When the Securities and Exchange Commission (SEC) voted to change several key rules on money market mutual funds (MMFs) last month, its Chair, Mary Jo White, said the revisions aim to protect the financial system. Although the new rules will likely result in significant changes within the money market industry over time, most investors will not be impacted significantly. Why? First, the rules will be implemented over a two year period, giving investors and the market plenty of time to digest them. And second, one of the more significant changes, moving to a floating NAV, will only impact funds used by institutional investors. Most individual investors will continue to have a stable $1 NAV.
Although the impact on individual investors is likely limited, it is good to understand the four major components of the reforms:
- 1. Floating NAV: Currently a money market fund’s net asset value (NAV), or per-share value, is required to remain stable at $1.00. NAV is calculated using the par value of securities plus accrued interest. Now, the SEC says some money market funds must utilize a “floating NAV”, which means the fund’s per-share value would be based on the current market price of its securities. In other words, the fund’s daily share price would fluctuate based on the market value of its investments, instead of remaining at a stable $1.00 level. The floating NAV rule will not apply to government and retail prime money market funds, but would apply to prime, institutional and tax-exempt money market funds.
What this means for investors: Per my prior comment, most retail investors will not be impacted. But institutional investors will now need to evaluate the credit, liquidity and interest rate risk of floating NAV money market funds.
- Fees and “Gates”: Under the new rules, a fund’s board of directors may impose liquidity fees on redemptions, and in some cases could temporarily suspend or “gate” redemptions. The fees and gates provision does not apply to government money market funds and would only be implemented during times of stress, not part of normal operations.
What this means for investors: For Investors who regularly use a money market fund for daily or even intraday liquidity, BlackRock advocates a careful review of these changes before making adjustments to your investment mix.
- Disclosure Requirements: Funds must now increase transparency, adding disclosures which include the publication of daily and weekly liquid asset levels, flows and market-based NAVs on their respective websites.
What this means for investors: With this easy access to more timely information, we believe investors will be empowered to make more informed decisions about their money market mutual fund investments.
- Taxes and Accounting: Once the new reforms on MMFs are implemented, the Treasury and IRS will allow floating NAV investors to use simplified accounting methods, eliminating the need to track individual buy and sell transactions for tax purposes. There will also be new guidelines surrounding “wash sale” rules.
What this means for investors: They will need to understand how tax treatment and record keeping will change for floating NAV money market funds.
As I stated before these changes won’t happen overnight. The SEC says the implementation period for these changes is two years after the date of the release in the Federal Register.
What is interesting about these changes is that they speak to a broader trend we are seeing in the market: a move to more transparency. After the changes go into effect, an investor in a prime money market fund will have a better idea of the mark to market value of their investment every day, and they will also have a better sense of fund flows. These are some of the same attributes that have driven interest in ETFs: investor preference for a vehicle that provides them with more information about how their money is performing. This is a broad trend that we have seen over the past few years, especially in the wake of the 2008 financial crisis: more investors wanting to be more informed about their money. And that is a trend that everyone can get behind.