As expected, the staff of the Securities and Exchange Commission recently updated its Money Market Reform Frequently Asked Questions release (FAQ). The following are the most significant changes made to the FAQ.
Form N-CR was created under the 2014 amendments to the money market rules (2014 Amendments) and requires reporting to the SEC and fund website disclosure in the case of certain material events affecting money market funds. The instructions to Form N-CR provide certain exceptions to the reporting requirements, including contributions by fund advisers and sponsors to correct operational errors and similar kinds of actions that are not intended to stabilize the liquidity or value of a money market fund due to investment losses. The staff has clarified in the FAQ that:
- A fund board may determine in advance that certain routine contributions will not constitute “financial support” of a money market fund; and
- No reports on Form N-CR are required where fund sponsors make capital contributions to top up a money market fund converting to a $1.0000 floating net asset value (NAV) so that all shareholders receive the same value per share at the time of the fund’s transition from a stable NAV to a floating NAV. The contributions must be made before the October 16, 2016 compliance date for the new rules.
The SEC staff corrected a mistake in its original FAQ on the use of a Rule 485(b) filing to reflect ongoing historical disclosure regarding the imposition of liquidity fees and redemption gates. The original FAQ stated that this disclosure should be reflected in a Rule 485(a) filing.
The beneficial ownership test for purposes of retail money market fund investors has been one of the more problematic issues for the industry since the release of the first FAQ. The 2014 Amendments require that a retail money market fund limit its investors to beneficial owners who are “natural persons.” The updated FAQ clarifies that an account that is managed by an institutional decision maker may still be considered a retail investor as long as the natural person has sole or shared investment power over the shares. In addition, the staff believes that voting power may be unrelated to the power to redeem securities and therefore would “not be significant when determining beneficial ownership.” Fund procedures therefore are not required to include voting power as a determinant for the beneficial ownership test.
The staff will also allow forfeiture or suspense accounts maintained by defined contribution plans to remain invested in a retail money market fund as long as they are used “solely to facilitate plan administration and operations.”
The updated FAQ also answered a new question related to whether an account that has been escheated to state custody may remain invested in a retail money market fund. In this situation, the staff stated that as long as the missing owner has a right to reclaim the escheated property, it will not object to the account remaining invested in the retail money market fund.
Fees and Gates
A new question was posed and answered in the updated FAQ as to whether a redemption gate imposed by a money market fund would be considered an “emergency” for the purposes of some fund charters that explicitly provide that a fund may suspend redemptions only in the case of an emergency. The staff responded that, in its view, a redemption gate is allowed only under “extraordinary circumstances,” which would in all likelihood constitute an “emergency.”
One of the Rule 2a-7 diversification rules under the 2014 Amendments requires a money market fund to treat two or more issuers as one single issuer if one issuer is controlled by, or under common control with, the other issuer. A question arose as to whether a state, municipal or foreign government or one of its agencies or instrumentalities would be considered controlled by, or under common control with, another entity. The updated FAQ provides that as long as a governmental entity does not issue voting securities, it will not be considered to be controlled by or under common control with another governmental entity. Accordingly, government money market fund procedures should require an analysis of this factor before investment.
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