Day 3 of Crane's Money Fund Symposium last week featured two sessions on Money Market Fund Reforms, including one with Sarah ten Siethoff, Senior Special Counsel at the Securities & Exchange Commission, who answered some questions on the SEC's "Frequently Asked Questions" release. She sat on a panel along with attorneys Stephen Keen, Senior Counsel, Perkins Coie; and Jack Murphy, Partner, Dechert, in a session called "Money Fund Rules: Questions on the Rule." The other reform-related session on the final day of the conference, called "More on MMF Reforms: Adoption Issues," featured Joan Swirsky, Counsel, Stradley Ronon Stevens & Young; and Robert Plaze, Counsel, Stroock & Stroock & Levan.
In the first session, Keen provided an overview of reforms, then focused his attention on some of the FAQs that he felt required additional guidance or clarification. Specifically, he brought up FAQ number 8: "Should a floating NAV MMF that values certain portfolio securities that mature in 60 days or less at amortized cost, report its share price on its website (even if that price is affected by the use of amortized cost), or should it report the MMF's NAV calculated before using amortized cost, even if that were to result in a different price?" Ten Siethoff responded, "If a floating NAV MMF's use of amortized cost to value a portfolio security were to result in a difference between its share price and its NAV calculated without the use of amortized cost, the amortized cost value of the portfolio security would not be "approximately the same" as the fair value of the security. Under these circumstances, the MMF should not use amortized cost to value that security."
Keen asked ten Siethoff, "For [an] FNAV fund using amortized cost for some of its portfolio, does it still have to mark-to-market that piece of the portfolio that's using amortized cost for purposes of putting up this website disclosure? He added, "There really should not be a difference between amortized cost and the market based estimated value of the portfolio -- at least not a big enough one to cause a difference at the fourth decimal point."
Ten Siethoff, speaking on behalf of herself and not the SEC, responded, "One of the things that this highlighted was how people were interpreting the guidance that we had in the release about the use of amortized costs for sixty day and under securities. It was a very conscious decision to do floating NAV out to the fourth decimal place. A big motivator of that was to have fluctuations in the funds tied to changes in the market and to have fluctuations out to the 4th decimal place. The staff felt that that overarching goal of the reforms would be undercut if funds were able to smooth their valuation through the use of amortized cost by holding a high proportion of 60 day and under. The second piece ... we spent a lot of time thinking about was that the decision to have the valuation guidance in the release talking extensively about when you can use amortized cost."
She added, "In a world of floating NAV, it could play a very big role. So we felt the need to clarify what we meant by that guidance, particularly in a world where we didn't want to undercut the heart of the reforms that the Commission was trying to do. So we spent some time in the release talking about that and the questions about 'What do you mean when you say the same? Do you mean exactly the same?' In our minds, approximately the same was very narrow, and I think that was what was put to light by the FAQs. We meant you could have very tiny differences and we weren't going to nitpick over that. But the overarching goals of the reform was that we were doing a floating NAV out to the 4th decimal place to have fluctuations. And when we got the FAQ saying, 'Well, what if for a floating NAV fund the web reporting price using market value is different?' Our immediate reaction was 'that wouldn't be approximately the same.' I know this has been a really important question for a lot of people so I wanted to walk through the history."
There was also some discussion of FAQ 26: "If a MMF's weekly liquid assets have fallen below 30% (but not below 10%) of MMF's total assets, may the board of directors determine to impose a fee or gate at a later time in the future, whether it is the next day's opening or another specified time?" The SEC responded, "While a fee or gate may not immediately come into effect due to practical considerations, a MMF should begin to implement a fee or gate immediately. Any delay beyond that required to take into account practical considerations would raise significant concerns. Directors should consider whether it would be consistent with their fiduciary duties to allow for a material lapse of time between their determination and implementation. Staff recognizes that it may not be feasible for a fee or gate to take immediate effect. For example, it may take time to notify intermediaries and shareholders. The MMF's transfer agent and other intermediaries may also need additional time to implement the liquidity fee or gate. Staff recognizes that a MMF's board may need to consider the practical limitations on the capacity of intermediaries and systems when implementing a liquidity fee or gate."
Keen said, "I think the Staff gave the only answer it could here. Fundamentally, they said, 'Look, if you think you need a fee or gate, we assume that's because there's something important going on that you need to stop redemption activity.' That needs to happen. You can't sit around and wait for it. On the other hand, they understand that there are operational limitations to everything. The boards don't have telekinesis, and they cannot sit together and will the fund to suddenly have liquidity. So the answer basically says that 'We realize there's a tension here and boards are going to have to find the right balance.' I did a blog post that basically said this is why you gate first -- gating buys you time to do a liquidity fee if that's the route you're going." Ten Siethoff added, "We recognized that there was no 'Easy' button that I push and there goes the fee or gate. `But by the same token, if you're doing this, time is of the essence and facts and circumstances are changing quickly right underneath your feet. So you can't just sit there and wait forever."
On the prospect of the SEC issuing future FAQs, ten Siethoff said, "The staff is always willing to consider any questions that come in the door. The initial set of 50-some F.A.Q.'s that we issued were from a collection of a whole variety of questions that came in. Some came through trade associations; some came straight to us. We continue to get questions on the FAQs as well as on additional topics that were not addressed by the first set of FAQs. We intend to, throughout the entire compliance, put out more [FAQs] if there are additional areas that need clarification."
Finally, session moderator and conference host Pete Crane asked about the status of two items, the credit ratings removal amendment and the Treasury's tax simplification and relief proposal. Ten Siethoff explained, "On the Treasury tax, they are working on that. They have gotten some additional questions and issues ... as the process has gone along, so they are considering more than just what was initially raised. On the credit ratings removal, we're ... actively working on that and we are definitely conscious that people are going to be rewriting policies and procedures for part of the reforms. It's good to have that sooner rather than later so you can bake that into the process and not have to go through everything twice. So I can't promise anything on timing, but I can say we're very aware of that and therefore trying to move on as quickly as we can."
Finally, in the session that followed, Plaze and Swirsky focused on three reform-related issues that have garnered the most attention among money market fund clients -- the valuation of securities that mature in 60 days or less; becoming a Government money market fund; and "topping up" impaired NAVs." (Note: Conference attendees and Crane Data subscribers may access session recordings and Powerpoints via our "Money Fund Symposium 2015 Download Center" or at the bottom of our "Content" page.)
