, 
experiences a default or event of insolvency (other than an immaterial 
default unrelated to the financial condition of the issuer), and the

[[Page 47974]]

portfolio security or securities (or the securities subject to the 
demand feature or guarantee) accounted for at least \1/2\ of 1 percent 
of the fund's total assets immediately before the default or event of 
insolvency, disclose the following information:

Item B.1 Security or securities affected. Disclose the name of the 
issuer, the title of the issue (including coupon or yield, if 
applicable) and at least two identifiers, if available (e.g., CUSIP, 
ISIN, CIK, LEI).
Item B.2 Date(s) on which the default(s) or Event(s) of Insolvency 
occurred.
Item B.3 Value of affected security or securities on the date(s) on 
which the default(s) or event(s) of insolvency occurred.
Item B.4 Percentage of the fund's total assets represented by the 
affected security or securities.
Item B.5 Brief description of actions fund plans to take, or has taken, 
in response to the default(s) or event(s) of insolvency.

    Instruction. For purposes of Part B, an instrument subject to a 
demand feature or guarantee will not be deemed to be in default (and an 
event of insolvency with respect to the security will not be deemed to 
have occurred) if: (i) In the case of an instrument subject to a demand 
feature, the demand feature has been exercised and the fund has 
recovered either the principal amount or the amortized cost of the 
instrument, plus accrued interest; (ii) the provider of the guarantee 
is continuing, without protest, to make payments as due on the 
instrument; or (iii) the provider of a guarantee with respect to an 
asset-backed security pursuant to rule 2a-7(a)(16)(ii) is continuing, 
without protest, to provide credit, liquidity or other support as 
necessary to permit the asset-backed security to make payments as due.
    A report responding to Items B.1 through B.4 is to be filed within 
one business day after occurrence of an event contemplated in this Part 
B. An amended report responding to Item B.5 is to be filed within four 
business days after occurrence of an event contemplated in this Part B.

Part C: Provision of Financial Support To Fund

    If an affiliated person, promoter, or principal underwriter of the 
fund, or an affiliated person of such a person, provides any form of 
financial support to the fund (including any (i) capital contribution, 
(ii) purchase of a security from the fund in reliance on Sec.  270.17a-
9, (iii) purchase of any defaulted or devalued security at par, (iv) 
execution of letter of credit or letter of indemnity, (v) capital 
support agreement (whether or not the fund ultimately received 
support), (vi) performance guarantee, or (vii) any other similar action 
reasonably intended to increase or stabilize the value or liquidity of 
the fund's portfolio; excluding, however, any (i) routine waiver of 
fees or reimbursement of fund expenses, (ii) routine inter-fund lending 
(iii) routine inter-fund purchases of fund shares, or (iv) any action 
that would qualify as financial support as defined above, that the 
board of directors has otherwise determined not to be reasonably 
intended to increase or stabilize the value or liquidity of the fund's 
portfolio), disclose the following information:

Item C.1 Description of nature of support.
Item C.2 Person providing support.
Item C.3 Brief description of relationship between the person providing 
support and the fund.
Item C.4 Date support provided.
Item C.5 Amount of support.
Item C.6 Security supported (if applicable). Disclose the name of the 
issuer, the title of the issue (including coupon or yield, if 
applicable) and at least two identifiers, if available (e.g., CUSIP, 
ISIN, CIK, LEI).
Item C.7 Value of security supported on date support was initiated (if 
applicable).
Item C.8 Brief description of reason for support.
Item C.9 Term of support.
Item C.10 Brief description of any contractual restrictions relating to 
support.

    Instruction. If an affiliated person, promoter, or principal 
underwriter of the fund, or an affiliated person of such a person, 
purchases a security from the fund in reliance on Sec.  270.17a-9, the 
fund must provide the purchase price of the security in responding to 
Item C.6.
    A report responding to Items C.1 through C.7 is to be filed within 
one business day after occurrence of an event contemplated in this Part 
C. An amended report responding to Items C.8 through C.10 is to be 
filed within four business days after occurrence of an event 
contemplated in this Part C.

Part D: Deviation Between Current Net Asset Value per Share and 
Intended Stable Price per Share

    If a retail money market fund's or a government money market fund's 
current net asset value per share (rounded to the fourth decimal place 
in the case of a fund with a $1.00 share price, or an equivalent level 
of accuracy for funds with a different share price) deviates downward 
from its intended stable price per share by more than \1/4\ of 1 
percent, disclose:

Item D.1 Date(s) on which such downward deviation exceeded \1/4\ of 1 
percent.
Item D.2 Extent of deviation between the fund's current net asset value 
per share and its intended stable price per share.
Item D.3 Principal reason or reasons for the deviation, including the 
name of any security whose value calculated using available market 
quotations (or an appropriate substitute that reflects current market 
conditions) or sale price, or whose issuer's downgrade, default, or 
event of insolvency (or similar event), has contributed to the 
deviation. For any such security, disclose the name of the issuer, the 
title of the issue (including coupon or yield, if applicable) and at 
least two identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI).

    Instruction. A report responding to Items D.1 and D.2 is to be 
filed within one business day after occurrence of an event contemplated 
in this Part D. An amended report responding to Items D.3 is to be 
filed within four business days after occurrence of an event 
contemplated in this Part D.

Part E: Imposition of Liquidity Fee

    If a fund (except a government money market fund that is relying on 
the exemption in rule 2a-7(c)(2)(iii)): (i) At the end of a business 
day, has invested less than ten percent of its total assets in weekly 
liquid assets or (ii) has invested less than thirty percent of its 
total assets in weekly liquid assets and imposes a liquidity fee 
pursuant to rule 2a-7(c)(2)(i) or (ii), disclose the following 
information:

Item E.1 Initial date on which the fund invested less than ten percent 
of its total assets in weekly liquid assets, if applicable.
Item E.2 If the fund imposes a liquidity fee pursuant to rule 2a-
7(c)(2), date on which the fund instituted the liquidity fee.
Item E.3 Percentage of the fund's total assets invested in weekly 
liquid assets as of the dates reported in items E.1 and E.2, as 
applicable.
Item E.4 Size of the liquidity fee, if any.
Item E.5 Brief description of the facts and circumstances leading to 
the fund's investing in the amount of weekly liquid assets reported in 
Item E.3.

[[Page 47975]]

Item E.6 Brief discussion of the primary considerations or factors 
taken in account by the board of directors in its decision to impose 
(or not impose) a liquidity fee.

    Instruction. A report responding to Items E.1 though E.4 is to be 
filed within one business day after occurrence of an event contemplated 
in this Part E. An amended report responding to Items E.5 and E.6 is to 
be filed within four business days after occurrence of an event 
contemplated in this Part E.

Part F: Suspension of Fund Redemptions

    If a fund suspends redemptions pursuant to rule 2a-7(c)(2)(i), 
disclose the following information:

Item F.1 Percentage of the fund's total assets invested in weekly 
liquid assets as of the date on which the fund suspended redemptions.
Item F.2 Date on which the fund initially suspended redemptions.
Item F.3 Brief description of the facts and circumstances leading to 
the fund's investing in the amount of weekly liquid assets stated in 
Item F.1.
Item F.4 Brief discussion of the primary considerations or factors 
taken in account by the board of directors in its decision to suspend 
the fund's redemptions.

    Instruction. A report responding to Items F.1 and F.2 is to be 
filed within one business day after occurrence of an event contemplated 
in this Part F. An amended report responding to Items F.3 and F.4 is to 
be filed within four business days after occurrence of an event 
contemplated in this Part F.

Part G: Removal of Liquidity Fees and/or Resumption of Fund Redemptions

    If a fund that has imposed a liquidity fee and/or suspended the 
fund's redemptions pursuant to rule 2a-7(c)(2) determines to remove 
such fee and/or resume fund redemptions, disclose the following, as 
applicable:

Item G.1 Date on which the fund removed the liquidity fee and/or 
resumed fund redemptions.

Part H: Optional Disclosure

    If a fund chooses, at its option, to disclose any other events or 
information not otherwise required by this form, it may do so under 
this Item H.1.

Item H.1 Optional disclosure.

    Instruction. Item H.1 is intended to provide a fund with additional 
flexibility, if it so chooses, to disclose any other events or 
information not otherwise required by this form, or to supplement or 
clarify any of the disclosures required elsewhere in this form. Part H 
does not impose on funds any affirmative obligation. A fund may file a 
report on Form N-CR responding to Part H at any time.

Signatures

    Pursuant to the requirements of the Investment Company Act of 1940, 
the registrant has duly caused this report to be signed on its behalf 
by the undersigned hereunto duly authorized.

-----------------------------------------------------------------------
(Registrant)

-----------------------------------------------------------------------
Date

-----------------------------------------------------------------------
(Signature)*


*Print name and title of the signing officer under his/her signature.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
17. The authority citation for Part 279 continues to read as follows:

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq.

0
18. Form PF (referenced in Sec.  279.9) is amended by:
0
a. In General Instruction 15, removing the reference to Question 57 
from the last bulleted sentence;
0
b. Revising section 3;
0
c. In the Glossary of Terms, adding and revising certain terms.
0
The additions and revisions read as follows:

    Note:  The text of Form PF does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form PF

* * * * *

Section 3

BILLING CODE 8011-01-P

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* * * * *

Glossary of Terms

* * * * *
    Conditional demand feature Has the meaning provided in rule 2a-7.
* * * * *
    Credit rating agency Any nationally recognized statistical rating 
organizations, as that term is defined in section 3(a)(62) of the 
Securities Exchange Act of 1934.
* * * * *
    Demand feature Has the meaning provided in rule 2a-7.
* * * * *
    Guarantee For purposes of Question 63, has the meaning provided in 
paragraph (a)(16)(i) of rule 2a-7.
    Guarantor For purposes of Question 63, the provider of any 
guarantee.
* * * * *
    Illiquid security Has the meaning provided in rule 2a-7.
* * * * *
    Maturity The maturity of the relevant asset, determined without 
reference to the maturity shortening provisions contained in paragraph 
(i) of rule 2a-7 regarding interest rate readjustments.
* * * * *
    Risk limiting conditions The conditions specified in paragraph (d) 
of rule 2a-7.
* * * * *
    WAL Weighted average portfolio maturity of a liquidity fund 
calculated taking into account the maturity shortening provisions 
contained in paragraph (i) of rule 2a-7, but determined without 
reference to the exceptions in paragraph (i) of rule 2a-7 regarding 
interest rate readjustments.
    WAM Weighted average portfolio maturity of a liquidity fund 
calculated taking into account the maturity shortening provisions 
contained in paragraph (i) of rule 2a-7.

    By the Commission.

    Dated: July 23, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17747 Filed 8-13-14; 8:45 a.m.]
BILLING CODE 8011-01-C


