At a meeting held on November 13, 2012, the Financial Stability Oversight Council (“FSOC”) approved proposed recommendations for the structural reform of money market mutual funds (“MMFs”). Pursuant to its authority under Section 120 of the Dodd-Frank Act and as set forth in a release from the FSOC (the “Release”), FSOC is proposing three alternatives for public comment:
- Floating Net Asset Value. Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV of $1.00.
- Stable NAV with NAV Buffer and “Minimum Balance at Risk.” Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (“MBR”) — be redeemed on a delayed basis.
- Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, FSOC could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.
Alternatives 1 and 2 essentially track the reform options advanced by SEC Chairman Schapiro earlier in the year that, as discussed in the August 28, 2012 Financial Services Alert, were ultimately withdrawn due to a lack of support from a majority of the SEC Commissioners.
In the Release, FSOC acknowledged that other reform options may achieve similar outcomes. In this regard, FSOC is also seeking public comment on other potential reforms, including, for example, standby liquidity fees and redemption gates.
In his remarks, Secretary Geithner emphasized that the FSOC may not need to take further action if the SEC issues its own proposal, allowing the comment process to take place at the primary regulator-level. Secretary Geithner also mentioned the other options at the FSOC’s disposal, which include the FSOC’s designation authority with respect to Systemically Important Financial Institutions (so called, SIFIs) and financial market utilities or payment clearing or settlement activities that FSOC determines are, or likely to become, systemically important, and the potential involvement of primary banking regulators.
Comments are due no later than 60 days after the Release is published in the Federal Register.