Money Market Mutual Funds: Financial Stability Oversight Council Proposes Recommendations for Money Market Mutual Fund Regulation

Sullivan & Cromwell LLP - November 21, 2012

On November 19, 2012, the Financial Stability Oversight Council (the “FSOC”) published for public comment proposed recommendations regarding the regulation of money market mutual funds (“MMFs”). The FSOC also proposed to determine, pursuant to its authority under Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), that MMFs could create or increase the risk of significant liquidity and credit problems spreading among financial companies and markets. If the FSOC were to make such a determination, it could then recommend reforms to the SEC. In the proposal, the FSOC presents three potential structural reform alternatives, which would not necessarily be mutually exclusive:

  • Alternative One: Floating Net Asset Value (“NAV”): This proposal would eliminate the amortized cost valuation methodology currently used by most MMFs to maintain a stable $1.00 NAV, as well as the penny rounding pricing methodology available to MMFs, and require MMFs to have a floating NAV, starting at $100.00, that reflects the market value of the underlying portfolio holdings.
  • Alternative Two: Stable NAV Combined with an NAV Buffer and Minimum Balance at Risk: MMFs would be required to have an NAV buffer of up to 1% in excess of the assets necessary to maintain the $1.00 share price, the size of which would be determined by the riskiness of a fund’s assets. Additionally, MMFs would be required to delay for 30 days any portion of a redemption that would leave a remaining account balance of less than 3% of a shareholder’s highest account value in excess of $100,000 during the previous 30 days, subject to certain exceptions. The FSOC refers to the portion of an account subject to delayed redemption as the “Minimum Balance at Risk.” If an MMF’s losses exceeded the buffer, the losses would be borne first by the Minimum Balances at Risk of shareholders who had recently redeemed in excess of $100,000.
  • Alternative Three: Stable NAV Combined with an NAV Buffer and Other Measures: MMFs would be required to have an NAV buffer similar to the one required under Alternative Two, except that the buffer could be as high as 3%. The buffer would be enhanced by other measures, possibly including more stringent investment diversification requirements, increased minimum liquidity levels, and heightened disclosure requirements.

The FSOC is soliciting comments by January 18, 2013 from interested parties on all aspects of the proposed recommendations. It is also seeking comment on other measures that may mitigate MMFs’ perceived vulnerabilities, and it requests any quantitative analyses or data from commenters relating to each proposal.

Following the 60-day public comment period, the FSOC may issue a final recommendation to the SEC which, pursuant to Dodd-Frank, would be required either to implement the recommended standards, likely following its own notice-and-comment rulemaking process, or explain to the FSOC in writing within 90 days why the SEC has determined not to implement them. The FSOC would also be required to report to Congress on its recommendation and the SEC’s implementation of, or failure to implement, the recommendation.