As we've mentioned in our News coverage over the past 2 weeks, the SEC included a host of enhanced disclosures and reporting requirements in its Money Fund Reform package, adopted July 23. The new rules, when they go into effect 18 months from this month (the rules have yet to be published in the Federal Register, so the effective date has not been set yet), will require funds to disclose daily on their web site daily and weekly assets, inflows/outflow, and market NAVs per share, as well as whether there has been any imposition of gates and fees, or any use of affiliate sponsor support. It will also remove the delay in disclosing monthly portfolio holdings via Form N-MFP, among other stipulations. Thankfully, the SEC pared back its exhaustive list of new disclosures from its 2013 proposal, though the list is still extensive. Below, we take a closer look at the disclosure requirements straight from the SEC's 869-page Money Market Fund Reform Final Rules. (See the SEC's "Money Market Funds" page here too.)
A summary of the "Amendments to Disclosure Requirements" (starting on page 281) says, "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"). Next, we discuss amendments to the disclosure requirements applicable to money market fund websites, 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."
On revising the disclosure statements it says, "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 website) and in the summary section of its prospectus (and, accordingly, in any summary prospectus, if used).... 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. 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 these reforms, increase and decrease as a result of the changes in the value of the underlying securities."
Money markets that maintain a stable NAV must include the following statement in their advertisements, sales materials, and in the summary section of the 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. 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." Funds with a floating NAV will be required to replace the second sentence of the above statement with: "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 Amendments also provide guidelines on the additional disclosures in the SAI or prospectus. "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, website 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."
Further, it adds, "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%. 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)."
On website disclosure, the final rules read: "We are adopting, as proposed, amendments to rule 2a-7 that require money market funds to disclose prominently on their websites 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. The amendments we are adopting would require, as proposed, a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its investments in daily liquid assets and weekly liquid assets for the previous six months, and would require the fund to update this historical information each business day, as of the end of the preceding business day."
The SEC explains, "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. 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.... Finally, we note that several funds have already voluntarily begun disclosing liquidity information on their websites."
The SEC is also requiring funds to disclose "prominently on their websites" the fund's "daily net inflows or outflows as well as 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 (the fund's "current NAV") as of the end of the previous business day during the preceding six months."
Regarding the new Form N-MFP Reporting Requirements, the rules state, "We are requiring the reporting of certain new information that will be useful for our oversight of money market funds.... 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.... We are also adopting, with some changes in response to comments, certain amendments to Form N-MFP's investment categories for portfolio securities.... 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."
The investment SEC's revised categories will 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."
Note that Crane Data will revise its Money Fund Portfolio Holdings collection to reflect the new categories once funds begin using the new scheme. (The main change is the addition of "Time Deposits", though we will also utilize more of the Form N-MFP data instead of the website disclosures once the time lag on the former is removed.) We also will continue publishing the "Market NAV" or MNAV in our Money Fund Intelligence Daily, and this will switch to a live NAV for Prime Institutional funds. We will be adding Daily and Weekly Liquidity statistics to MFI Daily as they become available. (Currently, only a handful of funds publish these, but we will add the fields in coming weeks. We currently offer Daily and % Maturing in 7 Days fiellds, as well as percentages in Treasury and Govt agency securities, in our monthly `MFI XLS.)
