Federal Register / Vol. 77, No. 223 / Monday, November 19, 2012 / Notices 69455 

indicated. The applications will also be 

available for inspection at the offices of 

the Board of Governors. Interested 

persons may express their views in 

writing on the standards enumerated in 

the BHC Act (12 U.S.C. 1842(c)). If the 

proposal also involves the acquisition of 

a nonbanking company, the review also 

includes whether the acquisition of the 

nonbanking company complies with the 

standards in section 4 of the BHC Act 

(12 U.S.C. 1843). Unless otherwise 

noted, nonbanking activities will be 

conducted throughout the United States. 

Unless otherwise noted, comments 

regarding each of these applications 

must be received at the Reserve Bank 

indicated or the offices of the Board of 

Governors not later than December 14, 

2012. 

A. Federal Reserve Bank of Boston 

(Richard Walker, Community Affairs 

Officer) 600 Atlantic Avenue, Boston, 

Massachusetts 02210–2204: 

1. New Hampshire Mutual Bancorp, 

Manchester, New Hampshire; to become 

a bank holding company by acquiring 

100 percent of the voting shares of 

Meredith Village Savings Bank, 

Meredith, New Hampshire. 

2. New Hampshire Mutual Bancorp, 

Manchester, New Hampshire, to become 

a bank holding company by acquiring 

and merging with Merrimack Bancorp, 

MHC, and thereby indirectly acquiring 

voting shares of Merrimack County 

Savings Bank, both in Concord, New 

Hampshire. 

Board of Governors of the Federal Reserve 

System, November 14, 2012. 

Michael J. Lewandowski, 

Assistant Secretary of the Board. 

[FR Doc. 2012–28072 Filed 11–16–12; 8:45 am] 

BILLING CODE 6210–01–P 

FINANCIAL STABILITY OVERSIGHT 

COUNCIL 

Proposed Recommendations 

Regarding Money Market Mutual Fund 

Reform 

AGENCY: Financial Stability Oversight 

Council. 

ACTION: Proposed recommendation. 

SUMMARY: Section 120 of the DoddFrank Wall Street Reform and Consumer 

Protection Act authorizes the Financial 

Stability Oversight Council (Council) to 

issue recommendations to a primary 

financial regulatory agency to apply 

new or heightened standards and 

safeguards for a financial activity or 

practice conducted by bank holding 

companies or nonbank financial 

companies under the agency’s 

jurisdiction. The Council is seeking 

public comment on proposed 

recommendations that the Council may 

make to the Securities and Exchange 

Commission to implement structural 

reforms for money market mutual funds 

(MMFs). Proposed Recommendations 

Regarding Money Market Mutual Fund 

Reform provides an overview of MMFs, 

an outline of the history of reform 

efforts and the role of the Council, the 

Council’s proposed determination that 

MMFs’ activities and practices create or 

increase certain risks, three proposed 

alternatives for reform, and an 

assessment of the impact of the 

Council’s proposed recommendations 

on long-term economic growth. In 

addition, the Council is requesting 

public comment on alternative 

structural reforms for MMFs. 

DATES: Comment due date: January 18, 

2013. 

ADDRESSES: Interested persons are 

invited to submit comments on all 

aspects of Proposed Recommendations 

Regarding Money Market Mutual Fund 

Reform according to the instructions 

below. All submissions must refer to 

docket number FSOC–2012–0003. 

Electronic Submission of Comments. 

Interested persons may submit 

comments electronically through the 

Federal eRulemaking Portal at http:// 

www.regulations.gov. Electronic 

submission of comments allows the 

commenter maximum time to prepare 

and submit a comment, ensures timely 

receipt, and enables the Council to make 

them available to the public. Comments 

submitted electronically through http:// 

www.regulations.gov can be viewed by 

other commenters and interested 

members of the public. Commenters 

should follow the instructions provided 

on that site to submit comments 

electronically. 

Mail: Comments may be mailed to 

Financial Stability Oversight Council, 

Attn: Amias Gerety, 1500 Pennsylvania 

Avenue NW., Washington, DC 20220. 

Public Inspection of Comments. 

Properly submitted comments will be 

available for inspection and 

downloading at http:// 

www.regulations.gov. 

Additional Instructions. In general, 

comments received, including 

attachments and other supporting 

materials, are part of the public record 

and are immediately available to the 

public. Do not include any information 

in your comment or supporting 

materials that you consider confidential 

or inappropriate for public disclosure. 

FOR FURTHER INFORMATION CONTACT: 

Amias Gerety, Deputy Assistant 

Secretary for the Financial Stability 

Oversight Council, Department of the 

Treasury, at (202) 622–8716; Sharon 

Haeger, Office of the General Counsel, 

Department of the Treasury, at (202) 

622–4353; or Eric Froman, Office of the 

General Counsel, Department of the 

Treasury, at (202) 622–1942. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Executive Summary 

II. Overview of Money Market Mutual Funds 

III. History of Reform Efforts and Role of the 

Financial Stability Oversight Council 

IV. Proposed Determination That MMFs 

Could Create or Increase the Risk of 

Significant Liquidity and Credit 

Problems Spreading Among Financial 

Companies and Markets 

V. Proposed Recommendations 

VI. Consideration of the Economic Impact of 

Proposed Reform Recommendations on 

Long-Term Economic Growth 

I. Executive Summary 

Reforms to address the structural 

vulnerabilities of money market mutual 

funds (MMFs or funds) are essential to 

safeguard financial stability. MMFs are 

mutual funds that offer individuals, 

businesses, and governments a 

convenient and cost-effective means of 

pooled investing in money market 

instruments. MMFs are a significant 

source of short-term funding for 

businesses, financial institutions, and 

governments. However, the 2007–2008 

financial crisis demonstrated that MMFs 

are susceptible to runs that can have 

destabilizing implications for financial 

markets and the economy. In the days 

after Lehman Brothers Holdings, Inc. 

failed and the Reserve Primary Fund, a 

$62 billion prime MMF, ‘‘broke the 

buck,’’ investors redeemed more than 

$300 billion from prime MMFs and 

commercial paper markets shut down 

for even the highest-quality issuers. The 

Treasury Department’s guarantee of 

more than $3 trillion of MMF shares and 

a series of liquidity programs 

introduced by the Federal Reserve were 

needed to help stop the run on MMFs 

during the financial crisis and 

ultimately helped MMFs to continue to 

function as intermediaries in the 

financial markets. 

The Securities and Exchange 

Commission (SEC) took important steps 

in 2010 by adopting regulations to 

improve the resiliency of MMFs (the 

‘‘2010 reforms’’). But the 2010 reforms 

did not address the structural 

vulnerabilities of MMFs that leave them 

susceptible to destabilizing runs. These 

vulnerabilities arise from MMFs’ 

maintenance of a stable value per share 

and other factors as discussed below. 

MMFs’ activities and practices give rise 

to a structural vulnerability to runs by 


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1Public Law 111–203, 124 Stat. 1376 (2010). 

creating a ‘‘first-mover advantage’’ that 

provides an incentive for investors to 

redeem their shares at the first 

indication of any perceived threat to an 

MMF’s value or liquidity. Because 

MMFs lack any explicit capacity to 

absorb losses in their portfolio holdings 

without depressing the market-based 

value of their shares, even a small threat 

to an MMF can start a run. In effect, first 

movers have a free option to put their 

investment back to the fund by 

redeeming shares at the customary 

stable share price of $1.00, rather than 

at a price that reflects the reduced 

market value of the securities held by 

the MMF. 

The broader financial regulatory 

community has focused substantial 

attention on MMFs and the risks they 

pose. Both the President’s Working 

Group on Financial Markets (PWG) and 

the Financial Stability Oversight 

Council (Council) called for additional 

reforms to address the structural 

vulnerabilities in MMFs, through the 

PWG’s 2010 report on Money Market 

Fund Reform Options and unanimous 

recommendations in the Council’s 2011 

and 2012 annual reports, respectively. 

In October 2010, the SEC issued a 

formal request for public comment on 

the reforms initially described in the 

PWG report, and in May 2011 the SEC 

hosted a roundtable on MMFs and 

systemic risk in which several Council 

members and their representatives 

participated. However, in August 2012, 

SEC Chairman Schapiro announced that 

the SEC would not proceed with a vote 

to publish a notice of proposed 

rulemaking to solicit public comment 

on potential structural reforms of 

MMFs. 

Under Section 120 of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the Dodd-Frank Act),1 if 

the Council determines that the 

conduct, scope, nature, size, scale, 

concentration, or interconnectedness of 

a financial activity or practice 

conducted by bank holding companies 

or nonbank financial companies could 

create or increase the risk of significant 

liquidity, credit, or other problems 

spreading among bank holding 

companies and nonbank financial 

companies, the financial markets of the 

United States, or low-income, minority, 

or under-served communities, the 

Council may provide for more stringent 

regulation of such financial activity or 

practice by issuing recommendations to 

a primary financial regulatory agency to 

apply new or heightened standards or 

safeguards. The recommended 

standards and safeguards are required 

by Section 120 to take costs to long-term 

economic growth into account, and may 

include prescribing the conduct of the 

activity or practice in specific ways, 

such as applying particular capital or 

risk-management requirements. 

The Council is proposing to use this 

authority to recommend that the SEC 

proceed with much-needed structural 

reforms of MMFs. There will be a 60- 

day public comment period on the 

proposed recommendations. The 

Council will then consider the 

comments and may issue a final 

recommendation to the SEC, which, 

pursuant to the Dodd-Frank Act, would 

be required to impose the recommended 

standards, or similar standards that the 

Council deems acceptable, or explain in 

writing to the Council within 90 days 

why it has determined not to follow the 

recommendation. 

Pursuant to Section 120, the Council 

proposes to determine that MMFs’ 

activities and practices could create or 

increase the risk of significant liquidity, 

credit, and other problems spreading 

among bank holding companies, 

nonbank financial companies, and U.S. 

financial markets. This is due to the 

conduct and nature of the activities and 

practices of MMFs that leave them 

susceptible to destabilizing runs; the 

size, scale, and concentration of MMFs 

and the important role they play in the 

financial markets; and the 

interconnectedness between MMFs, the 

financial system and the broader 

economy that can act as a channel for 

the transmission of risk and contagion 

and curtail the availability of liquidity 

and short-term credit. 

Based on this proposed 

determination, the Council seeks 

comment on the proposed 

recommendations for structural reforms 

of MMFs that reduce the risk of runs 

and significant problems spreading 

through the financial system stemming 

from the practices and activities 

described above. The Council is 

proposing three alternatives for 

consideration: 

• Alternative One: 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. The 

value of MMFs’ shares would not be 

fixed at $1.00 and would reflect the 

actual market value of the underlying 

portfolio holdings, consistent with the 

requirements that apply to all other 

mutual funds. 

• Alternative Two: 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 have an appropriate 

transition period and could be raised 

through various methods. 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 made available for 

redemption on a delayed basis. Most 

redemptions would be unaffected by 

this requirement, but redemptions of an 

investor’s MBR itself would be delayed 

for 30 days. In the event that an MMF 

suffers losses that exceed its NAV 

buffer, the losses would be borne first by 

the MBRs of shareholders who have 

recently redeemed, creating a 

disincentive to redeem and providing 

protection for shareholders who remain 

in the fund. These requirements would 

not apply to Treasury MMFs, and the 

MBR requirement would not apply to 

investors with account balances below 

$100,000. 

• Alternative Three: 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. The 

NAV buffer would have an appropriate 

transition period and could be raised 

through various methods. 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, the 

Council could include these measures 

in its final recommendation and would 

reduce the size of the NAV buffer 

required under this alternative 

accordingly. 

These proposed recommendations are 

not necessarily mutually exclusive but 

could be implemented in combination 

to address the structural vulnerabilities 

that result in MMFs’ susceptibility to 

runs. For example, MMFs could be 

permitted to use floating NAVs or, if 

they preferred to maintain a stable 

value, to implement the measures 

contemplated in Alternatives Two or 

Three. 


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2 15 U.S.C. 80a–1—80a–64. 

3At times, these two categories may overlap. For 

example, retail investors may invest in institutional 

MMF shares through employer-sponsored 

retirement plans, such as 401(k) plans and broker 

or bank sweep accounts. Investment Company 

Institute, ‘‘Report of the Money Market Working 

Group’’ (March 17, 2009), at 24–27, available at 

http://www.ici.org/pdf/ppr_09_mmwg.pdf. 

4 Investment Company Institute, ‘‘2012 

Investment Company Fact Book’’ (‘‘ICI Fact Book’’), 

at Table 39; ‘‘Weekly Money Market Mutual Fund 

Assets’’ (Oct. 25, 2012), available at http:// 

www.ici.org/research/stats/mmf. 

5Based on data filed on SEC Form N–MFP as of 

September 30, 2012; ‘‘Weekly Money Market 

Mutual Fund Assets’’ (Oct. 25, 2012), available at 

http://www.ici.org/research/stats/mmf; ICI Fact 

Book, at Table 39. 

6See ICI Fact Book, at Table 5. 7 17 CFR 270.2a–7. 

Other reforms, not described above, 

may be able to achieve similar 

outcomes. Accordingly, the Council 

seeks public comment on the proposed 

recommendations and other potential 

reforms of MMFs. Comments on other 

reforms should consider the objectives 

of addressing the structural 

vulnerabilities inherent in MMFs and 

mitigating the risk of runs. For example, 

some stakeholders have suggested 

features that only would be 

implemented during times of market 

stress to reduce MMFs’ vulnerability to 

runs, such as standby liquidity fees or 

gates. Commenters on such proposals 

should address concerns that such 

features might increase the potential for 

industry-wide runs in times of stress. 

The Council recognizes that regulated 

and unregulated or less-regulated cash 

management products (such as 

unregistered private liquidity funds) 

other than MMFs may pose risks that 

are similar to those posed by MMFs, and 

that further MMF reforms could 

increase demand for non-MMF cash 

management products. The Council 

seeks comment on other possible 

reforms that would address risks that 

might arise from a migration to nonMMF cash management products. 

Further, the Council is not considering 

MMF reform in isolation. The Council 

and its members intend to use their 

authorities, where appropriate and 

within their jurisdictions, to address 

any risks to financial stability that may 

arise from various products within the 

cash management industry in a 

consistent manner. Such consistency 

would be designed to reduce or 

eliminate any regulatory gaps that could 

result in risks to financial stability if 

cash management products with similar 

risks are subject to dissimilar standards. 

In accordance with Section 120 of the 

Dodd-Frank Act, the Council has 

consulted with the SEC staff. In 

addition, the standards and safeguards 

proposed by the Council take costs to 

long-term economic growth into 

account. 

II. Overview of Money Market Mutual 

Funds 

A. Description of Money Market Mutual 

Funds 

MMFs are a type of mutual fund 

registered under the Investment 

Company Act of 1940 (the Investment 

Company Act).2 Investors in MMFs fall 

into two categories: (i) Individual, or 

‘‘retail’’ investors; and (ii) institutional 

investors, such as corporations, bank 

trust departments, pension funds, 

securities lending operations, and state 

and local governments, that use MMFs 

for a variety of cash management and 

investment purposes.3 MMFs are widely 

used by both retail and institutional 

investors for cash management 

purposes, although the industry has 

become increasingly dominated by 

institutional investors. MMFs marketed 

primarily to institutional investors 

account for almost two-thirds of assets 

today compared to about one-third of 

industry assets in 1996.4

MMFs are a convenient and costeffective way for investors to achieve a 

diversified investment in various money 

market instruments, such as commercial 

paper (CP), short-term state and local 

government debt, Treasury bills, and 

repurchase agreements (repos). This 

diversification, in combination with 

principal stability, liquidity, and shortterm market yields, has made MMFs an 

attractive investment vehicle. MMFs 

provide an economically significant 

service by acting as intermediaries 

between investors who desire low-risk, 

liquid investments and borrowers that 

issue short-term funding instruments. 

MMFs serve an important role in the 

asset management industry through 

their investors’ use of MMFs as a cashlike product in asset allocation and as 

a temporary investment when they 

choose to divest of riskier investments 

such as stock or long-term bond mutual 

funds. 

The MMF industry had approximately 

$2.9 trillion in assets under 

management (AUM) as of September 30, 

2012, of which approximately $2.6 

trillion is in funds that are registered 

with the SEC for sale to the public. This 

represents a decline from $3.8 trillion at 

the end of 2008.5 As of the end of 2011, 

there were 632 such funds, compared to 

783 at the end of 2008.6

MMFs are categorized into four main 

types based on their investment 

strategies. Treasury MMFs, with about 

$400 billion in AUM, invest primarily 

in U.S. Treasury obligations and repos 

collateralized with U.S. Treasury 

securities. Government MMFs, with 

about $490 billion in AUM, invest 

primarily in U.S. Treasury obligations 

and securities issued by entities such as 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac), the Federal 

National Mortgage Association (Fannie 

Mae), and the Federal Home Loan Banks 

(FHLBs), as well as in repo 

collateralized by such securities. In 

contrast, prime MMFs, with about $1.7 

trillion in AUM, invest more 

substantially in private debt 

instruments, such as CP and certificates 

of deposit (CDs). Commensurate with 

the greater risks in their portfolios, 

prime MMFs generally pay higher yields 

than Treasury or government MMFs. 

Finally, tax-exempt MMFs, with about 

$280 billion in AUM, invest in shortterm municipal securities and pay 

interest that is generally exempt from 

state and federal income taxes, as 

appropriate. 

B. Rule 2a–7 and the 2010 Reforms 

Like other mutual funds, MMFs must 

register under the Investment Company 

Act and are subject to its provisions. An 

MMF must comply with all of the same 

legal and regulatory requirements that 

apply to mutual funds generally, except 

that rule 2a–7 under the Investment 

Company Act 7 allows MMFs to use 

special methods to value their portfolio 

securities and price their shares, subject 

to the conditions in the rule. These 

methods permit MMFs to maintain a 

stable NAV per share, typically $1.00. 

Pursuant to rule 2a–7, MMFs generally 

use the amortized cost method of 

valuation and the penny rounding 

method of pricing in order to effectively 

‘‘round’’ their share prices. Under these 

methods, securities held by MMFs are 

valued at acquisition cost, with 

adjustments for amortization of 

premium or accretion of discount, 

instead of at fair market value, and the 

MMFs’ price per share is rounded to the 

nearest penny. This permits an MMF to 

price its shares for purposes of sales and 

redemptions at $1.00 even though the 

fund’s NAV based on the fair market 

value of its portfolio securities—rather 

than amortized cost—may vary by as 

much as 0.50 percent per share above or 

below $1.00. All other types of mutual 

funds, in contrast, must value their 

NAVs using the market value of the 

funds’ portfolio securities and sell and 

redeem their shares based on that NAV 

without using penny rounding. 

In order to protect investors from 

being treated unfairly, an MMF may 

continue to use these valuation and 


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8SEC, Money Market Fund Reform, 75 FR 32688, 

10060 (Mar. 4, 2010). 

9An MMF’s board of directors may delegate to 

the fund’s investment adviser or officers the 

responsibility to make this determination pursuant 

to written guidelines that the board establishes and 

oversees. In addition, Section 939A of the DoddFrank Act requires the SEC (and other regulators) 

to review its regulations for any references to or 

requirements regarding credit ratings that require 

the use of an assessment of the creditworthiness of 

a security or money market instrument, remove 

these references or requirements, and substitute in 

those regulations other standards of 

creditworthiness in place of the credit ratings that 

the agency determines to be appropriate. The SEC 

has proposed to remove references to credit ratings 

from rule 2a–7. See SEC, References to Credit 

Ratings in Certain Investment Company Act Rules 

and Forms, Investment Company Act Release No. 

IC–28807, 76 FR 12896 (Mar. 9, 2011). It is the 

Council’s understanding that the SEC intends to act 

on removal of credit ratings from rule 2a–7 as 

required by the Dodd-Frank Act, and therefore the 

Council is not addressing this issue in these 

recommendations. 

10Second-tier securities are defined in rule 2a–7 

generally as securities that have received the 

second-highest short-term debt rating from an 

NRSRO or are of comparable quality. 

11The previous limit was the greater of one 

percent or $1 million. 

12Widening credit spreads, reflecting additional 

yield demanded by investors over a comparable 

risk-free rate, can negatively affect the value of a 

fund’s portfolio securities. The limit on an MMF’s 

WAL is designed to protect the fund against spread 

risk because longer-term adjustable-rate securities 

are more sensitive to credit spreads than short-term 

securities with final maturities equal to the reset 

date of the longer-term security. Under rule 2a–7, 

therefore, MMFs are permitted to use interest-rate 

reset dates to shorten the maturity of an adjustablerate security or a floating rate security in their 

WAM calculation, but not in their WAL calculation. 

13Tax-exempt MMFs are exempt from the 

requirement regarding daily liquid assets. 

pricing methods only when the fund’s 

stable $1.00 per share value fairly 

represents the fund’s market-based 

share price. Rule 2a–7 requires an MMF 

to periodically calculate its marketbased NAV, or ‘‘shadow price,’’ and 

compare this value to the fund’s stable 

$1.00 share price. If there is a difference 

of more than 0.50 percent (or $0.005 per 

share), the fund’s board of directors 

must consider promptly what action, if 

any, should be taken, including whether 

the fund should discontinue the use of 

these methods and re-price the 

securities of the fund at a value other 

than $1.00 per share, an event known as 

‘‘breaking the buck’’ (i.e., the fund 

would fail to maintain a stable NAV of 

$1.00). 

In order to reduce the likelihood that 

an MMF would experience such a 

significant deviation, rule 2a–7 imposes 

upon MMFs certain ‘‘risk-limiting 

conditions’’ relating to portfolio 

maturity, credit quality, liquidity, and 

diversification. These risk-limiting 

conditions limit the funds’ exposures to 

certain risks, such as credit, currency, 

and interest rate risks.8

The risk-limiting conditions, in their 

current form, include numerous changes 

to rule 2a–7 that were adopted by the 

SEC in 2010 as an initial response to the 

financial crisis. These 2010 reforms 

strengthened maturity limitations, 

increased MMFs’ diversification and 

liquidity requirements, imposed stresstest requirements, improved the creditquality standards for MMF portfolio 

securities, increased reporting and 

disclosure requirements on portfolio 

holdings, and provided new redemption 

and liquidation procedures to minimize 

contagion from a fund breaking the 

buck, as described below. The 2010 

reforms were a necessary and important 

step in reducing MMF portfolio risk and 

increasing the resiliency of MMFs to 

redemptions. 

Quality of portfolio securities. MMFs 

may purchase a security only if the 

security, at the time of acquisition, has 

received a specified credit rating from a 

nationally recognized statistical rating 

organization (‘‘NRSRO’’), generally the 

highest short-term rating (or is an 

unrated security of comparable quality 

as determined by the board of directors), 

and the fund’s board of directors 

determines that the security presents 

minimal credit risks based on factors 

pertaining to credit quality in addition 

to any credit rating assigned to the 

security by an NRSRO.9 The 2010 

reforms sought to reduce MMFs’ 

exposure to risks from lower-rated 

securities—so-called ‘‘second-tier’’ 

securities—in several ways.10 First, the 

reforms reduced the limit on 

investments in these securities from 5 

percent to 3 percent of the fund’s total 

assets. Second, MMFs’ allowable 

exposure to a single issuer of second-tier 

securities was reduced to 0.5 percent.11

Third, MMFs are only permitted to 

purchase second-tier securities with 

maturities of 45 days or less. The 

previous limit was 397 days. The 

reforms also tightened requirements 

relating to MMF holdings of repo that 

are collateralized with private debt 

instruments rather than cash 

equivalents or government securities. 

Maturity limitations. MMFs generally 

are prohibited from acquiring any 

security with a remaining maturity 

greater than 397 days (certain features, 

like an unconditional ‘‘put,’’ can 

shorten a security’s maturity for this and 

certain other purposes under rule 2a–7), 

and are subject to a maximum allowable 

dollar-weighted average portfolio 

maturity (WAM) and weighted average 

life (WAL). The 2010 reforms 

strengthened the maturity limitations by 

reducing the maximum allowable WAM 

of an MMF’s portfolio from 90 days to 

60 days, which reduces an MMF’s 

exposure to interest-rate risk. In 

addition, the 2010 reforms introduced a 

new 120-day WAL limit, which lowers 

MMFs’ exposure to credit-spread risk 

from floating- or variable-rate portfolio 

holdings by taking into account the 

securities’ ultimate maturity.12

Diversification requirement. 

Generally, MMFs must limit their 

investments in the securities of any one 

issuer (other than government 

securities) to no more than 5 percent of 

fund assets at the time of purchase. 

They must also generally limit their 

investments in securities subject to a 

demand feature or a guarantee from any 

particular provider to no more than 10 

percent of fund assets. 

Liquidity requirements. The 2010 

reforms added a requirement that each 

MMF maintain a minimum liquidity 

buffer. Each MMF must have at least 10 

percent of its assets invested in ‘‘daily 

liquid assets’’ and at least 30 percent of 

its assets invested in ‘‘weekly liquid 

assets.’’ 13 Daily liquid assets are cash, 

U.S. Treasury obligations, and securities 

that convert into cash (by maturing or 

through a put) within one business day. 

Weekly liquid assets are daily liquid 

assets, securities of an instrumentality 

of the U.S. Government that have a 

remaining maturity of 60 days or less, 

and securities that convert into cash 

within five business days. The 

amendments also reduced the amount of 

illiquid securities—those that cannot be 

disposed of within seven days without 

taking a discounted price—that an MMF 

can hold from 10 percent to 5 percent. 

These liquidity requirements are 

designed to help MMFs meet 

shareholder redemptions without 

selling portfolio securities into 

potentially distressed markets at 

discounted prices. 

Stress-testing requirement. The 2010 

reforms introduced a stress-testing 

requirement for MMFs, requiring that a 

fund’s board of directors adopt 

procedures for periodic stress tests of 

the fund’s ability to maintain a stable 

share price. The stress tests are based on 

certain hypothetical stress events and 

the results of these tests must be 

provided to the MMF’s board. 

Disclosure and reporting. The 2010 

reforms introduced enhanced reporting 

and disclosure obligations that require 

funds to post portfolio information on 

their Web sites within five business 

days after the end of each month. MMFs 

are also required to submit to the SEC 

each month more detailed portfolio 

holdings information, including the 

shadow price, which is made available 


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14Treasury, ‘‘Financial Regulatory Reform: A 

New Foundation’’ (2009), available at http:// 

www.treasury.gov/initiatives/Documents/ 

FinalReport_web.pdf. 

15SEC, Money Market Fund Reform, Investment 

Company Act Release No. IC–29132, 75 FR 10600, 

10062 (Mar. 4, 2010) (‘‘Our June 2009 proposals 

were the product of [the SEC’s and staff’s review of 

MMFs] and were, we explained, a first step to 

addressing regulatory concerns we identified.’’). 

16President’s Working Group on Financial 

Markets, ‘‘Money Market Fund Reform Options’’ 

(Oct. 2010), available at http://www.treasury.gov/ 

press-center/press-releases/Documents/ 

10.21%20PWG%20Report%20Final.pdf. 

17 IOSCO, ‘‘Policy Recommendations for Money 

Market Funds’’ (Oct. 2012), available at http:// 

www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD392.pdf. Substantially all of IOSCO’s 

recommendations are included in the SEC’s current 

regulation of MMFs or are addressed in these 

proposed recommendations. IOSCO noted in a 

media release issued on October 9, 2012, that 

although a majority of the SEC’s commissioners did 

not support the publication of IOSCO’s 

recommendations, there were no other objections, 

and IOSCO’s board approved the report containing 

the recommendations during its meeting on October 

3–4, 2012. In addition, in a statement issued on 

May 11, 2012, three of the SEC’s commissioners 

stated that IOSCO’s consultation report on MMFs, 

published on April 27, 2012, did not reflect the 

views and input of a majority of the SEC and, 

accordingly, cannot be considered to represent the 

views of the SEC. 

18The European Commission is also considering 

the need for further reforms to their regulation of 

money market funds. See European Commission 

Green Paper on Shadow Banking (Mar. 19, 2012), 

available at http://ec.europa.eu/internal_market/ 

bank/docs/shadow/green-paper_en.pdf; European 

Commission Consultation Document, Undertakings 

for Collective Investment in Transferable Securities 

(UCITS) Product Rules, Liquidity Management, 

Depositary, Money Market Funds, Long-term 

Investments (Jul. 26, 2012), available at http:// 

ec.europa.eu/internal_market/consultations/docs/ 

2012/ucits/ucits_consultation_en.pdf. 

19 Dodd-Frank Act Section 112(a)(1). 

to the public 60 days after the end of the 

month to which the information 

pertains. These requirements allow the 

SEC, investors, and others to better 

monitor fund risk taking. 

Facilitation of orderly fund 

liquidation. The 2010 reforms 

introduced a new rule, rule 22e–3 under 

the Investment Company Act, that 

permits the board of directors of an 

MMF, upon notification to the SEC, to 

suspend redemptions and liquidate the 

fund if it has broken, or is in danger of 

breaking, the buck. The rule is designed 

to prevent shareholder harm from 

distressed sales of securities that can 

occur with rapid liquidations when a 

fund breaks the buck. 

While the enhancements introduced 

in the 2010 reforms increase resiliency 

and limit MMFs’ exposure to certain 

risks, they do not address MMFs’ 

structural vulnerabilities. These 

vulnerabilities and the resulting risks to 

financial stability are described in more 

detail in the following sections. 

III. History of Reform Efforts and Role 

of the Financial Stability Oversight 

Council 

A. Reform Efforts to Date 

Following the financial crisis, the 

Department of the Treasury (Treasury) 

released a roadmap for financial reform 

in June 2009 14 calling for: (i) The SEC 

to complete its near-term MMF reform 

efforts and (ii) the PWG to evaluate the 

need for structural reform of MMFs. The 

SEC addressed this first element when 

it adopted the 2010 reforms. 

At the time of the adoption of the 

2010 reforms, the SEC noted that these 

reforms served as a ‘‘first step’’ in 

addressing MMF reform.15 In October 

2010, the PWG released a report 

outlining a set of additional policy 

options intended to address the risks to 

financial stability posed by MMFs’ 

susceptibility to runs.16 This report 

stated that the 2010 reforms ‘‘alone 

could not be expected to prevent a run 

of the type experienced in September 

2008.’’ This report was released for 

public comment and generated a large 

number of thoughtful and detailed 

responses, including suggestions by 

both academics and industry 

participants that MMFs maintain a 

capital buffer or impose a liquidity fee 

to help absorb losses and mitigate 

liquidity pressures. To further engage 

the public on reform, the SEC hosted a 

roundtable to discuss potential reform 

options in May 2011 that included 

Council members and their 

representatives, other regulators, trade 

groups, issuers of securities in which 

MMFs invest, MMF sponsors, and MMF 

investors. Throughout this period, the 

SEC engaged with stakeholders and 

regulators in an intensive effort to 

consider and refine various potential 

reform options. 

Concurrently, the broader financial 

regulatory community in both the 

United States and abroad has made 

repeated calls for MMF reform. The 

Council, in both its 2011 and 2012 

annual reports, highlighted the need for 

additional MMF reform to address 

structural vulnerabilities in the U.S. 

financial system. In 2012, the Council 

specifically recommended that the SEC 

publish structural reform proposals for 

public comment and ultimately adopt 

reforms that address MMFs’ lack of lossabsorption capacity and susceptibility to 

runs. The Office of Financial Research, 

in its 2012 annual report, identified the 

run risk for MMFs as one of the ‘‘current 

threats to financial stability.’’ 

Internationally, on October 9, 2012, 

the International Organization of 

Securities Commissions (IOSCO) issued 

policy recommendations for reforming 

MMFs. The IOSCO recommendations 

demonstrate the efforts by the G–20 and 

the Financial Stability Board to fulfill 

the mandate of strengthening the 

oversight and regulation of the ‘‘shadow 

banking system.’’ 17 There are also other 

international efforts, along with 

IOSCO’s, to consider aspects of MMF 

regulation where greater harmonization 

between jurisdictions and regulatory 

improvements could occur in an effort 

to avoid jurisdictional arbitrage.18

On August 22, 2012, SEC Chairman 

Schapiro announced that the majority of 

the SEC’s Commissioners would not 

support seeking public comment on the 

SEC’s staff proposal to reform the 

structure of MMFs. As a result, on 

September 27, 2012, the Chairperson of 

the Council, Treasury Secretary 

Geithner, sent a letter to Council 

members urging the Council to take 

action in the absence of the SEC doing 

so. 

B. Role of the Council and Dodd-Frank 

Act Section 120 

The Dodd-Frank Act established the 

Council ‘‘(A) to identify risks to the 

financial stability of the United States 

that could arise from the material 

financial distress or failure, or ongoing 

activities, of large, interconnected bank 

holding companies or nonbank financial 

companies, or that could arise outside 

the financial services marketplace; (B) to 

promote market discipline, by 

eliminating expectations on the part of 

shareholders, creditors, and 

counterparties of such companies that 

the Government will shield them from 

losses in the event of failure; and (C) to 

respond to emerging threats to the 

stability of the United States financial 

system.’’ 19

To carry out its financial stability 

mission, the Council has various 

authorities, including the authority 

under Section 120 of the Dodd-Frank 

Act to issue recommendations to 

primary financial regulatory agencies to 

apply ‘‘new or heightened standards 

and safeguards’’ for a financial activity 

or practice conducted by bank holding 

companies or nonbank financial 

companies under the regulatory 

agency’s jurisdiction. Prior to issuing 

such a recommendation, the Council 

must determine that ‘‘the conduct, 

scope, nature, size, scale, concentration, 

or interconnectedness’’ of the financial 

activity or practice ‘‘could create or 

increase the risk of significant liquidity, 

credit, or other problems spreading 

among bank holding companies and 

nonbank financial companies, financial 


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20 Dodd-Frank Act Section 120(a). 

21See 12 U.S.C. 5311(b). 

22See sections 4(k)(1), 4(k)(4)(A), 4(k)(4)(D), and 

4(k)(4)(H) of the Bank Holding Company Act (12 

U.S.C. 1843(k)(1), 1843(k)(4)(A), 1843(k)(4)(D), 

1843(k)(4)(H)). 

23See 12 U.S.C. 5311(a)(4). 

24The inherent fragility and susceptibility of 

MMFs to destabilizing runs has been the subject of 

considerable academic research and commentary. 

See, e.g., Sean S. Collins and Phillip R. Mack, 

‘‘Avoiding Runs in Money Market Mutual Funds: 

Have Regulatory Reforms Reduced the Potential for 

a Crash,’’ Working Paper 94–14, Federal Reserve 

Board Finance and Economics Discussion Series 

(June 1994); Naohiko Baba, Robert N. McCauley, 

and Srichander Ramaswamy, ‘‘US dollar money 

market funds and non-US banks,’’ BIS Quarterly 

Review (March 2009), at 65–81; Gary Gorton and 

Andrew Metrick, ‘‘Regulating the Shadow Banking 

System,’’ Brookings Papers on Economic Activity 

(Fall 2010), at 261–297; Patrick E. McCabe, ‘‘The 

Cross Section of Money Market Fund Risks and 

Financial Crises,’’ Working Paper 2010–51, Federal 

Reserve Board Finance and Economics Discussion 

Series (September 2010); Squam Lake Group, 

‘‘Reforming Money Market Funds,’’ Letter to the 

Securities and Exchange Commission re: File No. 4– 

619; Release No. IC–29497 President’s Working 

Group Report on Money Market Fund Reform (Jan. 

14, 2011), available at http://www.sec.gov/ 

comments/4–619/4619–57.pdf; Eric S. Rosengren, 

‘‘Money Market Mutual Funds and Financial 

Stability: Remarks at the Federal Reserve Bank of 

Atlanta’s 2012 Financial Markets Conference,’’ 

(April 11, 2012), available at http:// 

www.bos.frb.org/news/speeches/rosengren/2012/ 

041112/041112.pdf; Marcin Kacperczyk and 

Philipp Schnabl, ‘‘How Safe are Money Market 

Funds?’’ (April 2012); Burcu Duygan-Bump, Patrick 

Parkinson, Eric Rosengren, Gustavo A. Suarez, and 

Paul Willen, ‘‘How effective were the Federal 

Reserve emergency liquidity facilities? Evidence 

from the Asset-Backed Commercial Paper Money 

Market Mutual Fund Liquidity Facility,’’ Journal of 

Finance, forthcoming; Patrick E. McCabe, Marco 

Cipriani, Michael Holscher, and Antoine Martin, 

‘‘The Minimum Balance at Risk: A Proposal to 

Mitigate the Systemic Risks Posed by Money Market 

Funds,’’ Working Paper 2012–47, Federal Reserve 

Board Finance and Economics Discussion Series 

(July 2012); David S. Scharfstein, ‘‘Perspectives on 

Money Market Mutual Fund Reforms,’’ Testimony 

before U.S. Senate Committee on Banking, Housing, 

& Urban Affairs (June 21, 2012); Jeffrey N. Gordon 

and Christopher M. Gandia, ‘‘Money Market Funds 

Run Risk: Will Floating Net Asset Value Fix the 

Problem?’’ Columbia Law and Economics Working 

Paper No. 426 (Sept. 23, 2012), 

available at http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2134995. 

markets of the United States, or lowincome, minority or underserved 

communities.’’ 20 The Council believes 

that MMFs are ‘‘predominantly engaged 

in financial activities’’ 21 as defined in 

section 4(k) of the Bank Holding 

Company Act of 1956 22 and thus are 

‘‘nonbank financial companies’’ 23 for 

purposes of Title I of the Dodd-Frank 

Act. 

Pursuant to Section 120 of the DoddFrank Act, the Council proposes to 

determine that the activities and 

practices of MMFs, for which the SEC 

is the primary financial regulatory 

agency, could create or increase the risk 

of significant liquidity, credit, or other 

problems spreading among bank 

holding companies, nonbank financial 

companies, and the financial markets of 

the United States. This proposed 

determination is set forth below in 

Section IV. The Council seeks public 

comment on this proposed 

determination. 

To address the concerns regarding 

MMFs, the Council also seeks public 

comment on the proposed 

recommendations described in Section 

V. Comments are due 60 days after 

publication in the Federal Register. The 

Council will then consider the 

comments and may issue a final 

recommendation to the SEC, which, 

pursuant to the Dodd-Frank Act, would 

be required to impose the recommended 

standards, or similar standards that the 

Council deems acceptable, or explain in 

writing to the Council, not later than 90 

days after the date on which the Council 

issues the final recommendation, why 

the SEC has determined not to follow 

the Council’s recommendation. If the 

SEC accepts the Council’s 

recommendation, it is expected that the 

SEC would implement the 

recommendation through a rulemaking, 

subject to public comment, that would 

consider the economic consequences of 

the implementing rule as informed by 

the SEC staff’s own economic study and 

analysis. 

The SEC, by virtue of its institutional 

expertise and statutory authority, is best 

positioned to implement reforms to 

address the risks that MMFs present to 

the economy. If the SEC moves forward 

with meaningful structural reforms of 

MMFs before the Council completes its 

Section 120 process, the Council 

expects that it would not issue a final 

Section 120 recommendation to the 

SEC. 

In addition to the proposed 

recommendations to the SEC under its 

Section 120 authority, the Council and 

some of its members are actively 

evaluating alternative authorities in the 

event the SEC determines not to impose 

the standards recommended by the 

Council in any final recommendation. 

For instance, under Title I of the 

Dodd-Frank Act, the Council has the 

authority and the duty to designate any 

nonbank financial company that could 

pose a threat to U.S. financial stability. 

Designated companies are subject to 

supervision by the Federal Reserve and 

enhanced prudential standards. 

Alternatively, the Council’s authority to 

designate systemically important 

payment, clearing, or settlement 

activities under Title VIII of the DoddFrank Act could enable the application 

of heightened risk-management 

standards on an industry-wide basis. 

Additionally, other Council member 

agencies have the authority to take 

action to address certain of the risks 

posed by MMFs and similar cashmanagement products, as appropriate. 

IV. Proposed Determination That MMFs 

Could Create or Increase the Risk of 

Significant Liquidity and Credit 

Problems Spreading Among Financial 

Companies and Markets 

In order to issue a recommendation 

under Section 120 of the Dodd-Frank 

Act, the Council must determine that 

the conduct, scope, nature, size, scale, 

concentration, or interconnectedness of 

MMFs’ activities or practices could 

create or increase the risk of significant 

liquidity, credit, or other problems 

spreading among bank holding 

companies and nonbank financial 

companies, or U.S. financial markets. 

As further discussed below, the 

conduct and nature of MMFs’ activities 

and practices make MMFs vulnerable to 

destabilizing runs, which may spread 

quickly among funds, impairing 

liquidity broadly and curtailing the 

availability of short-term credit.24

Because of the size, scale, concentration, 

and interconnectedness of MMFs’ 

activities, the liquidity pressures on the 

MMF industry resulting from a run can 

cause this stress to propagate rapidly 

throughout the financial system and to 

the broader economy. 

As was evidenced in the financial 

crisis, even small portfolio losses may 

cause a fund to break the buck. If 

investors perceive a risk of such an 

event, MMFs’ lack of explicit lossabsorption capacity, the first-mover 

advantage enjoyed by redeeming 

investors, investor uncertainty regarding 

sponsor support, and the similarity of 

MMFs’ portfolios can incite widespread 

runs on MMFs. Heavy redemptions may 

magnify losses for other funds and 

potentially cause them to break the buck 

and suspend redemptions under rule 

22e-3, harming investors by impairing 

their liquidity. Further, due to the 

significant role MMFs play in the shortterm credit markets, an industry-wide 

run on MMFs can reduce the 

availability of credit to borrowers. 

Ultimately, a run on MMFs can create 

or increase the risk of significant 

liquidity, credit, or other problems 

spreading among bank holding 

companies, nonbank financial 

companies, and U.S. financial markets. 

• Conduct and nature of activities 

and practices: Several activities and 

practices of MMFs combine to create a 

vulnerability to runs, including: (i) 

Relying on the amortized cost method of 


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25See SEC, ‘‘Unofficial Transcript: Roundtable on 

Money Market Funds and Systemic Risk’’ (May 10, 

2011), available at http://www.sec.gov/spotlight/ 

mmf-risk/mmf-risk-transcript-051011.htm (quoting 

Seth P. Bernstein of J.P. Morgan Asset Management, 

‘‘We find ourselves uncomfortable about the 

informal arrangements that have existed in the 

industry for some time because we believe it’s both 

an issue of credit risk embedded in the portfolios, 

as well as the liquidity issues that arise in a run’’). 

26These data exclude losses that were absorbed 

by some forms of sponsor support, such as direct 

cash infusions to a fund and outright purchases of 

securities from a fund at above-market prices, so the 

number of funds that would have broken the buck 

in the absence of all forms of support may have 

exceeded 29. See McCabe, Cipriani, Holscher, and 

Martin, 2012. 

27See SEC, ‘‘Unofficial Transcript: Roundtable on 

Money Market Funds and Systemic Risk’’ (May 10, 

2011), available at http://www.sec.gov/spotlight/ 

mmf-risk/mmf-risk-transcript-051011.htm. At the 

roundtable, Bill Stouten of Thrivent Financial 

stated, ‘‘I think the primary factor that makes 

money funds vulnerable to runs is the marketing of 

the stable NAV. And I think the record of money 

market funds and maintaining the stable NAV has 

largely been the result of periodic voluntary 

sponsor support. I think sophisticated investors that 

understand this and doubt the willingness or ability 

of the sponsor to make that support know that they 

need to pull their money out before a declining 

asset is sold.’’ 

valuation and/or penny rounding to 

maintain a stable $1.00 per share price; 

(ii) offering shares that may be 

redeemed on demand despite MMFs’ 

limited same-day liquidity; (iii) 

investing in assets that are subject to 

interest-rate and credit risk without 

having explicit loss-absorption capacity; 

(iv) relying upon ad hoc discretionary 

support from sponsors, which has often 

shielded investors from losses and 

obscured portfolio risks; and (v) 

attracting a base of highly risk-averse 

investors that are prone to withdraw 

assets when even small losses appear 

possible. Together, these activities and 

practices foster MMFs’ structural 

vulnerability to runs by creating a firstmover advantage that provides an 

incentive for investors to redeem their 

shares at the first indication of any 

perceived threat to an MMF’s value or 

liquidity. Because MMFs lack any 

explicit capacity to absorb losses in 

their portfolio holdings without 

depressing the market-based value of 

their shares, even a small threat to an 

MMF can start a run. 

• Size, scale, and concentration of 

activities and practices: The MMF 

industry is large, with $2.9 trillion in 

assets, and provides a substantial 

portion of the short-term funding 

available to a range of borrowers in the 

capital markets. The industry is also 

highly concentrated, as the top 20 MMF 

sponsors operate funds with 90 percent 

of aggregate MMF assets under 

management. 

• Interconnectedness of activities and 

practices: MMFs are highly 

interconnected with the rest of the 

financial system and can transmit stress 

throughout the system because of their 

role as intermediaries, as significant 

investors in the short-term funding 

markets, as potential recipients of 

economic support from the financial 

institutions that sponsor them, and as 

important providers of cashmanagement services. 

Below is a further discussion of MMFs’ 

activities and practices and how they 

contribute to the funds’ vulnerability to 

runs, how those runs may transmit 

stresses throughout the financial system, 

evidence from the run on MMFs during 

the financial crisis, and an explanation 

of why action is needed beyond the 

2010 reforms. The Council solicits 

public comment on this proposed 

determination. 

Conduct and Nature 

MMFs’ vulnerability to runs results in 

part from the conduct and nature of the 

activities and practices of MMFs, their 

sponsors, and their investors. 

The stable, rounded NAV per share. 

Unlike other mutual funds, most MMFs 

rely on valuation and rounding methods 

to maintain a stable NAV per share, 

typically $1.00. Rounding obscures the 

daily movements in the value of an 

MMF’s portfolio and fosters an 

expectation that MMF share prices will 

not fluctuate. Importantly, rounding 

also exacerbates investors’ incentives to 

run when there is risk that prices will 

fluctuate. When an MMF that has 

experienced a small loss satisfies 

redemption requests at the rounded 

$1.00 share price, the fund effectively 

subsidizes these redemptions by 

concentrating the loss among the 

remaining shareholders. As a result, 

redemptions from such a fund can 

further depress its shadow NAV and 

increase the risk that the MMF will 

break the buck. This contributes to a 

first-mover advantage, in which those 

who redeem early are more likely to 

receive the full $1.00 per share than 

those who wait. Thus, first movers have 

a free option to put their investment 

back to the fund by redeeming shares at 

the customary stable NAV of $1.00 per 

share (rather than at a share price 

reflecting the market value of the 

underlying securities held by the MMF). 

In the absence of an explicit mechanism 

to take losses in the value of the 

securities held by an MMF without 

depressing the fund’s shadow NAV, the 

‘‘first movers’’ leave other fund 

investors sharing in such losses. 

Shares that can be redeemed on 

demand despite limited portfolio 

liquidity. MMFs perform maturity 

transformation by offering shares that 

investors may redeem on demand — 

providing shareholders unlimited daily 

liquidity — while also investing in 

relatively longer-term securities. MMFs 

invest not only in highly liquid 

instruments, such as securities that 

mature overnight and Treasury 

securities, but also in short-term 

instruments that are less liquid, 

including term CP and term repo. In the 

event of shareholder redemptions in 

excess of an MMF’s available liquidity, 

a fund may be forced to sell less-liquid 

assets to meet redemptions. In times of 

stress, such sales may cause funds to 

suffer losses that must be absorbed by 

the fund’s remaining investors, further 

reinforcing the first-mover advantage. 

Importantly, while the minimum 

liquidity requirements implemented in 

the SEC’s 2010 reforms should make 

MMFs more resilient to market 

disruptions by increasing the funds’ 

supply of liquid assets that can quickly 

be converted to cash, as noted below, 

these requirements are not designed to 

mitigate the first-mover advantage when 

a fund is at risk of suffering losses. 

Investments with interest-rate and 

credit risk without explicit lossabsorption capacity. MMFs invest in 

securities with credit and interest-rate 

risk to increase the yields they offer to 

investors, but the funds do so without 

any formal capacity to absorb losses.25

The short maturities of these securities 

and their high credit quality generally 

limit portfolio risks, but MMFs on 

occasion have been exposed to 

potentially significant losses. For 

example, 29 MMFs participating in the 

Treasury’s Temporary Guarantee 

Program for Money Market Funds 

reported losses in September and 

October 2008 that, absent sponsor 

support, would have exceeded 0.50 

percent of assets, and losses among 

those funds averaged 2.2 percent of 

assets.26 As discussed in more detail 

below, the Reserve Primary Fund’s 

experience demonstrates that the loss in 

value of a single security in an MMF’s 

portfolio can cause the fund to break the 

buck. As a result of investors’ 

expectations of a stable $1.00 per share 

NAV, even a small capital loss at an 

MMF can give its investors a strong 

incentive to redeem their shares. 

Reliance on discretionary sponsor 

support. In the absence of capital, 

insurance, or any other formal 

mechanism to absorb losses when they 

do occur, MMFs historically have relied 

upon ad hoc discretionary support from 

their sponsors to maintain $1.00 per 

share prices.27 Unlike other types of 


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28Moody’s found 144 cases in which U.S. MMFs 

‘‘would have ‘broken the buck’ but for the 

intervention of their fund sponsor/investment 

management firm’’ from 1989 to 2003. Moody’s 

identified a total of 146 funds that would have lost 

value before 2007 in the absence of support, but one 

of these losses occurred before the adoption of rule 

2a-7 and another loss was in a European fund. The 

Moody’s report covers ‘‘constant net asset value’’ 

funds other than MMFs, but we understand that the 

remaining 144 funds in question were all registered 

U.S. MMFs. Moody’s Investors Service, ‘‘Sponsor 

Support Key to Money Market Funds’’ (Aug. 8, 

2010). Separately, other researchers documented 

123 instances of support for 78 different MMFs 

between 2007 and 2011. These totals include 

support in the form of cash contributions from 

sponsors and outright purchases of securities from 

MMFs at above-market prices. However, the totals 

cited here exclude some forms of sponsor 

intervention, including capital support agreements 

and letters of credit that were not drawn upon. See 

Steffanie A. Brady, Ken E. Anadu, and Nathaniel R. 

Cooper, ‘‘The Stability of Prime Money Market 

Mutual Funds: Sponsor Support from 2007 to 

2011,’’ Federal Reserve Bank of Boston Risk and 

Policy Analysis Unit, Working Paper RPA 12–3 

(Aug. 13, 2012). 

29An MMF’s prospectus must state, ‘‘An 

investment in the Fund is not insured or guaranteed 

by the Federal Deposit Insurance Corporation or 

any other government agency. Although the Fund 

seeks to preserve the value of your investment at 

$1.00 per share, it is possible to lose money by 

investing in the Fund.’’ SEC Form N–1A, Item 

4(b)(1)(ii). 

30See SEC, ‘‘Unofficial Transcript: Roundtable on 

Money Market Funds and Systemic Risk’’ (May 10, 

2011), available at http://www.sec.gov/spotlight/ 

mmf-risk/mmf-risk-transcript-051011.htm (quoting 

Lance Pan of Capital Advisors Group, ‘‘[MMF 

investors] will take zero loss, and they’re loss averse 

as opposed to risk averse. So to the extent that they 

own that risk, at a certain point they started to own 

that risk, then the run would start to develop. It’s 

not that throughout the history of money market 

funds we did not have asset deterioration. We did. 

But I think over the last 30 or 40 years, people have 

relied on the perception that even though there is 

risk in money market funds, that risk is owned 

somehow implicitly by the fund sponsors. So once 

they perceive that they are not able to get that 

additional assurance, I believe that was one 

probable cause of the run.’’ 

31 ICI Fact Book; Investment Company Institute, 

‘‘Weekly Money Market Mutual Fund Assets,’’ 

available at http://www.ici.org/research/stats/mmf 

(Oct. 25, 2012). 

32Aggregate assets under management in all 

MMFs that are registered under the Investment 

Company Act of 1940 and report on Form N–MFP 

to the SEC totaled $2.9 trillion at September 30, 

2012. However, shares for some of these MMFs are 

not registered for sale to the public under the 

Securities Act of 1933. The assets in funds that are 

sold to the public totaled $2.6 trillion at September 

30, 2012, according to data from the Investment 

Company Institute and iMoneyNet. 

33Based on MMFs’ filings of SEC Form N–MFP, 

CD data from the Depository Trust & Clearing 

Corporation (‘‘DTCC’’), large time deposits data 

from the Federal Reserve Board Flow of Funds 

Accounts, and CP data from DTCC and the Federal 

Reserve Board. 

34For repo data, see Federal Reserve Bank of New 

York, http://www.newyorkfed.org/banking/ 

tpr_infr_reform.html; for short-term municipal 

securities, see SIFMA, http://www.sifma.org/ 

research/item.aspx?id=8589940509 and Flow of 

Funds Accounts of the United States. 

35Based on Form N–MFP filings with the SEC. 

mutual funds, MMF sponsors have often 

supported their funds, with researchers 

documenting over 200 instances of such 

support since 1989.28

While MMF prospectuses must warn 

investors that their shares may lose 

value,29 the extensive record of sponsor 

intervention and its critical role 

historically in maintaining MMF price 

stability may have obscured some 

investors’ appreciation of MMF risks 

and caused some investors to assume 

that MMF sponsors will absorb any 

losses, even though sponsors are under 

no obligation to do so. As such, it is not 

the sponsor support itself, but rather its 

discretionary nature that contributes to 

uncertainty among market participants 

about who will bear losses when they 

do occur. This uncertainty likely makes 

MMFs even more vulnerable to runs 

during periods of financial instability, 

when broader financial risks are most 

salient and when concerns arise about 

the health of the sponsors and their 

wherewithal to provide support to 

affiliated MMFs. 

Highly risk-averse investors. Although 

MMFs invest in assets that may lose 

value and the funds are under no legal 

or regulatory requirement to redeem 

shares at $1.00, the industry’s record of 

maintaining stable and rounded $1.00 

per share NAVs combined with the 

funds’ low-risk investment strategies 

has attracted highly risk-averse 

investors that are prone to withdraw 

assets rapidly when losses appear 

possible.30 This has been exacerbated by 

the outsized growth of institutional 

MMFs in recent decades. MMFs 

marketed primarily to institutional 

investors made up only about one-third 

of industry assets in 1996 but account 

for almost two-thirds of assets today.31

Institutional investors are typically 

more sophisticated than retail investors 

in obtaining and analyzing information 

about MMF portfolios and risks, have 

larger amounts at stake, and hence are 

quicker to respond to events that may 

threaten the stable NAV. 

Interaction of these activities and 

practices. In combination, the activities 

and practices of MMFs described above 

tend to exacerbate each other’s effects 

and increase MMFs’ vulnerability to 

runs. For example, by relying on the 

amortized cost method of valuation and/ 

or penny rounding to maintain a stable 

$1.00 per share NAV, offering shares 

that may be redeemed on demand 

despite limited same-day portfolio 

liquidity, and investing in assets with 

interest-rate and credit risk without 

explicit loss-absorption capacity, MMFs 

create a first-mover advantage for 

investors who redeem quickly during 

times of stress. If MMFs with rounded 

NAVs had lacked sponsor support over 

the past few decades, many might have 

broken the buck, causing investors to 

recalibrate their perception of MMF 

risks and resulting in a less risk-averse 

investor base. Or if funds maintained 

credible loss-absorption capacity, even a 

risk-averse investor base might be less 

likely to run because the funds would 

be better equipped to maintain a stable 

$1.00 per share NAV. As a result, policy 

responses that diminish these 

destabilizing interactions hold promise 

for mitigating the risks that MMFs 

pose—even if not all five of these 

activities and practices are fully 

addressed through reform. 

Size, Scale, and Concentration 

MMFs’ size, scale, and concentration 

increase both their vulnerability to runs 

and the damaging impact of runs on 

short-term credit markets, borrowers, 

and investors. 

As discussed in Section II, the MMF 

industry is large, with $2.9 trillion in 

assets under management.32 MMFs are 

important providers of short-term 

funding to financial institutions, 

nonfinancial firms, and governments, 

and play a dominant role in some shortterm funding markets. For example, as 

of September 30, 2012, MMFs owned 44 

percent of U.S. dollar-denominated 

financial CP outstanding and about 30 

percent of all uninsured dollardenominated time deposits, including 

nearly two-thirds of the CDs that are 

tradable in financial markets.33 These 

funds also provided approximately onethird of the lending in the tri-party repo 

market and held significant portions of 

the outstanding short-term securities 

issued by state and local governments, 

the Treasury, and Federal agencies.34

Given the dominant role of MMFs in 

short-term funding markets, runs on 

these funds can therefore have severe 

implications for the availability of credit 

and liquidity in those markets. 

In addition, because of the 

concentration of the MMF industry, 

even heavy withdrawals from (or shifts 

in portfolio holdings of) MMFs offered 

by a handful of asset management firms 

may reverberate through financial 

markets. As of September 30, 2012, the 

top five MMF sponsors managed funds 

with $1.3 trillion in assets (46 percent 

of industry assets), and the top 20 

sponsors managed $2.6 trillion (90 

percent).35

Interconnectedness 

MMFs’ extensive interconnectedness 

with financial firms, the financial 

system, and the U.S. economy can 


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36Based on Form N–MFP filings with the SEC. 

37Based on Form N–MFP filings with the SEC; 

see Scharfstein, 2012. 

38Based on Form N–MFP and form ADV filings 

with the SEC, company Web sites, and staff analysis 

from Federal Reserve Bank of Boston. 

39Based on Form N–MFP filings with the SEC. 

40Based on Form N–MFP filings with the SEC. 

41The M2 money-stock measure includes retail 

MMF assets (excluding IRA and Keogh balances at 

MMFs) but not institutional MMF assets. M2 totaled 

$10.1 trillion in September 2012. 42This discussion focuses on prime MMFs, but 

holdings of other types of MMFs within the same 

category (such as different tax-exempt MMFs that 

specialize in the same state) also tend to be similar. 

43Based on Form N–MFP filings with the SEC; 

see Scharfstein, 2012. 

44Based on Form N–MFP filings with the SEC. 

45The Reserve Primary Fund was only the second 

MMF to break the buck since rules for MMFs were 

first introduced in 1983. In 1994, the Community 

Bankers U.S. Government Money Market Fund, a 

small government MMF, broke the buck because of 

exposures to interest rate derivatives. The event 

passed without significant repercussions, in part 

because the Community Bankers U.S. Government 

Money Market Fund was very small (less than $100 

million in assets when it closed) and was sold to 

a narrow group of investors, ‘‘principally to small 

community banks seeking an alternative to lending 

money overnight on deposit at Federal Reserve 

banks at the Federal funds rate’’ (see SEC, In the 

Matter of Craig S. Vanucci and Brian K. Andrew, 

Respondents: Order Instituting Public 

Administrative and Cease-and-Desist Proceedings 

(Jan. 11, 1998), Administrative Proceeding File No. 

3–9804). In addition, the contagion risk stemming 

from this MMF’s problem may have been limited 

by its idiosyncratic portfolio. According to the SEC 

cease and desist order, the fund had an ‘‘unsuitable 

investment’’ (27.5 percent of its assets) in 

adjustable-rate derivative securities. See also Jeffrey 

N. Gordon and Christopher M. Gandia, ‘‘Money 

Market Fund Run Risk: Will Floating Net Asset 

Value Fix the Problem?’’ Columbia Law School 

(Sept. 4, 2012). 

46However, the Reserve Primary Fund evidently 

did not honor all of these redemptions, because it 

announced on October 30, 2008, that ‘‘[t]he Fund’s 

total assets have been approximately $51 billion 

since the close of business on September 15.’’ The 

Reserve, ‘‘Reserve Primary Fund Makes Initial 

Distribution of $26 Billion to Primary Fund 

Shareholders’’ (Oct. 30, 2008). See also McCabe, 

2010, at A–1; SEC, Securities and Exchange 

Commission v. Reserve Management Company, Inc. 

et al. Civil Action No. 09–CV–4346 (May 5, 2009). 

create a significant threat to broader 

financial stability because the shocks 

from a run on MMFs can rapidly 

propagate to other entities throughout 

the financial system. 

Most of the short-term financing that 

MMFs provide to non-government 

entities is extended to financial firms. 

As of September 30, 2012, 86 percent of 

the funding that MMFs extended to 

private entities was in the form of 

financial sector obligations, including 

CDs, financial CP, asset-backed 

commercial paper (ABCP), repo, other 

MMF shares, and insurance company 

funding agreements.36 Among the top 

50 private sector firms that received 

funding from prime MMFs in September 

2012, only four were nonfinancial 

firms.37 Moreover, because 13 of the top 

15 private-sector firms receiving 

funding were domiciled outside the 

United States, MMFs can also represent 

a potential channel for rapid 

transmission of global stress to the U.S. 

financial markets. 

MMFs are further interconnected with 

the U.S. financial system because bank 

and savings and loan holding 

companies sponsor MMFs. Sponsors 

face potential risks because, historically, 

sponsors have absorbed nearly all MMF 

losses that threatened the funds’ $1.00 

per share NAVs, and sponsors would 

likely face pressure from investors and 

other market participants to continue to 

do so in the future. As of September 30, 

2012, MMFs that are sponsored by 

subsidiaries of bank holding companies 

accounted for 41 percent of industry 

assets, and MMFs sponsored by 

subsidiaries of thrift holding companies 

accounted for another 11 percent of the 

industry’s assets.38

The interconnectedness of the 

financial system and MMFs is 

exacerbated by the role of banks in 

providing liquidity enhancements and 

guarantees for securities held by MMFs. 

As of September 30, 2012, for example, 

three large U.S. banks provided 

liquidity or credit support for 

approximately $100 billion in securities 

held by MMFs, and European financial 

institutions provided liquidity or credit 

support for more than $115 billion in 

such securities.39 Tax-exempt MMFs 

hold many of these securities, which are 

largely obligations of state and local 

governments and other tax-exempt 

issuers.40 Due to these interconnections 

with financial firms, stress at MMFs can 

spread rapidly into the banking system 

and then more broadly through the 

financial system. 

MMFs may also transmit risk to the 

broader economy through the payments 

system because MMFs are used as cash 

management vehicles by individual 

investors, businesses and other 

institutional investors, and 

governments. MMFs offer services such 

as check writing and other bank-like 

functions, particularly for retail 

investors. In addition, MMF shares 

outstanding are sizable relative to 

money stock measures. As of September 

30, 2012, assets in MMFs registered 

with the SEC for sale to the public were 

25 percent of the size of the Federal 

Reserve’s M2 money stock measure, and 

prime fund assets alone were 14 percent 

of M2.41 Hence, a widespread run on 

MMFs could quickly pose liquidity 

problems for the millions of investors— 

households, businesses, and 

governments—that use MMFs for cash 

management, and such an event would 

resonate rapidly throughout the 

payments system. 

Finally, not only are MMFs 

interconnected with the financial sector 

and payments system, but the funds 

themselves are also highly 

interconnected due to their common 

exposures. The largest prime funds 

generally provide funding to a relatively 

small group of firms with high credit 

quality,42 consistent with the 

requirements of rule 2a–7, leading to the 

potential for highly correlated losses. As 

of September 30, 2012, for example, 

financing for the top 50 firms accounted 

for 91 percent of prime MMF 

investments in private entities,43 while 

10 firms accounted for 39 percent. In 

addition, 14 firms individually received 

funding from more than half of the 243 

prime MMFs.44 The similarity of MMF 

portfolio holdings increases the 

contagion risk to the entire MMF 

industry and to the broader financial 

system in the event that one MMF 

encounters stress. 

Evidence From the 2007–2008 Financial 

Crisis 

The financial crisis demonstrated how 

the conduct, nature, size, scale, 

concentration, and interconnectedness 

of MMFs’ activities and practices 

described above can interact and 

amplify the transmission of risk of 

significant liquidity and credit problems 

in the financial system. 

Run on prime MMFs. MMFs came 

under intense stress after the Reserve 

Primary Fund announced on September 

16, 2008, that it would break the buck 

due to losses on the Lehman Brothers 

Holdings, Inc. (Lehman) debt 

instruments that the fund owned. These 

holdings represented just 1.2 percent of 

that fund’s assets—well below the 5 

percent limit applicable to such 

holdings—but, due to the lack of 

explicit loss-absorption capacity, that 

exposure was large enough to cause the 

fund to break the buck.45

The Reserve Primary Fund’s loss 

immediately started a run on that fund, 

as investors sought to redeem 

approximately $40 billion from the fund 

in just two days.46 More importantly, 

the run quickly spread to other prime 

MMFs and illustrated several activities 

and practices that make MMFs 

vulnerable to runs as well as the 

contagion risk to the industry. The 

failure of Reserve Primary Fund’s 

sponsor to deliver support for its fund 

may have heightened investors’ 

uncertainty about the likelihood of 

discretionary sponsor support at other 

MMFs and, as a result, accelerated the 

run on the entire prime MMF industry. 


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47Moody’s Investors Service, ‘‘Lehman Support 

in Prime Money Market Funds,’’ mimeo, April 30, 

2012. The sponsors of the other MMFs with 

exposure to Lehman provided support to their 

funds, and as result did not break the buck as the 

Reserve Primary Fund did. 

48According to data from iMoneyNet (with 

adjustments to correct misreported assets for the 

Reserve Primary Fund and for one closed MMF), 

prime MMF assets fell $81 billion in the two 

business days after the Lehman bankruptcy. In the 

two days following the Reserve Primary Fund’s lateafternoon announcement on September 16 that it 

had broken the buck, prime MMF assets dropped 

$194 billion. But see, e.g., Comment Letter of 

Treasury Strategies, Inc., SEC File No. 4–619 (Jun. 

1, 2012) (stating that MMFs ‘‘have been 

misidentified as a proximate contributor to the 

financial crisis’’). 

49As measured by credit default swap spreads for 

parent firms or affiliates. See McCabe, 2010. 

50Based on data from iMoneyNet for the week 

following the Lehman bankruptcy. 

51Based on data from iMoneyNet. 

52Based on data from iMoneyNet on changes in 

prime MMFs’ portfolio holdings from September 9 

to September 30, 2008. 

53 Data from the Federal Reserve Board show that 

total CP outstanding declined $206 billion in that 

three-week period. 

54See Federal Open Market Committee, ‘‘Minutes 

of the Federal Open Market Committee, October 28– 

29, 2008,’’ at 3, 5. 

55Based on data from iMoneyNet. 

56Based on data from iMoneyNet. 

57See, e.g., Comment Letter of the Investment 

Company Institute, SEC File No. 4–619 (Aug. 20, 

2012) (stating, ‘‘Investors pulled about $300 billion 

from prime money market funds, which held such 

securities. But those investors didn’t run from 

money market funds. For every dollar that left 

prime funds, 61 cents went into Treasury and 

government and agency funds. It was a classic flight 

to quality—and money market funds were the 

vehicle of choice for fleeing investors.’’). 

58MMF shareholders moving their investments 

from prime MMFs to government MMFs in 

September 2008 may have reduced the effect of this 

episode on the availability of repo financing (since 

some government funds invest in repo), on the 

aggregate assets of MMFs, and on the fees earned 

by MMF advisers. 

59See Treasury, ‘‘Treasury Enters Into Agreement 

To Assist the Reserve Fund’s US Government 

Money Market Fund’’ (2008), available at http:// 

www.treasury.gov/press-center/press-releases/ 

Pages/hp1286.aspx. 

60Based on daily data on MMF assets from 

iMoneyNet. 

At least a dozen MMFs held Lehman 

securities at the time of the Lehman 

bankruptcy, and the Reserve Primary 

Fund’s Lehman holdings were below 

the average holdings among MMFs with 

exposure to Lehman.47 However, the 

most serious phase of the run on MMFs 

occurred not in the two business days 

immediately after the Lehman 

bankruptcy, but in the two days 

following the Reserve Primary Fund’s 

announcement that it had broken the 

buck.48

In addition, outflows from 

institutional prime MMFs following the 

Lehman bankruptcy tended to be larger 

among MMFs with sponsors that were 

themselves under stress, indicating that 

MMF investors redeemed shares when 

concerned about sponsors’ potential 

inabilities to bolster ailing funds.49

These run dynamics were primarily 

prevalent among the more sophisticated, 

risk-averse institutional investors, as 

institutional funds accounted for 95 

percent of the net redemptions from 

prime funds.50

Aggregate daily outflows from other 

prime MMFs tripled the day after the 

Reserve Primary Fund announced its 

loss.51 During the week of September 

15, 2008, investors withdrew 

approximately $310 billion (15 percent 

of assets) from prime MMFs. The run 

slowed only after Treasury established 

the Temporary Guarantee Program for 

Money Market Funds and the Board of 

Governors of the Federal Reserve 

System established facilities aimed at 

stabilizing markets linked to MMFs. 

Despite government intervention, the 

run in September 2008 led to rapid 

disinvestment by MMFs of short-term 

instruments which severely exacerbated 

stress in already strained financial 

markets. For example, in the three 

weeks following the Lehman 

bankruptcy, prime MMFs reduced their 

holdings of CP by $202 billion (29 

percent) and repo by $75 billion (32 

percent).52 The reduction in CP held by 

MMFs accounted for a substantial 

portion of the decline in outstanding CP 

during that period 53 and contributed to 

a sharp rise in borrowing costs for CP 

issuers.54 MMFs managed by just a 

dozen firms accounted for almost threequarters of the $202 billion decline in 

the industry’s holdings of CP, and five 

MMF sponsors accounted for almost 

half of the decline.55

Impact on government MMFs. While 

the run in September 2008 centered on 

prime MMFs, government MMFs 

attracted inflows of $192 billion during 

the week following the Lehman 

bankruptcy.56 Some commenters have 

argued that these inflows provide 

evidence that MMFs are not structurally 

vulnerable to runs.57 However, the 

activities and practices discussed above 

do not lead investors to redeem their 

shares in all types of funds 

simultaneously, but rather they increase 

the possibility that losses at one or more 

MMFs may lead to widespread 

redemptions at other funds that share 

similar characteristics. Such contagion 

was evident among prime MMFs in 

2008 due to, among other factors, the 

similarity of their portfolios. 

Government MMFs did not face similar 

run vulnerabilities at the time because 

they had significantly different portfolio 

holdings than the distressed prime 

funds and many government MMF 

investments were appreciating in value. 

Government MMFs nonetheless may 

pose the same structural risks, in that 

the funds’ investors would have an 

incentive to redeem if they feared even 

small losses. 

Importantly, the inflows to 

government funds in 2008 did not 

mitigate the damage caused by the run 

on prime MMFs. Government MMFs 

only purchase limited amounts of 

private debt securities and hence could 

not alleviate the reduction in the 

availability of credit for businesses and 

financial institutions that relied on 

MMFs for short-term financing.58

Furthermore, government MMFs also 

can be vulnerable to runs. In November 

2008, Treasury agreed to assist with the 

liquidation of the Reserve Fund’s U.S. 

Government Fund by serving as ‘‘a 

buyer of last resort’’ for securities held 

by the fund, which suspended 

redemptions in September 2008.59 In 

addition, during the last three business 

days in July 2011, amid large net 

redemptions from institutional MMFs 

(discussed below), outflows from 

government MMFs totaled 7 percent of 

assets and exceeded (as a percentage of 

assets) outflows from prime funds.60

The 2010 Reforms Do Not Address 

These Structural Factors 

The SEC’s 2010 reforms are 

important, but further reform is needed. 

The SEC’s 2010 reforms helped to make 

MMFs more resilient to certain shortterm market risks and more transparent. 

However, they did not address certain 

activities and practices of MMFs that 

continue to make the funds vulnerable 

to runs. Moreover, MMFs remain 

concentrated and highly interconnected 

with one another, the U.S. banking 

system, and the broader financial 

system. 

Of the activities and practices listed 

above that make MMFs susceptible to 

runs, the two most directly addressed in 

the SEC’s 2010 reforms are liquidity 

risks associated with maturity 

transformation and MMF portfolios’ 

exposures to credit and interest-rate 

risks. While the reforms reduced these 

risks, many of the credit and liquidity 

risks at issue in 2008 persist today. 

Importantly, if the rules adopted in 2010 

had been in place in 2008, they would 

not have prevented the Reserve Primary 

Fund from breaking the buck due to its 

holdings of Lehman securities. 

Moreover, the redemptions from 

many MMFs during the run in 2008 

exceeded the liquidity buffers now 

mandated by the daily and weekly 

liquidity requirements that were 

adopted as part of the 2010 reforms. At 


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61Based on daily data on MMF assets from 

iMoneyNet. 

62Based on weekly data on MMF assets from the 

Investment Company Institute. 

63Based on daily data on MMF assets from 

iMoneyNet, prime MMF assets fell a total of $194 

billion on September 17 and 18, 2008. 

64Outflows from institutional prime MMFs were 

highly correlated with the funds’ European 

exposures, particularly in June 2011. See Sergey 

Chernenko and Adi Sunderam, ‘‘The Quiet Run of 

2011: Money Market Funds and the European Debt 

Crisis,’’ (May 12, 2012). During this eight-week 

period, retail prime MMFs had small net inflows. 

65 During this episode of heavy redemptions 

(from May to August 2011), the largest monthly 

decline in any prime MMF’s reported shadow NAV 

was 12 basis points, and only five funds 

experienced shadow NAV declines of more than 4 

basis points. Such small changes in shadow NAVs 

are not unusual: In the first seven months of 2012, 

three prime MMFs reported shadow NAV declines 

of 10 basis points or more. Presumably, if MMFs 

had suffered material losses in the summer of 2011, 

redemptions would have been larger. 

66See SEC, Money Market Fund Reform, 

Investment Company Act Release No. IC–28807, 74 

FR 32688, 32691 (July 8, 2009); McCabe, 2010; 

Brady, Anadu, and Cooper, 2012. 67See Chernenko and Sunderam, 2012 and 

Rosengren, 2012. 68See Investment Company Institute, ‘‘Report of 

the Money Market Working Group’’ (March 17, 

2009); McCabe, 2010; Kacperczyk and Schnabl, 

2012. 

the height of the run in 2008, 40 

institutional prime MMFs (excluding 

the Reserve Primary Fund) had one-day 

outflows in excess of the new 10 percent 

daily liquidity requirement, and 13 of 

those funds’ one-day outflows exceeded 

20 percent of assets. In addition, 10 

institutional prime funds had five-day 

outflows exceeding the new 30 percent 

weekly liquidity requirement, including 

eight funds with five-day outflows 

greater than 40 percent of assets.61

Notably, outflows in 2008 probably 

would have been considerably larger in 

the absence of the unprecedented 

government interventions to support 

MMFs and short-term funding markets. 

Evidence from 2011. Heavy outflows 

from institutional prime MMFs in the 

summer of 2011 further highlighted 

MMFs’ continued vulnerability to runs, 

even after the 2010 reforms. In the eight 

weeks ending on August 3, 2011, 

institutional prime funds experienced 

net outflows of $179 billion (16 percent 

of assets).62 Because the pace of 

outflows in 2011 was well below that 

experienced during the run in 

September 2008 (total net redemptions 

from prime institutional funds in two 

days in 2008 exceeded the eight-week 

outflow in 2011),63 MMFs were able to 

withstand redemption pressures 

without further repercussions. 

The institutional investor 

redemptions were apparently in 

response to concerns about the funds’ 

European holdings and the U.S. debtceiling impasse.64 Importantly, these 

outflows occurred despite the fact that 

the MMFs suffered no material losses 

during this episode.65 This is in stark 

contrast to August 2007, when many 

MMFs held distressed ABCP that 

ultimately lost significant value, yet 

institutional investors generally did not 

respond by redeeming MMF shares, 

likely because investors expected 

sponsors to absorb the losses.66

Redemptions in the summer of 2011 

may indicate that institutional investors 

have become more reactive and runprone since 2008, when the Reserve 

Primary Fund’s sponsor was unable to 

provide support to prevent that fund 

from breaking the buck. Furthermore, 

the increase in certain MMFs’ exposure 

to European securities in 2011 appears 

to have been motivated by increased 

risk-taking in an attempt to boost 

investment yields and revenues.67 This 

motive was also reportedly a significant 

factor in the investment policies that 

ultimately led the Reserve Primary Fund 

to break the buck.68

Council Proposed Determination 

Regarding MMFs 

As described above, the conduct and 

nature of MMFs’ activities and practices 

make MMFs vulnerable to runs that can 

spread quickly across the industry. As 

evidenced in the financial crisis, runs 

on MMFs can result in significant 

liquidity, credit and other problems in 

the short-term credit markets, 

particularly given the size and scale of 

the MMF industry’s participation in 

those markets; cause or exacerbate 

substantial stresses in the financial 

system; and threaten financial stability. 

The interconnections among MMFs and 

the concentration of the MMF industry 

increase the likelihood that stresses at 

one MMF will spread to other MMFs, 

and MMFs’ interconnectedness with 

other financial firms means that stresses 

in MMFs can spread rapidly to the 

larger financial system, further limiting 

system-wide liquidity and credit. 

Therefore, the Council proposes to 

determine that the conduct, nature, size, 

scale, concentration, and 

interconnectedness of MMFs’ activities 

and practices could create or increase 

the risk of significant liquidity and 

credit problems spreading among bank 

holding companies, nonbank financial 

companies, and the financial markets of 

the United States. 

V. Proposed Recommendations 

The Council seeks comment on 

proposed recommendations to the SEC 

to address the structural vulnerabilities 

of MMFs discussed in Section IV. In 

particular, the Council aims to address 

the activities and practices of MMFs 

that make them vulnerable to 

destabilizing runs: (i) The lack of 

explicit loss-absorption capacity in the 

event of a drop in the value of a security 

held by an MMF and (ii) the first-mover 

advantage that provides an incentive for 

investors to redeem their shares at the 

first indication of any perceived threat 

to an MMF’s value or liquidity. 

In considering options for further 

reform, the Council notes three key 

features of MMFs that make them 

appealing to investors: The stability of 

principal associated with the funds’ 

stable $1.00 per share NAV, liquidity 

through shares that can be redeemed on 

demand, and market-based yields that 

often exceed those of short-term 

Treasury securities and rates on FDICinsured bank deposits. 

The activities and practices of MMFs 

that have made them appealing to 

investors also contribute to their 

vulnerability to runs. For example, both 

MMFs’ reliance on rounding to maintain 

stable NAVs and the liquidity of MMF 

shares contribute to a first-mover 

advantage for redeeming investors. 

MMFs’ practice of investing in shortterm securities with interest-rate and 

credit risk to boost yields, without 

explicit loss-absorption capacity, makes 

them more vulnerable when losses do 

occur. 

Therefore, reforms that would provide 

meaningful mitigation of the risks posed 

by MMFs would likely reduce their 

appeal to investors by altering one or 

more of their attractive features. The 

first proposed alternative would require 

funds to have a floating NAV by 

removing the valuation and pricing 

provisions in rule 2a–7 that currently 

allow funds to maintain a stable, 

rounded $1.00 NAV. Alternatives Two 

and Three would preserve, and 

potentially bolster, the principal 

stability that investors currently enjoy 

by preserving the stable NAV, but 

would likely reduce the higher yields 

and/or the liquidity that MMFs offer to 

investors. These reform alternatives, 

therefore, present trade-offs between 

stability, yield, and liquidity. 

Different MMF investors may have 

different preferences. Accordingly, it 

may be optimal to offer both floating 

NAV funds and stable NAV funds with 

enhanced protections and to allow 

investors to determine which they 

prefer. The Council seeks comment on 

the merits of adopting such a flexible 

approach as well as the merits of 

recommending a single structural 

reform alternative. 


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69All mutual funds, when fair valuing a portfolio 

debt security, may value the security at its 

amortized cost only if the security has a remaining 

maturity of 60 days or less and the fund’s board of 

directors determines, in good faith, that the 

security’s fair value is its amortized cost value and 

the circumstances do not suggest otherwise (e.g., an 

impairment of the creditworthiness of an issuer). 

See SEC, Valuation of Debt Instruments by Money 

Market Funds and Certain Other Open-End 

Investment Companies, Investment Company Act 

Release No. 9786, 42 Fed. Reg. 28999 (June 7, 1977). 

70The fund would have a share price of $0.9995 

after the loss which, even without penny rounding, 

would be rounded up to $1.00. 

71Any mutual fund, including a floating-NAV 

MMF, may seek an order from the SEC permitting 

the fund to suspend redemptions and liquidate. 

A. Alternative One: Floating Net Asset 

Value 

Require MMFs to have a floating net 

asset value per share (NAV) by 

removing the special exemption that 

currently allows MMFs to utilize 

amortized cost accounting and/or penny 

rounding to maintain a stable NAV. The 

value of MMFs’ shares would not be 

fixed at $1.00 and would reflect the 

actual market value of the underlying 

portfolio holdings, consistent with the 

requirements that apply to all other 

mutual funds. 

(i) Description of the Alternative 

Overview. This reform alternative 

would require MMFs to have a floating 

NAV instead of a stable NAV. The price 

per share would fluctuate based on 

small changes in the value of the MMF’s 

portfolio, rather than remaining at $1.00 

absent a break the buck event. As such, 

the value of MMFs’ shares would reflect 

the market value of the underlying 

portfolio holdings, consistent with the 

valuation requirements that apply to all 

other mutual funds under the 

Investment Company Act. As discussed 

in more detail below, a requirement that 

MMFs use floating NAVs could make 

investors less likely to redeem en masse 

when faced with the prospect of even 

modest losses by eliminating the ‘‘cliff 

effect’’ associated with breaking the 

buck. Regular fluctuations in MMF 

NAVs likely would cause investors to 

become accustomed to, and more 

tolerant of, fluctuations in NAVs. A 

floating NAV would also reduce the 

first-mover advantage that exists in 

MMFs today because investors would 

no longer be able to redeem their shares 

for $1.00 when the shares’ market-based 

value is less than $1.00. This alternative 

does not contemplate requiring funds to 

have an NAV buffer. 

Rule 2a–7 protections remain. 

Consistent with investors’ expectations 

about the nature of their MMF 

investments, the risk limiting provisions 

of rule 2a–7 that govern the credit 

quality, maturity, liquidity, and 

diversification of MMFs’ portfolios 

would continue to apply to any fund 

that called itself a ‘‘money market fund’’ 

or used a similar name. 

Portfolio valuation. This alternative 

would require removing the provisions 

of rule 2a–7 that allow MMFs to use the 

penny rounding method of pricing and 

the amortized cost method of valuation 

for their portfolios, except to the extent 

other mutual funds may do so. Rather, 

MMFs would value their portfolios like 

all other mutual funds, including using 

amortized cost valuation only under 

certain limited circumstances.69

Share pricing. Under this alternative, 

each floating-NAV MMF would re-price 

its shares to $100.00 per share (or 

initially sell them at that price) to be 

more sensitive to fluctuations in the 

value of the portfolio’s underlying 

securities than under a $1.00 share 

price. For example, a 5 basis point loss 

would not move the share price of a 

floating-NAV MMF with a share price of 

$1.00.70 If the fund’s shares were priced 

at $100.00, in contrast, the fund’s share 

price would decrease by 5 cents to 

$99.95. Hence, a $100.00 share price is 

more likely than a $1.00 share price to 

result in regular fluctuations in NAVs 

and therefore changes in investor 

expectations and behavior. Just like in 

any other mutual fund, shareholders 

would be able to purchase and redeem 

fractional shares, and as a result the repricing would not impact shareholder 

purchases and redemptions. For 

example, a shareholder could still 

purchase or redeem $50 of MMF shares 

regardless of the fund’s price per share. 

Removing exemptions under the 

Investment Company Act. Because 

MMFs would no longer seek to maintain 

a stable NAV, the SEC also would need 

to rescind two rules under the 

Investment Company Act that provide 

exemptions to MMFs to prevent a fund 

from breaking the buck: 

• Orderly Liquidation. Rule 22e–3 

currently allows an MMF to suspend 

redemptions and begin an orderly 

liquidation if the fund has broken or is 

about to break the buck. With a floating 

NAV, the need for MMF sponsors or 

boards of directors to suspend 

redemptions or otherwise intervene 

upon share price declines should be 

significantly reduced except under the 

most extreme market circumstances.71

• Sponsor Support. Rule 17a–9 

allows affiliates of an MMF to purchase 

portfolio securities from an MMF and 

typically is used to support an MMF’s 

stable price per share. Because a 

floating-NAV MMF is designed to 

fluctuate in value, allowing the type of 

affiliate support currently permitted 

under rule 17a–9 would appear to be 

unnecessary. This type of affiliate 

support is not permitted for any other 

type of mutual fund. 

Transition. To reduce potential 

disruptions and facilitate the transition 

to a floating NAV for investors and 

issuers, existing MMFs could be 

grandfathered and allowed to maintain 

a stable NAV for a phase-out period, 

potentially lasting five years. Instead of 

requiring these grandfathered funds to 

transition to a floating NAV 

immediately, the SEC would prohibit 

any new share purchases in the 

grandfathered stable-NAV MMFs after a 

predetermined date, and any new 

investments would have to be made in 

floating-NAV MMFs. This would 

discourage significant and sudden 

investor redemptions that could occur 

out of fear that a fund would force 

existing shareholders to incur a loss 

immediately upon the fund’s transition 

to a floating NAV. 

(ii) Benefits and Considerations 

An SEC requirement that all MMFs 

operate with a floating NAV could 

reduce financial instability and the risk 

of runs among MMFs in several ways. 

Modified investor expectations. A 

floating NAV would make gains and 

losses on MMF investments a regular 

occurrence. It would accustom investors 

to changes in the value of their MMF 

shares and reduce the perception that 

shareholders do not bear any risk of loss 

when they invest in an MMF. Such 

beliefs can make MMFs prone to runs if 

shareholders suddenly become 

concerned that they may bear losses. 

Breaking the buck should no longer be 

a significant event because MMFs 

would simply fluctuate in value in the 

same manner as other mutual funds. 

Losses—which are inevitable in an 

investment product—would no longer 

be obscured by valuation and rounding 

conventions, but would be borne by 

shareholders and reflected in a fund’s 

share price just like all other mutual 

funds. 

Similar to other mutual funds. A 

floating NAV would allow MMFs to 

operate with the same price 

transparency as all other mutual funds. 

Currently, shadow prices for stable NAV 

funds are disclosed on a monthly basis 

with a 60-day delay. Under a floating 

NAV model, shareholders would not be 

required to obtain and analyze an 

MMF’s portfolio to surmise the fund’s 

mark-to-market value. Rather, investors 

would see day-to-day fluctuations in 

value in different market conditions and 

interest-rate environments, just as they 


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72Floating NAV cash funds in other jurisdictions 

and U.S. ultra-short bond funds also suffered heavy 

redemptions during the financial crisis. See, e.g., 

Gordon and Gandia, 2012 and Comment Letter of 

the Investment Company Institute, SEC File No. 

4–619 (Jan. 10, 2011), at 33–34 (‘‘ICI January PWG 

Letter’’) (noting that ‘‘by the end of 2008, assets of 

[ultra-short bond] funds were down more than 60 

percent from their peak in mid-2007’’ and ‘‘French 

floating NAV dynamic money funds (or tre ́sorerie 

dynamique funds), lost about 40 percent of their 

assets over a three-month time span from July 2007 

to September 2007’’); Comment Letter of the 

European Fund and Asset Management Association, 

SEC File No. 4–619 (Jan. 10, 2011) (‘‘In a matter of 

weeks, EUR 70 billion were redeemed from these 

[enhanced money market] funds, predominantly by 

institutional investors; around 15–20 suspended 

redemptions for a short period, and 4 of them were 

definitely closed’’). In each case, these funds were 

not subject to the same investment restrictions as 

U.S. MMFs and as a result the experience of these 

funds is not necessarily indicative of the way 

floating-NAV MMFs and their investors would 

respond under this alternative in times of stress. In 

addition, many European MMFs accumulate 

dividends, rather than distributing any net income 

the fund earns to shareholders. Accordingly, losses 

in these funds are generally reflected as a negative 

yield rather than a loss in the value of a share. 

73See, e.g., Comment Letter of HSBC Global Asset 

Management on the European Commission’s Green 

Paper on Shadow Banking (May 28, 2012), available 

at http://ec.europa.eu/internal_market/ 

consultations/2012/shadow/individual-others/ 

hsbc_en.pdf. 

74See 26 U.S.C. 1091. 

75 26 CFR 1.6045–1(c)(3)(vi) exempts MMFs from 

this requirement. 

76Financial Accounting Standards Board, 

Accounting Standards Codification paragraph 305– 

10–20. 

77 17 CFR 270.2a–7(c)(13). 

78For a discussion of potential operational costs, 

see e.g., Comment Letter of John D. Hawke, Jr. on 

behalf of Federated Investors, Inc., SEC File No. 4– 

619 (Dec. 15, 2011). 

do today with all other mutual funds. 

This information should help all types 

of investors in MMFs make investment 

decisions that better match their riskreturn preferences. 

Investors bear risk. A floating NAV 

would remove uncertainty or confusion 

regarding who bears the risk of loss in 

an MMF. A floating NAV would 

reinforce the principle that investors, 

not fund sponsors or taxpayers, are 

expected to bear the pro rata risk of loss 

in MMFs, as they do with other 

investment vehicles. 

Reduced first-mover advantage. Such 

a change would reduce, though not 

eliminate, the first-mover advantage 

currently present in MMFs because all 

redemptions would be priced at a fund’s 

per share mark-to-market value. MMF 

shareholders would no longer have the 

opportunity to redeem shares at $1.00 

when their market-based value falls 

below $1.00; so redemptions would no 

longer threaten to concentrate an MMF’s 

loss over a shrinking shareholder base. 

In addition, even if some shareholders 

redeem due to a sudden change in 

perceived risk, a floating NAV results in 

a fairer allocation of losses among 

redeeming and remaining investors. 

Though this first-mover advantage 

would be reduced, the incentive to 

redeem before others may remain, in 

part, because each MMF has a limited 

supply of liquid assets with which to 

meet redemptions. Shareholders still 

may have an incentive to redeem 

quickly from an MMF, just as they do 

from any mutual fund that is at risk of 

depleting its most liquid assets, because 

subsequent redemptions may force the 

fund to dispose of less liquid assets and 

potentially incur losses. In addition, 

while a floating NAV would remove the 

ability of a shareholder to redeem shares 

at $1.00 when the market value is less 

than $1.00, it would not remove a 

shareholder’s incentive to redeem 

whenever the shareholder believes that 

the NAV will decline significantly in 

the future, consistent with the incentive 

that exists today for other types of 

mutual funds. 

Evidence from other jurisdictions and 

U.S. ultra-short bond funds suggests that 

floating-NAV MMFs could experience 

redemption pressures under stressed 

market conditions.72 Such behavior 

could be more likely if a floating-NAV 

MMF continues to be used as a cash 

management product and investors do 

not fully adjust their expectations of the 

risks inherent in MMFs. This 

adjustment could fail to take place 

because, under normal market 

conditions, the value of a floating-NAV 

MMF, even re-priced to $100.00 per 

share, would likely not fluctuate to the 

same degree as other mutual funds 

because of the risk-limiting conditions 

applicable to MMFs.73 Investors may 

come to accept small, temporary 

variations in the value of their MMF 

shares, but still redeem at the prospect 

of larger declines. 

Tax considerations. A floating NAV 

for MMFs also would present certain 

federal income tax issues for MMFs and 

their investors. The stable NAV of MMF 

shares under present law results in 

simpler tax-reporting rules for 

transactions in MMF shares than the 

rules for transactions in shares of all 

other types of mutual funds. Because all 

purchases and sales of MMF shares are 

at the same $1.00 price, these 

transactions generate no taxable gains or 

losses, obviating the need for 

shareholders to track the basis and 

holding period of particular shares. If 

the NAV of MMF shares were instead to 

fluctuate, there would be gains and 

losses to report. More specifically, 

because each redemption of MMF 

shares could produce a gain or loss for 

the shareholder, it would be necessary 

to determine for every redemption—(i) 

which share was redeemed, (ii) the tax 

basis (generally, the acquisition cost) of 

that share, and (iii) whether the holding 

period of that share was long term or 

short term. In addition, if a shareholder 

purchases shares in an MMF within 

thirty days before or after a redemption, 

the Tax Code’s ‘‘wash sale’’ rules would 

limit the extent to which the 

shareholder could deduct any loss 

realized on the redemption.74

Because of the high volume of 

redemptions of shares of MMFs, 

however, and because of the minimal 

per share losses that may result from 

each redemption, the Council 

understands that the Treasury 

Department and the IRS will consider 

administrative relief for both 

shareholders and fund sponsors. Among 

the questions that the Council 

understands they plan to address are 

whether changes to tax rules and forms 

(including new assumptions and default 

methods) could simplify the 

measurement and reporting of gains and 

losses from floating-NAV MMFs. Today, 

the sponsors of non-MMF 75 mutual 

funds must report the basis and holding 

period of redeemed shares both to the 

IRS and to redeeming shareholders 

(referred to as ‘‘basis reporting’’). The 

Treasury Department and the IRS have 

indicated to the Council that they will 

consider the extent to which expansion 

or modification of basis reporting could 

help shareholders deal with floatingNAV MMFs. Finally, they will evaluate 

the possibility of some administrative 

relief from the wash sale rules for de 

minimis losses on floating-NAV MMF 

shares. 

Accounting impacts. There also are 

accounting considerations relating to 

floating-NAV MMFs. U.S. generally 

accepted accounting principles (GAAP) 

currently include investments in MMFs 

as an example of a cash equivalent.76

Shareholders and their accountants 

would need to evaluate whether a 

floating-NAV MMF meets the 

characteristics of a cash equivalent 

under relevant accounting guidance. 

Operational costs. MMFs also would 

have to change their operations to 

accommodate a floating NAV. MMFs 

and their transfer agents are currently 

required to have the capacity to transact 

at the fund’s floating NAV,77 but a 

permanent change to a floating NAV 

may require additional operational 

changes.78 These costs may be 

mitigated, however, because MMFs are 

required periodically to determine their 

market-based NAV and currently have 

systems in place to do so. In addition, 


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79To see one example of a floating-NAV MMF 

that conducts same-day settlement, see DWS 

Variable NAV Money Fund Prospectus (Dec. 1, 

2011) (‘‘If the fund receives a sell request prior to 

the 4:00 p.m. Eastern time cut-off, the proceeds will 

normally be wired on the same day. However, the 

shares sold will not earn that day’s dividend.’’). 

80See generally ICI January PWG Letter; 

Comment Letter of the American Bankers 

Association, SEC File No. S7–11–09 (Sept. 8, 2009); 

Comment Letter of Fidelity Investments, SEC File 

No. 4–619 (Feb. 3, 2012); Comment Letter of 

Treasury Strategies, Inc., SEC File No. S7–11–09 

(Sept. 8, 2009). 

81See, e.g., Comment Letter of the Investment 

Company Institute, SEC File No. 4–619 (Apr. 19, 

2012) (enclosing survey data reflecting, among other 

things, that 79 percent of the 203 respondents 

(corporate, government, and institutional investors) 

would decrease or stop using MMFs if the funds 

had floating NAVs); Comment Letter of Fidelity 

Investments, SEC File No. 4–619 (Feb. 3, 2012) 

(enclosing survey data reflecting, among other 

things, that 57 percent of surveyed institutional 

investors and 47 percent of surveyed retail investors 

would reduce or eliminate their investments in 

MMFs if the funds used floating NAVs). Some 

institutional investors could be required to seek 

changes to investment policies or statutory or 

regulatory restrictions that otherwise could 

preclude them from investing certain assets in 

funds with floating NAVs. See, e.g., Comment Letter 

of the American Bankers Association, SEC File No. 

S7–11–09 (Sept. 8, 2009). 

82See, e.g., Comment Letter of HSBC Global Asset 

Management on the European Commission’s Green 

Paper on Shadow Banking (May 28, 2012), available 

at http://ec.europa.eu/internal_market/ 

consultations/2012/shadow/individual-others/ 

hsbc_en.pdf. ‘‘We believe any ambiguity of risk 

ownership must be removed so risk is correctly 

priced. We therefore propose a prohibition on MMF 

sponsors providing support to their MMFs. This 

will make clear to all investors that they are buying 

an investment product and own the risks and 

rewards of that investment.’’ 

MMF sponsors may be able to adapt the 

systems used by their other mutual 

funds, which price at market value each 

day, to their floating-NAV MMFs. For 

example, funds may need to modify 

policies and procedures in order to 

calculate a daily floating NAV per share 

and to communicate that value to their 

distribution partners and shareholders 

on an ongoing basis. Both fund 

complexes and other intermediaries in 

the distribution chain may need to 

reprogram systems to accommodate a 

permanent floating NAV. 

MMFs’ current ability to transact at a 

stable NAV also generates other 

operational efficiencies that may be lost 

with a floating NAV. Some of these 

conveniences have evolved due to 

expectations that MMF share prices 

would never fluctuate and are not 

consistent with the actual risks in MMF 

portfolios. For example, a stable NAV 

facilitates same-day settlement of 

purchase and redemption transactions. 

MMFs would need to modify systems to 

allow same-day settlement to continue 

with a floating-NAV MMF or shift to 

next day settlement.79

Impact on industry size. Moving to a 

floating NAV may cause the MMF 

industry’s AUM to contract. Some MMF 

investors may be unwilling or unable to 

conduct their cash management through 

an investment vehicle that does not 

offer a stable value.80 Some institutional 

investors may be prohibited by boardapproved guidelines or firm policies 

from conducting cash management 

using MMFs that do not have a stable 

NAV and may be unwilling to change 

these policies. Other investors, such as 

some state and local governments, may 

be subject to statutory or regulatory 

requirements that permit them to invest 

certain assets only in funds that seek to 

maintain a stable net asset value. 

These factors may reduce overall 

investor demand for MMFs, which 

would diminish the funds’ capacity to 

invest in the short-term securities of 

financial institutions, businesses, and 

governments, possibly impacting their 

costs of funding.81 Elimination of the 

stable NAV would be a significant 

change for a multi-trillion dollar 

industry in which the stable $1.00 share 

price has been a core feature. It may take 

time for investors and short-term 

funding markets to adjust to such a 

change, and the ultimate long-term 

reaction to such a change is difficult to 

predict with any precision. In addition, 

if the transition to the new regulatory 

regime prompted investors to redeem 

suddenly and substantially, the 

transition itself could create financial 

instability. A longer transition period 

and the grandfathering of existing fund 

shareholdings are designed to lessen 

this risk. 

(iii) Questions 

The Council requests comment on 

this alternative as well as on all aspects 

of the discussion presented above. The 

Council also requests any quantitative 

analysis or data from commenters 

relating to this alternative. 

Would requiring that all MMFs 

operate with a floating NAV make them 

less susceptible to runs? Would it 

reduce or increase the potential 

financial instability associated with 

MMFs? Would it enhance their 

resiliency? 

Would floating the NAV alter investor 

expectations and make them 

substantially more willing to bear losses 

from their MMF investments? 

Alternatively, would shareholders 

become accustomed only to relatively 

small fluctuations in value but redeem 

heavily in the face of more significant 

losses? 

Would some MMF sponsors support 

their MMFs despite the elimination of 

rule 17a–9 (for instance, by contributing 

capital) under this option and thereby 

prevent their share prices from 

deviating materially on a day-to-day 

basis? If so, would this mitigate the 

achievement of reform objectives? 

Should sponsor support of MMFs be 

prohibited? 82

Would initially re-pricing MMF 

shares to $100.00 per share help 

sensitize investors to fluctuations in 

fund value and better change investor 

expectations? Should they be initially 

re-priced to a different value than 

$100.00 to best achieve this goal, for 

instance, $10.00? 

Should existing MMFs be 

grandfathered for a limited phase-in 

period, as discussed above, or should 

they be grandfathered indefinitely? 

What length of time should be the 

optimal phase-in period? What length of 

time would be appropriate after which 

the SEC would prohibit any new share 

purchases in stable-NAV MMFs, and 

any new investments would have to be 

made in floating-NAV MMFs? 

Should the current basis reporting 

rules applicable to other mutual funds 

be extended to MMFs in their present 

form, or can those rules be simplified in 

a manner that better reflects the 

comparatively larger volume of 

transactions in MMF shares and the 

greater likelihood that gains or losses 

arising from those transactions will be 

relatively small on a per-share basis? 

Are there changes to the basis-reporting 

rules, such as the use of rounding 

conventions, that would reduce 

compliance costs for MMFs while 

providing shareholders with the 

information they would need? 

Are there classes of MMF 

shareholders to which current law does 

not require basis reporting but which 

may be unable to obtain this 

information from an MMF fund in the 

absence of an explicit regulatory 

requirement? 

If the Treasury Department and the 

IRS were to provide administrative 

relief for de minimis losses on wash 

sales of shares in MMFs, what should be 

the terms of that relief? 

How significant are the accounting 

and operational considerations relating 

to floating-NAV MMFs? To lessen 

possible issues arising from these 

considerations, what recommendations 

would commenters have for possible 

changes to accounting treatment for 

floating-NAV MMFs? What amount of 

operational costs would fund groups 

incur to implement a floating NAV for 

MMFs? To what extent are funds and 

their intermediaries currently prepared 

to operate floating-NAV MMFs on an 

ongoing basis due to the current 


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83 Daily and weekly liquid assets are defined in 

rule 2a–7, as described in Section II. 

84Based on data reported to the SEC on Form N– 

MFP as of September 30, 2012, the average NAV 

buffer would be approximately 0.84 percent for 

prime funds; 0.80 percent for tax-exempt funds; and 

0.70 percent for government funds. 

85Treasury MMFs, despite not having an NAV 

buffer, generally would be able to maintain a stable 

value because they would be permitted to continue 

to use penny rounding. Treasury MMFs also would 

not be required to have minimum balances at risk, 

as discussed below. 

86 In the event that a fund is converted to a 

floating-NAV MMF, any subordinated portion of 

investors’ MBRs (as discussed below) would be 

depleted before repricing the shares. 

requirement that MMFs be able to 

transact at a price other than the fund’s 

stable price per share and as a result of 

the group’s existing systems for their 

other mutual funds? 

Would investors and their 

accountants consider floating-NAV 

MMFs to be cash equivalents under 

relevant accounting guidance without 

clarification by accounting standard 

setters? If not, what are the implications 

for a shareholder that treats MMF shares 

as an investment for accounting 

purposes? If not, and if there were relief 

on the potential accounting 

considerations, would these funds be an 

attractive investment to investors? 

Should any types of MMFs be exempt 

from a requirement that they operate 

with a floating NAV, such as retail 

MMFs, Treasury MMFs, or government 

MMFs? If so, why? If there were an 

exemption for retail funds, how should 

the SEC define a retail MMF? 

Should MMFs be required to mark-tomarket all assets in their portfolios 

under this option and be limited in 

using the amortized cost method of 

valuation to the same extent as other 

mutual funds? Why or why not? If the 

SEC required MMFs to use floating 

NAVs like other mutual funds, should it 

nonetheless continue to permit different 

valuation practices regarding portfolio 

securities for MMFs versus other mutual 

funds? How effective would this be 

during times of stress, when markets for 

such securities may be less liquid or 

transparent? 

Should a floating NAV requirement be 

combined with any other regulatory 

reform options, such as redemption 

restrictions, to further lessen funds’ 

susceptibility to runs? If so, which 

restrictions and why? 

How would floating the NAV affect 

investor demand for MMFs? To what 

extent and why would investors 

discontinue investing in MMFs if they 

operated with a floating NAV? Where 

would investors shift their investments 

and how would this mitigate or increase 

risks to financial stability? 

B. Alternative Two: 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 have an appropriate 

transition period and could be raised 

through various methods. 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 made available for 

redemption on a delayed basis. Most 

redemptions would be unaffected by 

this requirement, but redemptions of an 

investor’s MBR itself would be delayed 

for 30 days. In the event that an MMF 

suffers losses that exceed its NAV 

buffer, the losses would be borne first by 

the MBRs of shareholders who have 

recently redeemed, creating a 

disincentive to redeem and providing 

protection for shareholders who remain 

in the fund. These requirements would 

not apply to Treasury MMFs, and the 

MBR requirement would not apply to 

investors with account balances below 

$100,000. 

(i) Description of the Alternative 

A second regulatory reform 

alternative would mandate that most 

MMFs: (i) Maintain an NAV buffer, 

which would be a tailored amount of 

assets of up to 1 percent in excess of 

those needed for a fund to maintain its 

$1.00 share price and which would 

absorb day-to-day fluctuations in the 

value of the fund’s portfolio securities; 

and (ii) require that 3 percent of any 

shareholder’s highest account value in 

excess of $100,000 during the previous 

30 days (the MBR) be available for 

redemption with a 30-day delay. The 

MBR requirement would have no effect 

on any redemptions that leave an 

investor’s remaining balance at least as 

large as the MBR; only redemptions of 

the MBR itself would be delayed. In the 

event that an MMF suffers losses that 

exceed its NAV buffer, those losses 

would be borne first by the MBRs of 

shareholders who have recently 

redeemed. These requirements would 

not apply to Treasury MMFs, and 

investors with balances of less than 

$100,000 would not be subject to the 

MBR requirement. 

The NAV buffer and the MBR would 

be designed to reduce MMFs’ 

susceptibility to runs by allowing a fund 

to absorb day-to-day fluctuations in the 

value of its portfolio securities, 

providing a disincentive for 

shareholders to redeem in times of 

stress, and allocating more fairly the 

costs to the fund that can result when 

shareholders do redeem. This 

alternative would be designed to 

address the structural vulnerabilities of 

MMFs while also allowing them to 

continue to maintain a stable NAV 

under most conditions. 

NAV Buffer 

Overview. MMFs would be required 

to maintain an NAV buffer, which 

would provide a fund with additional 

assets that would be available to absorb 

daily fluctuations in the value of the 

fund’s portfolio securities. The NAV 

buffer would allow funds generally to 

maintain a $1.00 stable value per share 

and replace the provisions of rule 2a–7 

that allow MMFs to use the pennyrounding method of pricing and the 

amortized cost method of valuation. 

Size of the NAV buffer. The required 

minimum size of a fund’s NAV buffer 

would be tailored based on the riskiness 

of the fund’s assets, using the following 

formula: 

(i) No buffer requirement for cash, 

Treasury securities, and Treasury repos 

(repos collateralized solely by cash and 

Treasury securities); 

(ii) A 0.75 percent buffer requirement 

for other daily liquid assets (or for 

weekly liquid assets, in the case of taxexempt funds); 83 and 

(iii) A 1.00 percent buffer requirement 

for all other assets.84

Treasury MMFs—MMFs that invest at 

least 80 percent of their assets in cash, 

Treasury securities, and Treasury 

repos—would not be required to 

maintain an NAV buffer.85 A fund 

whose NAV buffer fell below the 

required minimum amount would be 

required to limit its new investments to 

cash, Treasury securities, and Treasury 

repos until its NAV buffer was restored, 

using the methods discussed below. A 

fund that completely exhausted its NAV 

buffer would be required to suspend 

redemptions and liquidate under rule 

22e–3, which the SEC would have to 

amend for this purpose, or could 

continue to operate as a floating-NAV 

MMF indefinitely or until it restored its 

NAV buffer.86

Funding the NAV buffer. An MMF 

would be permitted to use any funding 

method or combination of methods it 

found optimal to build the NAV buffer, 

and could vary these methods over time 

in response to market conditions and 

other considerations. An NAV buffer 

that may be raised from the capital 

markets, fund sponsors, and income 

from the fund itself would be designed 

to provide flexibility for funds to raise 


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87See, e.g., SEC Staff No-Action Letter to Legg 

Mason Partners Institutional Trust—Western Asset 

Institutional Money Market Fund (Oct. 22, 2008). 

88To prevent overreaching on the part of a 

sponsor or affiliate, the MMF would not be 

permitted to pay buffer shares held by a sponsor or 

affiliate dividends at a higher rate than that paid to 

the redeemable shares unless at least 75 percent of 

the fund’s buffer shares were owned by unaffiliated 

persons. This limitation would be designed to 

ensure that sponsors and other affiliates would 

receive dividends on their buffer shares at rates 

established in an arms’-length process. 

89Today, in contrast, if a fund’s market-based 

NAV exceeds $1.00 by more than 50 basis points, 

the fund would have to re-price its shares to $1.01 

(or higher). 

90The MBR calculation would exclude any MBR 

shares that the shareholder has tendered for 

redemption but that have not yet been redeemed 

due to the required delay period. 

91Specifically, the number of subordinated shares 

would be zero for an investor whose account value 

exceeds the High Water Mark, as would be the case 

for any investor with an account balance that has 

not recently (or ever) exceeded $100,000. 

Otherwise, the fund would determine the number 

of subordinated MBR shares as follows: MBR × 

((High Water Mark¥current balance) ÷ (High Water 

Mark¥MBR)). 

92Losses that exceed the total of the fund’s NAV 

buffer and the subordinated portions of 

shareholders’ MBRs would be absorbed by the 

remaining portions of investors’ MBRs. Any losses 

that exceed the total of the fund’s NAV buffer and 

all of its shareholders’ MBRs (subordinated and 

unsubordinated) would be allocated proportionally 

among the remaining shares in the fund. MMFs 

would be required to file as exhibits to their 

registration statements plans of liquidation 

providing for the liquidation of their assets in 

accordance with these priorities. 

93For additional analysis on the operation of a 

minimum balance at risk requirement, see Patrick 

E. McCabe, Marco Cipriani, Michael Holscher, and 

Antoine Martin, The Minimum Balance at Risk: A 

the buffer at the lowest possible cost. 

We have identified three funding 

methods that would be possible with 

SEC relief from certain provisions of the 

Investment Company Act: 

• Escrow account. An MMF’s sponsor 

could establish and contribute assets to 

an escrow account pledged to support 

the fund’s NAV. The escrow account 

would be limited to holding weekly 

liquid assets (i.e., cash, Treasury 

securities, certain short-term 

government securities, and securities 

payable within five business days). 

These accounts would be similar to the 

segregated accounts established by some 

MMF sponsors during the financial 

crisis to support their funds’ stable 

values,87 and therefore are a tested and, 

for some, familiar method of funding. 

• Subordinated buffer shares. MMFs 

could issue a class of subordinated, nonredeemable equity securities (buffer 

shares) that would absorb first losses in 

the funds’ portfolios and that could be 

sold to third parties or purchased by a 

fund’s sponsor or affiliates. The buffer 

shares would be permitted to pay higher 

dividends than those paid to 

redeemable shares but would have a 

subordinated claim on the fund’s assets. 

The fund’s redeemable shares would 

offer a preferred claim on the fund’s 

assets up to $1.00 per share (i.e., the 

buffer shares would absorb losses before 

they affect the redeemable shareholder’s 

$1.00 share value).88

• Retained earnings. An MMF could 

retain some earnings it otherwise would 

distribute to shareholders. The 

usefulness of this method of funding, 

however, would be greatly limited by 

the tax law requirements for 

maintaining the ability to avoid any 

fund-level tax. In addition to incurring 

tax on any amount retained, an MMF 

would be required to pay tax on the 

amounts that it does distribute if it fails 

to distribute substantially all of its 

earnings each year. 

In order to permit an MMF to build its 

NAV buffer through the issuance of 

buffer shares or the retention of 

earnings, the SEC would need to amend 

rule 2a–7 to allow the fund to redeem 

and sell its redeemable shares for $1.00 

per share, even when the value of the 

fund’s assets, including the NAV buffer, 

is above $1.00.89 In addition, a fund 

could be permitted to reduce an NAV 

buffer that becomes too large relative to 

the size of the fund’s portfolio. A fund’s 

board of directors could allow the fund 

to repurchase buffer shares, and a 

sponsor could recover assets it had 

contributed to an escrow account, in 

both cases only if the fund would 

exceed the minimum required NAV 

buffer immediately thereafter. 

Transition period. In order to allow 

sufficient time for funds to raise the 

NAV buffer, an MMF would be required 

to put in place a buffer equal to one-half 

of the buffer described above one year 

after the effective date of any rule. The 

full required buffer would have to be in 

place two years after the effective date. 

Minimum Balance at Risk 

Overview. The NAV buffer would be 

coupled with a requirement that 3 

percent of any shareholder’s highest 

account value in excess of $100,000 

during the previous 30 days (the 

shareholder’s MBR) be available for 

redemption only with a 30-day delay. 

The MBR requirement would have no 

effect on any redemptions that leave an 

investor’s remaining balance at least as 

large as the MBR. Shares other than 

those in the investor’s MBR would be 

redeemable on demand, just as MMF 

shares are today; only redemptions of 

the MBR itself would be delayed. The 

MBR requirement, like the NAV buffer, 

would not apply to Treasury MMFs. In 

addition, the MBR requirement would 

not apply to investors with account 

balances of less than $100,000. 

The MBR requirement would ensure 

that an investor who redeems from an 

MMF remains partially invested in the 

fund for 30 days and would share in any 

losses that the fund incurs during that 

time. This is designed to dampen 

investors’ incentive to redeem quickly 

in a crisis, because they cannot entirely 

avoid imminent losses simply by 

redeeming. Furthermore, as discussed in 

more detail below, if the MMF suffers 

losses that exceed its NAV buffer, those 

losses would be borne first by the MBRs 

of shareholders who have recently 

redeemed. This allocation of losses 

would be designed to create a 

disincentive to redeem when an MMF is 

under stress and would provide some 

protection for shareholders who do not 

redeem. 

Size of the MBR. An investor’s MBR 

would be equal to 3 percent of the 

investor’s ‘‘High Water Mark,’’ which 

would be the amount, if any, by which 

the highest balance in that investor’s 

account over the previous 30 days 

exceeded $100,000. At any point in 

time, an investor’s account balance 

available for immediate redemptions 

would be equal to the account balance 

less the MBR (the investor’s ‘‘Available 

Balance’’).90

MBR delay period. If an investor 

chooses to redeem more than the 

Available Balance (e.g., all of the shares 

in the account), the fund would be 

required to delay redemption of the 

MBR for 30 days. The investor would 

receive the MBR redemption proceeds, 

priced at $1.00 per share, after the 30- 

day delay period, unless the MMF 

suffered a loss in excess of its NAV 

buffer during that period. The MBR 

requirement would have no effect on an 

investor’s transactions in the fund as 

long as the remaining shares exceeded 

the MBR. 

Subordination of the MBR. For those 

investors subject to an MBR 

requirement, a portion of the investor’s 

MBR could be subject to first loss 

(subordinated) if the investor had made 

net redemptions in excess of $100,000 

during the prior 30 days, with the extent 

of subordination approximately 

proportionate to the shareholder’s 

cumulative net redemptions during the 

prior 30 days.91 In the event that an 

MMF suffered losses in excess of its 

NAV buffer, and only in such an event, 

the subordinated portions of 

shareholders’ MBRs would absorb losses 

before other shares do.92

Illustrative examples.93 The following 

examples illustrate how an MBR 

requirement would operate: 


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Proposal To Mitigate the Systemic Risks Posed by 

Money Market Funds, Federal Reserve Bank of New 

York Staff Report No. 564 (July 2012). 

94The subordinated portion of the MBR would 

be: MBR × ((High Water Mark¥current balance) ÷ 

(High Water Mark¥MBR)). Here, this amount is 

$3,000 × (($100,000¥$80,000) ÷ 

($100,000¥$3,000)) = $619. 

95That is, the subordinated portion of the MBR 

would be: MBR × ((High Water Mark¥current 

balance) ÷ (High Water Mark¥MBR)). Here, this 

amount is $3,000 × (($100,000¥$3,000) ÷ 

($100,000¥$3,000)) = $3,000. 

96 Data reported to the SEC on Form N–MFP show 

that as of September 30, 2012, 52 percent of all 

MMF assets and 47 percent of prime MMF assets 

matured in 30 days or less. 

97These data exclude losses that were absorbed 

by some forms of sponsor support, such as direct 

cash infusions to a fund and outright purchases of 

securities from a fund at above-market prices, so the 

number of funds that would have broken the buck 

in the absence of all forms of support may have 

exceeded 29. See McCabe, Cipriani, Holscher, and 

Martin, 2012. 

98Based on data reported to the SEC on Form N– 

MFP as of September 30, 2012. Excludes exposures 

through repo backed by U.S. government securities 

and sponsored ABCP conduits. The definition of 

firm in this analysis differs from the definition of 

issuer in rule 2a–7, as it combines all affiliates 

within a single consolidated group as one firm. 

99Although financial intermediaries would not be 

required by rule 2a–7 to apply the minimum 

balance at risk to their customers, they may need 

to do so (or take other measures) to ensure their 

customers are treated fairly in times of stress (i.e., 

to ensure that delays in redemptions for various 

customers are managed equitably). 

100See Section IV. 

(a) An investor with a $200,000 MMF 

account and a $100,000 High Water 

Mark redeems $120,000. The transaction 

is unaffected by the MBR requirement 

because the remaining balance of 

$80,000 exceeds the MBR of $3,000 

(equal to 3 percent of the High Water 

Mark). The transaction does, however, 

cause a portion of the investor’s MBR to 

be placed in a subordinated, or firstloss, position. The portion of the MBR 

that would be subordinated is $619.94

(b) The investor closes the account the 

next day. The investor receives $77,000, 

all of the Available Balance, 

immediately. This represents the entire 

remaining account value of $80,000 less 

the $3,000 MBR. The MBR shares will 

be redeemed after a 30-day delay. By 

closing the account, the investor causes 

its entire MBR to be subordinated for 

that 30-day period.95 However, the 

investor will receive the full $3,000 after 

the 30-day delay, unless the fund suffers 

losses in excess of its NAV buffer. 

Design considerations. The 30-day 

delay period is designed to provide 

protection against preemptive runs 

while not unnecessarily 

inconveniencing redeeming 

shareholders or blunting the role of 

redemptions in imposing market 

discipline on MMFs. The delay should 

be sufficient to ensure that redeeming 

shareholders remain invested in the 

fund long enough to share in any losses 

due to stress on the fund at the time of 

redemption or liquidity costs that might 

be generated by their redemptions. On 

average, about half of MMF portfolio 

assets mature in 30 days or less,96 and 

a 30-day period likely would be long 

enough to prevent a shareholder from 

avoiding a specific anticipated loss by 

preemptively redeeming. As a result, the 

30-day delay period would provide 

more protection against preemptive runs 

than might occur with shorter delay 

periods. The MBR may also enhance 

market discipline by causing MMF 

investors to monitor more carefully 

MMF operations and risk-taking and 

redeem shares from a poorly run MMF 

well in advance of any specific 

problems developing in the fund’s 

portfolio because investors would be 

unable to redeem quickly during a crisis 

to avoid losses. 

The size of the MBR (3 percent) is 

designed to be large enough to mitigate 

the risk of destabilizing runs while, at 

the same time, not so large as to 

unnecessarily inconvenience 

shareholders. In order to reduce the 

incentives for investors to redeem from 

an MMF under stress, the combined size 

of the MBR and the NAV buffer must be 

greater than the expected portfolio 

losses in such an MMF as well as the 

liquidity losses that investors may suffer 

as a consequence of the MMF’s closure. 

The 3-percent MBR, combined with 

the NAV buffer, is designed to mitigate 

this risk in most potential loss 

scenarios. For example, although the 

record of MMF losses has been obscured 

by sponsor support actions, two MMFs 

have broken the buck since the adoption 

of rule 2a–7 in 1983. The Community 

Bankers U.S. Government Money 

Market Fund lost 3.9 percent of its value 

in 1994, and the Reserve Primary Fund 

announced a 3-percent loss on 

September 16, 2008. In addition, as 

previously discussed, data collected 

from MMFs participating in the 

Treasury’s Temporary Guarantee 

Program for Money Market Funds show 

that losses among MMFs that would 

have broken the buck in the absence of 

sponsor support averaged 2.2 percent, 

including five funds that had losses 

exceeding 3 percent.97 A default of 

MMFs’ largest single-name exposures 

could also produce similarly sized 

losses. As of September 30, 2012, the 

average prime MMF had investments in 

approximately 20 firms that each 

exceeded 1 percent of the fund’s assets 

and had investments in securities issued 

by seven firms, predominately financial 

institutions, that each exceeded 3 

percent of the fund’s assets.98

Importantly, because the MBR creates 

a disincentive for large redemptions 

when a fund is under stress and 

expected losses are less than the size of 

the MBR, the MBR’s size need not 

exceed every conceivable loss to be 

effective in preventing runs from 

spreading among funds. While the 

combination of the NAV buffer and the 

3-percent MBR likely would not be 

sufficient to stop a run on an MMF if 

investors anticipate very large losses in 

that fund, such a combination may be 

large enough to stem runs on most other 

funds unless investors expect that very 

large losses would be incurred across 

MMFs. 

Application to recordholders. MMFs 

would be required to apply the MBR 

requirement to each of their 

recordholders. This would include 

recordholders that are financial 

intermediaries, such as banks or brokerdealers that hold shares on behalf of 

their customers, unless the 

intermediaries provide the MMF 

sufficient information to apply the MBR 

requirement to the intermediaries’ 

individual customers directly. Absent 

such information, an MMF and its 

financial intermediary recordholders 

would allocate between themselves the 

responsibility (and associated costs) of 

applying the MBR requirement 

equitably.99

Treasury MMFs and retail investors. 

Treasury MMFs would not be required 

to maintain NAV buffers, and their 

shareholders would not have MBRs. 

Treasury MMFs are unlikely to suffer 

credit events; tend to experience net 

inflows, rather than net redemptions, in 

times of stress; and may be more likely 

to maintain a stable value during times 

of market stress, when Treasury 

securities generally maintain their 

values. Treasury MMFs would continue 

to be able to use penny rounding to 

maintain a stable value. 

Because the MBR only applies to 

investors with account balances greater 

than $100,000, many retail investors 

would not be subject to the MBR 

requirement. The experience of MMFs 

during the financial crisis and the 

redemption pressures that some MMFs 

experienced in the summer of 2011 

suggest that retail investors are far less 

likely to redeem in times of stress. In 

both episodes, institutional MMFs 

experienced substantially more 

redemptions than retail MMFs.100

(ii) Benefits and Considerations 

A requirement for most MMFs to 

maintain NAV buffers and MBRs could 

mitigate funds’ susceptibility to runs 


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69472 Federal Register / Vol. 77, No. 223 / Monday, November 19, 2012 / Notices 

101Commenters have suggested that an NAV 

buffer could make MMFs less susceptible to runs. 

See, e.g., Comment Letter of Fidelity Investments, 

Charles Schwab, and Wells Fargo, SEC File No. 4– 

619 (May 3, 2011). Some commenters, however, 

have argued for substantially larger buffers to 

accomplish this objective. See, e.g., Comment Letter 

of the Squam Lake Group, SEC File No. 4–619 (Jan. 

14, 2011). 

102As one commenter explained, the NAV buffer, 

in contrast to the buffering effect of the rounded 

NAV, generally would increase in size as investors 

redeem, assuming there are no portfolio losses. See 

Comment Letter of Fidelity Investments, Charles 

Schwab, and Wells Fargo, SEC File No. 4–619 (May 

3, 2011) (‘‘[A] key feature of the NAV buffer is that 

a fund’s market value per share would typically 

increase as shareholders redeem. This greatly 

reduces any incentive for shareholders to run on the 

fund.’’) 

103The escrow account, although it would not 

itself directly decrease a fund’s yield, also would 

not increase it, because any yield earned on the 

instruments held in the account would be for the 

benefit of the fund’s sponsor as the owner of the 

account. 

and reduce the likelihood of resulting 

financial instability in several ways. 

Reduced first-mover advantage. A 

buffer-supported NAV would reduce the 

first-mover advantage that exists under 

rule 2a–7’s current rounding 

conventions.101 Specifically, by 

removing shareholders’ ability to 

redeem at $1.00 per share when the 

fund’s market-based NAV is below 

$1.00, the NAV buffer would be 

designed to prevent redeeming 

shareholders from extracting more than 

their pro rata share of fund assets.102

Explicit support. A fully funded NAV 

buffer would give the fund an explicit 

form of support that would be designed 

to enable the fund to absorb day-to-day 

fluctuations in the value of its portfolio, 

such as declines in the value of assets 

following increases in interest rates and 

minor credit losses. Unlike the 

discretionary sponsor support discussed 

in Section IV, the availability of the 

prefunded NAV buffer to support the 

fund during times of stress would not be 

in question. 

Additional discipline on fund 

managers. The NAV buffer could 

impose additional discipline on fund 

managers by ensuring that small losses, 

which today are not reflected in funds’ 

share prices, force changes in portfolio 

management. If an MMF’s NAV buffer 

fell below the required amount, until 

the buffer is repaired, the fund would be 

required to limit its new investments to 

cash, Treasury securities, and Treasury 

repos. Repairing the buffer could be 

costly, and foregoing potentially higheryielding investments to repair the buffer 

could reduce the fund’s yield and its 

appeal to investors. As such, the buffer 

requirement may diminish the 

attractiveness of risky portfolio 

strategies that might lead to losses that 

erode a fund’s NAV buffer. 

Increased flexibility to sell securities. 

The NAV buffer also could increase the 

resilience of MMFs by providing them 

with additional flexibility to sell 

securities that have suffered small losses 

because such losses could be absorbed 

by the buffer. Today, in contrast, such 

losses may reduce the fund’s marketbased NAV below $1.00 per share and 

potentially heighten the risks of a run. 

Recognizing this, MMFs tend to avoid 

selling securities that have suffered 

small losses and instead dispose of 

securities that have not suffered losses 

first. Hence, the reluctance to sell 

securities that have suffered small losses 

can contribute to the first-mover 

advantage for redeeming investors. 

Redeeming shareholders share in 

losses caused by redemptions. The MBR 

requirement could make MMFs more 

resilient by diminishing or reversing the 

first-mover advantage for investors who 

might otherwise redeem MMF shares 

when their fund is under stress. 

Investors who make sufficiently large 

redemptions from an MMF subject to an 

MBR requirement would remain 

partially invested in the fund for 30 

days and would share in any losses that 

the fund might experience during that 

time, including losses that may be 

caused directly or indirectly by their 

own redemptions. 

Disincentive for investors to redeem 

during times of stress. The MBR 

requirement would be designed to 

create a disincentive for redemptions 

from a fund that is at risk of suffering 

losses that an investor expects will be 

less than the NAV buffer plus the MBR. 

An investor with an account balance 

greater than $100,000 in such a fund 

could minimize or potentially avoid 

entirely any expected losses by not 

redeeming and not subordinating a 

portion of its MBR. 

Protection for shareholders who do 

not redeem. The MBR requirement 

would provide some protection for 

investors who do not redeem from an 

MMF under stress. Because redeeming 

investors would share in losses that 

immediately follow their redemptions, 

investors who have not redeemed would 

not be forced to bear all of the fund’s 

losses in excess of its NAV buffer. In 

addition, the portions of redeeming 

investors’ MBRs that are subordinated 

would, by absorbing first losses, provide 

additional protection for the 

shareholders who do not redeem from a 

fund that suffers losses that exceed its 

NAV buffer. 

Reduced investor yields. The NAV 

buffer likely would either directly or 

indirectly reduce the yield funds offer 

investors. For example, an NAV buffer 

funded through the issuance of buffer 

shares or a combination of the issuance 

of buffer shares and the retention of 

earnings would diminish the net yields 

paid to investors who hold the fund’s 

redeemable shares. Although a sponsorprovided buffer would not directly 

reduce the fund’s yield,103 sponsors 

likely would pass on to investors some 

or all of the costs of providing the 

buffer. In addition, this may raise 

fairness concerns if MMF investors 

receive reduced yields in order to build 

a buffer that benefits subsequent 

investors. 

Impact on sponsors. Sponsors that 

chose to provide NAV buffers for their 

MMFs also could be required to 

consolidate their MMFs on their balance 

sheets for accounting purposes. If the 

MMFs were consolidated on sponsor 

balance sheets or the sponsor provided 

explicit guarantees or liquidity facilities 

to their MMFs, this could have bank 

regulatory capital implications if the 

sponsor was affiliated with a bank or 

bank holding company. 

Operational and technology costs. All 

three of the methods for funding the 

NAV buffer that are discussed above 

likely would involve operational and 

technology costs. These include the 

costs of raising capital for MMFs that 

issue buffer shares and for sponsors that 

obtain funding for their funds’ NAV 

buffers in the capital markets. Capitalraising costs also would include legal, 

accounting, and issuance expenses (e.g., 

road show costs). Funds also could 

incur one-time costs in seeking any 

shareholder approvals that may be 

necessary, such as authorization to issue 

buffer shares. MMFs that enhance 

buffers by retaining earnings would face 

additional tax costs. It is important to 

note, however, that some of these costs 

associated with capital raising may be 

reallocations of existing costs that have 

been borne indirectly by fund sponsors 

that have provided, or were prepared to 

provide, discretionary support. 

Costs also would include one-time 

set-up costs (e.g., reprogramming 

systems to fair value certain portfolio 

securities, rather than valuing them at 

their amortized cost, and 

reprogramming compliance systems to 

track NAV buffer levels). There also may 

be ongoing operational costs associated 

with the requirement to fair value a 

larger number of the securities in funds’ 

portfolios. 

The MBR also would involve 

operational and technology costs, which 

could be substantial, including to 

implement and maintain systems to 

track investors’ High Water Marks, MBR 

shares that are subject to redemption 


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104 Investment of Customer Funds, 17 CFR 

1.25(c)(5)(i) (2012). For such investments, the MMF 

may postpone the redemption only in certain 

enumerated, extraordinary circumstances such as 

the non-routine closure of the Fedwire or the 

existence of an emergency situation (as determined 

under SEC rules). 

105See, e.g., Comment Letter of the Investment 

Company Institute, SEC File No. 4–619 (June 20, 

2012) (providing an analysis of operational impacts 

of proposed redemption restrictions); Comment 

Letter of Treasury Strategies, SEC File No. 4–619 

(Apr. 27, 2012) (providing an analysis on holdback 

requirements); Comment Letter of DST Systems, 

Inc., SEC File No. 4–619 (Mar. 2, 2012) (describing 

‘‘systems and operational impacts’’ associated with 

a holdback requirement based on a stated 

percentage of an investor’s average account balance 

over a 30-day period). 

106See, e.g., Comment Letter of DST Systems, 

Inc., SEC File No. 4–619 (Mar. 2, 2012) (‘‘The 

omnibus accounting layers that exists in the mutual 

fund shareholder recordkeeping environment 

would provide further complexity with a minimum 

balance requirement.’’). 

107See, e.g., Comment Letter of the Investment 

Company Institute, SEC File No. 4–619 (Apr. 19, 

2012) (enclosing survey data reflecting that some 

investors would reduce their investments in MMFs, 

or stop using the funds, if MMFs had a holdback 

requirement); Comment Letter of Sungard Global 

Network, SEC File No. 4–619 (Mar. 16, 2012) 

(stating that ‘‘88 percent of corporate treasurers and 

cash managers surveyed in the 2011 SunGard 

investment study cited immediate access to cash as 

a major requirement of their cash investment 

policies’’) (emphasis in original). 

108Comment Letter of the Investment Company 

Institute, SEC File No. 4–619 (June 20, 2012) (‘‘[The 

costs of these changes [operational changes required 

to implement an MBR] could be prohibitive and 

* * * the industry would be unlikely to undertake 

them, particularly if the SEC’s changes result in 

shrinking the asset base of money market funds.’’). 

delays, and any subordinated MBR 

shares. Institutional shareholders also 

could incur one-time operational costs 

to reprogram their cash management 

systems to take account of the MBR 

requirement. 

Impact on derivatives clearing 

organizations and futures commission 

merchants. An MBR requirement could 

lead the Commodity Futures Trading 

Commission (CFTC) to reassess 

customer funds investment regulations 

as they pertain to MMFs other than 

Treasury MMFs. Investments in MMFs 

subject to an MBR would not satisfy the 

CFTC’s requirements for investment of 

customer funds supporting futures and 

swaps positions. The CFTC’s next-day 

redemption requirement provides that 

for such investments in MMFs, the 

MMF must be ‘‘legally obligated to 

redeem an interest and to make payment 

in satisfaction thereof by the business 

day following a redemption request.’’ 104

The next-day redemption requirement is 

intended to ensure that an investment of 

customer funds is sufficiently liquid, 

thereby permitting the reliable and 

timely flow of daily customer variation 

margin payments. 

Impact on demand for MMFs. While 

this alternative likely would make 

MMFs more resilient, it also could make 

the funds less appealing in other 

respects by diminishing the net yields 

that the funds pay to investors and by 

placing constraints on the liquidity 

currently available to MMF 

shareholders. The MBR may be 

confusing to some investors, 

particularly initially, and may be 

unattractive to those who have come to 

expect full and immediate liquidity 

from their MMFs (potentially to the 

detriment of the investors who remain 

in the fund). Some investors may find 

the MBR inconvenient and may require 

significant operational changes. 

Institutional investors may not be 

willing to incur the operational costs 

necessary to accommodate an MBR.105

The application of the MBR could be 

particularly complex as applied to fund 

shares sold through series of 

intermediaries in the MMFs’ 

distribution chains.106 Some investors 

therefore could reduce or eliminate their 

investments in MMFs subject to the 

NAV buffer and MBR requirements.107

Some MMF sponsors may be less 

willing to offer MMFs subject to the 

NAV buffer and MBR requirements 

because they expect that demand for 

such funds might be limited and 

because of additional costs required to 

operate them.108

All of these considerations could 

reduce the size and assets of the MMF 

industry as funds exit the market to 

avoid the NAV buffer and MBR 

requirements or as investors choose 

other investment vehicles. This could 

lead to an increase in demand for other 

investment vehicles not subject to these 

requirements. 

(iii) Questions 

The Council requests comment on 

this alternative as well as on all aspects 

of the discussion presented above. The 

Council also requests any quantitative 

analysis or data from commenters 

relating to this alternative. 

Would requiring most MMFs to 

maintain NAV buffers and MBRs make 

the funds less susceptible to runs? 

Would this alternative reduce the 

potential financial instability associated 

with MMFs? 

Would this alternative make MMFs 

more resilient by replacing the rounding 

conventions currently provided by rule 

2a–7 with a transparent and prefunded 

NAV buffer? Would the buffer 

requirement help foster discipline for 

fund managers? Would it reduce the 

uncertainty for investors caused by the 

current reliance on sponsor support to 

absorb minor losses in MMF portfolios? 

Would such uncertainty be maintained 

if sponsors, on a discretionary basis, 

provided financial support to prevent 

material decline of the required NAV 

buffer? 

Should MMFs be required to maintain 

an NAV buffer of a different size? When 

combined with an MBR requirement, 

should the NAV buffer be larger or 

smaller? Should the NAV buffer 

requirements applicable to various types 

of MMF portfolio assets be different? 

Should funds have the flexibility to 

raise the NAV buffer through a variety 

of funding methods? If not, which 

methods should funds be required to 

use and why? What governance, 

incentive, and other concerns are raised 

by each method of funding a buffer? Are 

there additional funding methods that 

would require relief from the SEC, or 

particular methods that the SEC should 

preclude? Could additional types of 

buffer shares, other than equity 

securities, be used to create an NAV 

buffer? Would some sponsors’ cost 

advantage in providing their funds’ 

NAV buffers give competitive 

advantages to their MMFs? If so, how 

would this affect the financial 

instability associated with MMFs? How 

could the SEC design an NAV buffer 

requirement to mitigate any such 

competitive advantages? Should the 

SEC, for example, mandate that the 

NAV buffer could be raised only 

through a combination of the issuance 

of buffer shares and a fund’s retention 

of earnings, because these methods of 

funding potentially would be available 

to all MMFs? Is the contemplated NAV 

buffer phase-in appropriate? If not, 

should it be shorter or longer? 

Would the MBR requirement make 

MMFs more resilient by requiring some 

redeeming investors to remain partially 

invested in an MMF for 30 days? Would 

a 3 percent MBR be sufficiently large to 

mitigate the risk of runs on MMFs? 

Should be it be larger or smaller? 

Should the length of the redemption 

delay be longer or shorter than 30 days? 

Does a 3 percent MBR with a 30-day 

redemption delay appropriately balance 

the objectives of reducing the 

vulnerability of MMFs to runs without 

burdening unnecessarily the funds and 

their shareholders? Does it preserve the 

role of redemptions in providing market 

discipline for MMFs? Should each 

investor’s MBR be a portion of its High 

Water Mark, a portion of the average of 

the investor’s balance over the previous 

30 days or some other period, or some 

other measure? Would an alternative 


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109See McCabe, Cipriani, Holscher, and Martin, 

2012 for a discussion of a number of alternative 

methods of allocating first losses. 

110The definitions of daily and weekly liquid 

assets are those provided by rule 2a–7. See Section 

II. 

111Based on data reported to the SEC on Form N– 

MFP as of September 30, 2012, the average NAV 

buffer would be approximately 2.51 percent for 

prime funds; 2.39 percent for tax-exempt funds; and 

2.10 percent for government funds. 

approach toward subordination be more 

effective? 109

Are the exemptions from the NAV 

buffer and MBR requirements for 

Treasury MMFs appropriate? Should the 

SEC provide exemptions for other types 

of funds? 

Some retail investors—those with 

balances of less than $100,000—would 

not be subject to the MBR requirement 

because retail investors may be less 

likely to participate in a run. Are retail 

investors less likely to participate in a 

run? Would MMFs consisting primarily 

of retail investors not subject to an MBR 

requirement be at increased risk? Is it 

appropriate to define a retail investor for 

this purpose by reference to the size of 

the investor’s account? If so, should the 

threshold be $100,000, or should it be 

higher or lower, and why? If not, what 

other characteristics would be more 

appropriate? How would MMFs apply 

this exemption to omnibus accounts? 

Should MMFs be required to have 

transparency through these accounts to 

apply the exemption? 

Should the SEC provide an exemption 

from the MBR for redemptions made in 

accordance with a plan that a 

shareholder has provided to the fund in 

advance? If so, how far in advance 

should a shareholder be required to 

notify the MMF of the shareholder’s 

redemptions plans in order to prevent 

the shareholder from using the 

exemption to avoid redemption delays 

when MMFs are under stress? 

Are there ways to reduce the 

operational and other costs associated 

with implementing the NAV buffer and 

the MBR? What is a realistic timeframe 

for implementation of these changes 

from an operational perspective? Who 

would bear these one-time and recurring 

costs? Would these costs end up being 

absorbed by fund sponsors, financial 

intermediaries, or investors in these 

funds? To what extent would these costs 

affect MMF sponsors’ willingness to 

offer non-Treasury MMFs under this 

alternative? To what extent are the costs 

associated with the NAV buffer new 

costs, as opposed to costs that have been 

borne by some fund sponsors? 

How would the combined effects of 

any reduction in yield from the NAV 

buffer and inconvenience caused by 

restrictions on redemptions from the 

MBR affect investor demand for MMFs? 

To what extent and why would 

investors discontinue investing in 

MMFs subject to these requirements? If 

a reduction in demand is anticipated, to 

which other investment vehicles would 

investors most likely shift money? What 

would be the net effect on financial 

stability? 

C. Alternative Three: 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. The NAV buffer would 

have an appropriate transition period 

and could be raised through various 

methods. 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, the Council 

could include these measures in its final 

recommendation and would reduce the 

size of the NAV buffer required under 

this alternative accordingly. 

Description of the Alternative 

This alternative would incorporate a 

larger risk-based NAV buffer than 

Alternative Two, of 3 percent, that 

could be combined with other measures 

to enhance MMFs’ loss-absorption 

capacity and mitigate the run 

vulnerabilities that would be addressed 

by the MBR in Alternative Two. To the 

extent that more stringent investment 

diversification requirements, alone or in 

combination with other measures, 

complement the NAV buffer and reduce 

MMFs’ vulnerabilities, the Council 

could include them in its final 

recommendation. These measures could 

serve to reduce the size of the NAV 

buffer required under this alternative 

accordingly. The Council requests 

comment on how the other measures 

might be structured; how, if at all, they 

could complement the NAV buffer and 

reduce the vulnerabilities described in 

Section IV; and whether more stringent 

investment diversification requirements, 

alone or in combination with other 

measures, would increase MMFs’ 

resiliency sufficiently to warrant a 

smaller NAV buffer requirement. 

NAV Buffer 

(i) Description 

The NAV buffer would function as 

outlined in Alternative Two in most 

respects, including the various funding 

methods for the NAV buffer (such as an 

escrow account, subordinated buffer 

shares, and retained earnings), the 

exclusion for Treasury MMFs from the 

requirement, and the implications of 

depleting the buffer. However, in 

contrast to Alternative Two, the NAV 

buffer of 3 percent would be designed 

to provide greater loss-absorption 

capacity. 

Buffer size. In Alternative Two, the 

NAV buffer is primarily designed to 

absorb day-to-day variations in the 

mark-to-market value of MMFs’ 

portfolio holdings, and the MBR serves 

as the primary tool to reduce investors’ 

incentive to redeem their shares when a 

fund encounters stress. In Alternative 

Three, the NAV buffer would serve as 

the primary tool to increase the 

resiliency of MMFs and reduce their 

vulnerability to runs. While the other 

measures described below would be 

designed to complement the NAV 

buffer, they would be unlikely to 

provide the same structural protections 

as the MBR described in Alternative 

Two. Given these considerations, the 

NAV buffer in this alternative must be 

significantly larger to provide greater 

capacity to absorb losses, lower the 

probability that a fund would fully 

deplete its buffer, and, accordingly, 

reduce the incentive of investors to run 

during times of stress. 

As in Alternative Two, the required 

minimum size of a fund’s NAV buffer 

would be tailored based on the riskiness 

of the fund’s assets, using the following 

formula: 

(i) No buffer requirement for cash, 

Treasury securities, and Treasury repos 

(i.e., repos collateralized solely by cash 

or Treasury securities); 

(ii) A 2.25 percent buffer requirement 

for other daily liquid assets (or for 

weekly liquid assets, in the case of taxexempt funds); 110 and 

(iii) A 3.00 percent buffer requirement 

for all other assets.111

If more stringent investment 

diversification requirements, possibly in 

combination with other measures 

outlined below, are determined to work 

in tandem with the NAV buffer and 

reduce MMFs’ vulnerabilities, they 

could be included in this alternative in 

the Council’s final recommendation and 

the level of this buffer requirement 

would be lowered accordingly. Similar 

to Alternative Two, Treasury MMFs 

would not be required to maintain an 

NAV buffer. 


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112See, e.g., Comment Letter of the Investment 

Company Institute, SEC File No. 4–619 (May 16, 

2012) (enclosing an analysis of certain implications 

of capital buffers for MMFs); Christopher Payne, 

Capital Buffer for Money Market Funds Not as 

Costly as Predicted, Bloomberg Government Study 

(Sept. 20, 2012). 

113Based on data reported to the SEC on Form N– 

MFP as of September 30, 2012 among 243 prime 

MMFs that filed form N–MFP with the SEC. 

Analysis excludes exposures through repo backed 

by U.S. government securities and sponsored ABCP 

conduits. 

Transition period. In order to allow 

sufficient time for funds to raise the 

larger NAV buffer, under this alternative 

a phase-in period would be provided for 

funds to reach the full buffer levels. An 

NAV buffer of one-sixth of the total 

amount would become effective after 

one year and an NAV buffer of one-third 

of the total amount would become 

effective after two years. A multi-year 

transition period would follow to allow 

the full implementation of the required 

NAV buffer levels contemplated in this 

alternative. 

(ii) Benefits and Considerations 

The main benefits and considerations 

associated with the NAV buffer were 

discussed in Alternative Two. However, 

given the absence of an MBR in this 

alternative, a brief discussion of the 

calibration of the buffer amount and 

transition period is warranted. 

Additional loss-absorption capacity. 

A larger NAV buffer would provide 

funds with additional capacity to absorb 

fluctuations in the market value of 

portfolio securities and credit losses. 

While MMFs generally provide stable 

value and invest in lower-risk securities, 

experience has shown (as discussed in 

Section IV) that funds can experience 

losses exceeding the NAV buffer level of 

1 percent contemplated in Alternative 

Two. In addition, based on the size of 

MMFs’ largest single-name exposures 

(as discussed in Section V.B), the failure 

of any of these firms could result in 

losses potentially exceeding a buffer of 

such size. The additional lossabsorption capacity provided by the 

larger NAV buffer in this alternative 

could reduce the number of firms whose 

failure could fully deplete the fund’s 

NAV buffer and decrease the likelihood 

that an MMF experiences losses that 

threaten the stable value per share. This 

may reduce the first-mover advantage 

and decrease the motivation for 

investors to redeem during periods of 

stress as long as they expect any losses 

to be less than the size of the buffer 

(discussed further below). 

Reduced incentive for excessive risktaking. Additionally, capital buffers can 

increase the cost of risk-taking ex ante, 

further reducing the probability of 

distress of an MMF or the MMF 

industry. For buffers raised through the 

sale of subordinated buffer shares, third 

parties purchasing shares may require 

higher dividends based on the perceived 

risks of the fund’s portfolio securities, 

therefore limiting the yield benefit any 

increased risk-taking provides to the 

redeemable shares. For buffers provided 

by fund sponsors or retained earnings, 

the threat of losing this contributed 

capital may lead fund managers to 

internalize the cost of any increased 

risk-taking. This may reduce MMFs’ 

incentive or ability to shift towards 

riskier assets in order to attract 

additional investments. The reduction 

in MMFs’ incentive or ability to shift 

towards riskier assets could be more 

significant than under Alternative Two 

because of the increased size of the NAV 

buffer under this alternative. 

Additional costs to MMFs, sponsors, 

or borrowers. The increased size of the 

buffer would likely impose additional 

costs on MMFs or the sponsors who 

would need to raise the capital.112

Increasing the size of the NAV buffer 

may increase the costs of short-term 

funding, particularly for financial 

institutions, if MMFs demand higher 

yields. These costs could also be passed 

on to MMF investors, in whole or in 

part, in the form of reduced yield. They 

also could alter the financial returns for 

sponsors such that they contemplate 

exiting or reducing their MMF 

businesses. 

Depending on the funding method 

chosen (such as an escrow account, 

subordinated buffer shares, or retained 

earnings), building higher levels of 

capital in periods of low interest rates, 

as exist today, may prove difficult or 

costly. Although a transition period may 

reduce the costs of implementing the 

buffer, it will also result in MMFs 

having NAV buffers that are smaller 

than deemed adequate during the 

transition period. 

Reduced, but not eliminated, 

vulnerability to run. In addition, while 

the NAV buffer may reduce the 

probability that an MMF investor suffers 

losses, it is unlikely to be large enough 

to absorb all possible losses and may not 

be sufficient to prevent investors from 

redeeming when they expect possible 

losses in excess of the NAV buffer. For 

instance, the largest average exposure in 

prime MMFs to a single firm, when 

aggregating all affiliates and weighting 

by fund assets, was 4.5 percent.113

Additionally, as noted in Section IV, 

prime MMF exposures may be heavily 

correlated. Therefore, if one firm were to 

fail, there is a higher probability that 

additional firms would also fail 

concurrently, potentially resulting in 

multiple MMF portfolio losses. 

(iii) Questions for Comment 

The Council requests comment on 

this alternative as well as on all aspects 

of the discussion presented above. The 

Council also requests any quantitative 

analysis or data from commenters 

relating to this alternative. 

The Council seeks comment on the 

size of the NAV buffer. Should the NAV 

buffer be larger or smaller? Does a larger 

NAV buffer address the structural 

vulnerabilities described in Section IV? 

What type of analysis of MMF portfolio 

exposures should be undertaken when 

considering an appropriate size for the 

NAV buffer? 

How would this higher NAV buffer 

impact investors, short-term financing 

markets, and long-term economic 

growth? How would the NAV buffer 

requirement, and particular MMF’s 

choices of buffer funding methods, 

affect MMFs’ yields? To what extent 

would an NAV buffer funded solely 

through buffer shares and the retention 

of earnings affect a MMF’s yield? Could 

it cause a prime MMF’s yield to 

decrease below those offered by 

government or Treasury MMFs? In what 

circumstances could this occur and how 

likely is it to occur? 

The Council also requests comment 

on the design and duration of the 

transition period to implement the NAV 

buffer. How long should the transition 

period be? Should the transition period 

be based on economic or market 

conditions rather than a pre-determined 

phase-in deadline? 

How would the larger NAV buffer in 

Alternative Three, alone or combined 

with investment diversification 

requirements and other measures as 

discussed below, affect investor demand 

for MMFs? To what extent and why 

would investors discontinue investing 

in MMFs subject to these requirements? 

Where would investors shift their 

investments and how would this 

mitigate or increase risks to financial 

stability? 

When considering the larger NAV 

buffer in Alternative Three, what mix of 

other measures described below can 

most effectively complement the NAV 

buffer? To the extent that more stringent 

investment diversification requirements 

reduce MMFs’ vulnerabilities, as 

discussed below, could such 

requirements be combined with a lower 

minimum NAV buffer and, if so, what 

would be the appropriate minimum? 

Could other measures be combined with 

more stringent investment 

diversification requirements to provide 

additional protections? Should the 


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Council consider additional risk-based 

tailoring of the NAV buffer, for instance, 

based on specific types of MMF assets? 

Should the required NAV buffer be 

larger for MMFs with more concentrated 

exposures, particularly those to 

financial institutions? 

Other Measures 

Description. Alternative Three 

contemplates possible additional 

measures that may complement the 

NAV buffer in mitigating run 

vulnerabilities. These include more 

stringent investment diversification 

requirements, increased minimum 

liquidity levels, and more robust 

disclosure requirements. These 

measures individually would likely not 

significantly alter the activities and 

practices that make MMFs vulnerable to 

runs. 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 MMFs’ 

risks and increase their resiliency, the 

Council’s final recommendation could 

include these additional measures with 

the NAV buffer requirement, and the 

size of the NAV buffer would be 

reduced accordingly. 

More Stringent Investment 

Diversification Requirements 

(i) Description 

As noted above, prime MMFs 

generally have numerous large 

exposures to individual firms’ 

securities. Rule 2a–7 currently provides 

that an MMF, other than a single-state 

fund, ‘‘shall not have [immediately after 

the acquisition of any security] invested 

more than 5 percent of its Total Assets 

in securities issued by the issuer of the 

security.’’ The Council requests 

comment on two proposed 

modifications to this provision: (i) 

Reducing the 5 percent limitation; and 

(ii) revising the definition of ‘‘issuer’’ in 

this context to include all affiliates of a 

consolidated group. 

(ii) Benefits and Considerations 

More stringent investment 

diversification requirements, 

particularly when paired with a material 

NAV buffer, could allow MMFs to 

potentially weather the default of 

securities issued by large firms. 

Lower maximum loss from default of 

one firm. A lower limit on exposure to 

a single firm, when combined with an 

NAV buffer of 3 percent, would reduce 

the likelihood that losses from the 

failure of a single firm would threaten 

a fund’s stable NAV. Similar 

requirements are utilized in other 

contexts, including risk management for 

financial institutions and central 

clearing parties. 

Modifying the calculation to aggregate 

all related affiliates would align more 

closely the rule 2a–7 limits with 

traditional credit analysis concepts. For 

instance, it is highly likely that material 

distress at a financial holding company 

would occur at the same time that its 

bank or broker-dealer subsidiary was 

experiencing similar distress, and these 

interrelationships would have 

implications for the obligations of both 

entities. 

Reduced funding and less 

creditworthy investments. However, 

tightening the investment 

diversification requirements could 

materially reduce the amount of funding 

that MMFs can provide to larger issuers. 

It also could result in MMFs investing 

in less creditworthy issuers if MMFs are 

required to reduce their largest 

exposures and invest in other firms, or 

it could cause MMFs to withdraw 

funding from the financial system and 

instead invest in less-risky securities 

(such as Treasury securities) that are not 

subject to issuer diversification 

requirements. 

(iii) Questions 

What impact would these changes 

have on large issuers and on the shortterm funding markets? To the extent 

that MMF investments are constrained 

or reduced in response to these 

restrictions, in what types of securities 

would MMFs invest? 

At what level should the issuer 

diversification requirements be set? 

Does adopting a ‘‘cover one’’ 

methodology—whereby each MMF 

would have sufficient loss absorption 

capacity to mitigate the failure of its 

largest investment—provide adequate 

protection to MMFs? How should these 

standards be compared to those used in 

other regulatory contexts? 

Should these standards be applied 

differently to different types of funds 

(for instance, prime MMFs, government 

MMFs, and tax-exempt MMFs)? What 

changes, if any, should be made with 

respect to the diversification 

requirements for demand features and 

guarantees? Should diversification 

limits apply to credit enhancements 

other than guarantees and demand 

features? 

What changes should be made, if any, 

to the definition of ‘‘issuer’’ in the 

context of issuer diversification 

requirements? Are there other changes 

to the issuer diversification calculations 

that would further strengthen these 

reforms? For example, should 

diversification requirements for assetbacked securities generally treat as the 

issuer of the securities the special 

purpose entity that issued them, the 

sponsor of the asset-backed securities, 

or the issuers of the securities 

underlying the asset-backed securities? 

Are there other credit exposure limits 

that should be tightened to reduce 

MMFs’ risks? For example, should 

certain types of exposures, such as 

financial-sector exposures, be subject to 

limitations? If so, what should the limits 

be? How should such exposures be 

defined? Should limits on second-tier 

securities be tightened? If so, how? 

Should collateral requirements be more 

stringent? How should that be 

accomplished? 

Should diversification requirements 

for providers of demand features and 

guarantees be tightened? How and to 

what extent? How might more stringent 

diversification requirements for 

providers of demand features and 

guarantees affect securities markets 

(particularly markets for tax-exempt 

securities) in which demand features 

and guarantees are important? Should 

limitations on other credit or liquidity 

enhancements be tightened? 

Increased Minimum Liquidity Levels 

(i) Description 

As discussed in Section II, MMFs are 

required to maintain liquidity buffers in 

the form of minimum levels of daily and 

weekly liquid assets. These liquidity 

buffers could be increased, for instance, 

by raising the required level of daily 

liquidity from the current level of 10 

percent to 20 percent, and the minimum 

weekly liquidity requirement from the 

current level of 30 percent to 40 percent. 

While these liquidity requirements 

would be a significant increase over the 

current requirements, which were 

adopted in 2010, they are below the 

liquidity levels many funds have 

maintained since Form N–MFP 

reporting began in late 2010. 

As under existing rule 2a–7, if a fund 

falls below the minimum liquidity 

requirement, it would be prohibited 

from acquiring any securities other than 

daily liquid assets until it is in 

compliance with the requirement. Taxexempt funds would remain exempt 

from the daily liquidity requirement. 

Investor transparency. Additional 

‘‘know-your-investor’’ requirements 

could be implemented to provide MMFs 

with increased visibility into omnibus 

accounts to improve their ability to 

understand their shareholder base and 

to predict investors’ redemption 

activity. Today, many MMF shares are 

held by financial intermediaries on 

behalf of their customers—the MMF’s 


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beneficial owners—making it difficult 

for MMFs to obtain information about 

their beneficial owners and predict their 

redemption activity. Requiring MMFs to 

obtain more information about their 

beneficial owners could help MMFs 

better understand and predict those 

investors’ behavior, and allow the funds 

to better manage their liquidity to meet 

anticipated redemption requests. 

(ii) Benefits and Considerations 

Increased minimum liquidity levels 

may limit MMFs’ investment risks and 

increase an MMF’s ability to meet 

heightened redemption requests without 

selling portfolio securities. 

Improved ability to meet redemption 

requests. Increased minimum liquidity 

levels may improve a fund’s ability to 

convert portfolio holdings into cash to 

pay redeeming shareholders. Absent a 

sufficient supply of liquid assets, heavy 

redemptions could force a fund to sell 

less-liquid assets at a discount or at firesale prices, not only imposing losses on 

the fund’s remaining shareholders but 

also potentially causing losses for other 

funds that hold similar securities. 

Increased minimum liquidity levels may 

increase the effectiveness of the NAV 

buffer and reduce the likelihood that 

periods of stress force fire sales that 

deplete MMFs’ buffers. 

Enhanced liquidity management. 

Know-your-investor requirements may 

improve the ability of MMFs to predict 

and manage investor liquidity needs. 

This could reduce the likelihood that 

unexpected redemptions would force 

MMFs to sell assets, which may cause 

losses, particularly during times of 

stress. 

Reduced investment risk. Shifting the 

composition of MMFs’ investment 

portfolios may decrease the risk of 

losses. The shorter-duration investments 

would reduce MMFs’ exposure to 

interest rate risk and, to the extent these 

requirements cause MMFs to increase 

their investments in U.S. Treasury 

obligations, this may also reduce their 

overall credit risk. 

Decreased investor yields. If funds 

shift their investments into shorterduration, lower-yielding assets, this may 

decrease the return they provide to 

investors. In addition, the current level 

and slope of the yield curve may have 

led funds to hold higher levels of shortduration assets than they might 

otherwise. In future periods in which 

interest rates are higher and there is a 

greater interest-rate premium paid for 

longer-duration assets, funds may be 

less likely to maintain this level of daily 

and weekly liquid assets if increased 

liquidity requirements are not 

implemented. 

Reduced term funding. While the 

increased liquidity requirements may 

improve funds’ ability to meet 

redemption requests, they may also 

reduce the supply of term funding in 

certain markets in which MMFs invest. 

Borrowers, particularly financial 

institutions, may need to shift to 

funding at shorter durations, making 

their exposure to short-term markets 

more pronounced and potentially 

increasing the fragility of the financial 

system. 

Modified nature of MMFs. Enhanced 

liquidity requirements would reduce 

MMFs’ ability to invest in longer-dated 

or higher-risk instruments, which would 

impact the ability of MMFs, particularly 

prime MMFs, to serve their traditional 

role as a financial intermediary and 

potentially change the nature of the 

product. 

(iii) Questions 

Would enhanced liquidity 

requirements mitigate the impact of 

increased redemptions on a fund? Are 

the proposed minimum liquidity 

requirements sufficient for funds to 

meet redemption requests during times 

of stress? Would higher or lower 

requirements be more appropriate? 

Rather than increasing both the daily 

and weekly liquid asset requirements, 

are there greater benefits or costs 

associated with increasing one or the 

other? Should tax-exempt funds 

continue to be exempt from any daily 

liquidity requirement? 

What harmful impacts would higher 

liquidity requirements have? How might 

they impact the funding markets in 

which MMFs participate? Would these 

requirements result in the institutions 

that borrow from MMFs shifting to 

shorter-term borrowing, increasing the 

risk that they may be unable to 

refinance their outstanding debt when 

necessary? If so, how might this impact 

financial stability? How would this 

impact the ability of borrowers to 

address new liquidity and stable 

funding requirements contemplated in 

Basel III? 

The current definitions of MMFs’ 

‘‘weekly’’ and ‘‘daily’’ liquid assets used 

in the minimum liquidity requirements 

include all assets that can be converted 

into cash within pre-defined 

timeframes, including unsecured and 

secured exposures to financial 

institutions. An alternative would be to 

exclude all non-government securities 

(and repo backed by non-government 

securities) from these definitions. This 

would potentially reduce the risk of 

credit or liquidity strains in the 

securities counted towards these 

buffers. This may also alleviate the 

concern, discussed above of, of potential 

unintended consequences such as 

pushing financial institutions into 

shorter duration borrowing. Should 

such a change to the definitions of daily 

and weekly assets be made? If so, 

should this be in place of, or in addition 

to, higher minimum liquidity 

requirements? 

Should MMFs be required to gather 

more information about their beneficial 

owners? MMFs also could be required to 

perform certain risk management 

procedures and consider information 

about beneficial owners’ historical 

redemption behavior when stress testing 

their funds. To what extent can MMFs 

currently increase investor 

transparency? If regulatory changes 

would be necessary to facilitate this 

level of transparency, how could this be 

done most effectively by the SEC under 

its current statutory authority? 

Should MMFs be prohibited from 

having too concentrated an investor 

base, or should additional limitations 

apply if a fund has a concentrated 

investor base? For example, should an 

MMF investor be limited to owning no 

more than a specified percentage of any 

particular MMF? What limit would be 

appropriate? 

How might higher minimum liquidity 

levels complement the NAV buffer? 

Would they reduce the risks present in 

MMFs’ investment portfolios? Would 

they reduce the probability that an MMF 

investor would redeem its shares based 

upon concerns about the MMF’s 

portfolio liquidity? 

More Robust Disclosure Requirements 

(i) Description 

An NAV buffer could also be 

accompanied by enhanced disclosure 

requirements that would increase 

investors’ ability to monitor MMFs’ 

investment risks. Rule 2a–7 requires 

MMFs to disclose information about 

their portfolio holdings each month on 

their Web sites within five business 

days. MMFs are also required to provide 

to the SEC monthly filings, on Form N– 

MFP, containing more detailed 

information regarding their portfolio 

holdings, including their mark-tomarket NAV per share. This information 

is then publicly released 60 days after 

the end of the month for which the 

information was reported. 

The transparency of MMF portfolio 

holdings could be increased by 

enhancing the level or frequency of 

required disclosures. This could include 

more frequent (e.g., daily or weekly) 

public reporting of portfolio information 

such as daily and weekly liquidity 

levels and mark-to-market per share 


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valuations. These adjustments also 

could include reducing or eliminating 

the current delay before public 

disclosure. This could be supplemented 

with additional disclosure of MMFs’ 

valuation methodologies and the factors 

that their boards of directors (or the 

boards’ delegates) take into account, or 

the processes they follow, when 

assessing whether a portfolio security 

poses minimal credit risk. MMFs could 

also be required to disclose any 

instances of sponsor support, including 

purchases of distressed portfolio 

securities. 

(ii) Benefits and Considerations 

More robust disclosure requirements 

may improve investors’ ability to 

monitor the portfolio holdings and the 

risk of an MMF. 

Improved investor monitoring of 

MMFs’ risks. More robust disclosure 

requirements would provide investors 

greater transparency into the risks of the 

investments held by the MMFs in which 

they invest and important indicators of 

its health, including the fund’s liquidity 

and NAV buffer levels. This may allow 

investors, particularly in times of stress, 

to differentiate MMFs based on the 

quality and stability of their 

investments, potentially preventing 

uninformed, across-the-board runs. This 

also may impose additional investor 

discipline on MMFs and reduce their 

ability to take increased risks, 

potentially enhancing the effectiveness 

of the NAV buffer. 

Increased volatility of MMFs’ flows. 

There is a risk that more frequent 

reporting of portfolio information may 

make investors quicker to redeem when 

these indicators show signs of 

deterioration. In addition, more frequent 

reporting of portfolio information such 

as daily mark-to-market per share values 

or liquidity levels could increase the 

volatility of MMFs’ flows, even when 

the funds are not under stress, if 

investors are highly sensitive to changes 

in those levels. More frequent disclosure 

of portfolio holdings may also limit 

funds’ ability to utilize differentiated 

investment strategies. 

(iii) Questions 

Would more frequent reporting of the 

portfolio holdings, mark-to-market 

NAVs, and liquidity levels help 

investors and others differentiate among 

MMFs? If so, what would be the 

appropriate frequency (e.g., daily or 

weekly)? How might investors respond 

to daily changes in an MMF’s mark-tomarket NAV or liquidity levels? Should 

MMFs be required to disclose the markto-market value of their investments? 

Would enhanced disclosure decrease or 

increase the probability of 

indiscriminate runs across MMFs? 

Would MMFs be adversely affected by 

the need to provide enhanced disclosure 

of their portfolio holdings? Would 

enhanced transparency have 

unintended consequences? 

Should MMFs be required to notify 

their investors and the public each time 

they receive support from their 

sponsors? This would include, for 

example, purchases of distressed 

securities under rule 17a–9 under the 

Investment Company Act, if that rule is 

not rescinded in connection with any 

structural reforms. What other kinds of 

support warrant disclosure? Would this 

kind of disclosure help investors and 

others better understand and appreciate 

the risks in particular MMFs? How 

should this disclosure be made (e.g., on 

an MMF’s Web site or in its 

prospectus)? Should MMFs be required 

to disclose their performance absent 

sponsor support? Where SEC relief is 

required for sponsor support, should the 

SEC no longer entertain requests for the 

relief? Should the SEC otherwise 

prohibit sponsor support? 

Should MMFs be required to provide 

increased disclosure on their valuation 

methodologies? Should MMFs be 

required to provide greater information 

about the factors that their boards of 

directors (or the boards’ delegates) take 

into account, or the processes they 

follow, when assessing whether a 

security poses minimal credit risk? How 

might more robust disclosure 

requirements complement the NAV 

buffer? Would they reduce the risks 

present in MMFs’ investment portfolios 

or improve investors’ ability to 

differentiate between funds? 

D. Request for Comment on Other 

Reforms 

The policy alternatives discussed in 

the proposed recommendations 

described above aim to address the 

structural vulnerabilities inherent in 

MMFs and reduce their susceptibility to 

runs. The alternatives are not mutually 

exclusive but could potentially be 

implemented in combination. For 

example, sponsors could manage funds 

that have floating NAVs as well as stable 

NAV funds with the appropriate 

enhanced structural protections. 

The Council recognizes that there may 

be other reforms it could consider that 

are not mentioned above that may 

mitigate risks to financial stability by 

providing a substantial reduction in the 

susceptibility of MMFs to runs. 

Accordingly, in addition to the request 

for feedback on the proposed 

recommendations above, the Council 

also solicits comment on other possible 

reforms of MMFs that the Council 

should consider for its final 

recommendation. 

Analysis of other reforms. Any 

comments submitted under this section 

should discuss how such reforms would 

address the structural vulnerabilities 

inherent in MMFs and mitigate the risk 

of runs and the threat they pose to 

financial stability. The comments also 

should address the potential impacts to 

the MMF industry, shareholders, and 

long-run economic growth. 

Liquidity fees and/or gates. For 

example, some market participants and 

other stakeholders have suggested 

alternative features that only would be 

implemented during times of market 

stress to reduce MMFs’ vulnerability to 

runs. Specifically: 

(i) Standby liquidity fees that, when 

triggered, may directly charge 

shareholders who redeem their shares to 

compensate MMFs and the remaining 

MMF investors for the potential cost of 

withdrawing this liquidity from the 

fund; or 

(ii) Temporary restrictions on 

redemptions, or ‘‘gates’’ that, when 

triggered, would prohibit investors from 

redeeming and provide a period of time 

for a fund to restore its health. 

The Council welcomes views on such 

features and how they, alone or in 

combination with other reforms, could 

provide a substantial reduction in the 

susceptibility of MMFs to runs. These 

proposals may provide some benefits by 

limiting investors’ ability or motive to 

redeem during periods of stress and by 

potentially helping to restore a fund’s 

NAV or NAV buffer. Some of these 

benefits may include fairer treatment of 

redeeming and non-redeeming 

investors, giving investors unfettered 

access to liquidity except during times 

of stress, and imposing additional 

discipline on fund managers, who 

would be motivated to manage their 

funds to avoid triggering a fee or a gate. 

However, members of the Council are 

concerned that standby liquidity fees 

and temporary gates may not adequately 

address—and in fact may further 

increase—the potential for industrywide runs in times of stress. Standby 

liquidity fees and temporary gates may 

increase the risk of preemptive runs by 

investors who would be motivated to 

redeem before a fee or gate is triggered. 

Such fees or gates may also increase 

contagion risk, because the triggering of 

fees or gates in one MMF could 

encourage shareholder redemptions in 

other MMFs. Additionally, these 

proposals in isolation do not provide 

explicit loss-absorption capacity and 

may not significantly alter the activities 


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114See Blackrock Viewpoint, ‘‘Money Market 

Funds: A Path Forward’’ (2012) (recommending this 

trigger for the automatic imposition of a liquidity 

fee as opposed to a temporary gate), available at 

http://www2.blackrock.com/global/home/ 

PublicPolicy/ViewPoints/index.htm; Comment 

Letter of HSBC Global Asset Management on the 

European Commission’s Green Paper on Shadow 

Banking (May 28, 2012), available at http:// 

ec.europa.eu/internal_market/consultations/2012/ 

shadow/individual-others/hsbc_en.pdf. 

115For MMF shares held through omnibus 

accounts, the financial intermediary would need to 

ensure that any standby liquidity fees apply to the 

ultimate beneficial owners to prevent unfair results, 

just as they must do today when other types of 

mutual funds impose redemption fees. 

116On the one hand, see Comment Letter of 

Fidelity Investments, SEC File No. 4–619 (Feb. 3, 

2012) (stating that in a survey of their retail money 

market fund customers 43 percent stated that they 

would stop using a money market fund with a 1 

percent non-refundable redemption fee charged if 

the fund’s NAV per share fell below $0.9975 and 

27 percent would decrease their use of such a fund). 

But see Comment Letter of BlackRock on the IOSCO 

Consultation Report on Money Market Fund 

Systemic Risk Analysis and Reform Options (May 

28, 2012) (‘‘based on our client discussions, standby 

liquidity fees are less likely to cause clients to 

abandon the product in large numbers.’’). 

117The Regulatory Flexibility Act (RFA) (5 U.S.C. 

601–612) provides that whenever an agency is 

required by 5 U.S.C. 553, or any other law, to 

publish general notice of proposed rulemaking for 

any proposed rule, the agency must either provide 

an initial regulatory flexibility analysis or certify 

that the proposed rule will not have a significant 

economic impact on a substantial number of small 

entities. Because these proposed recommendations 

are not a ‘‘rule’’ for purposes of the RFA, neither 

an initial regulatory flexibility analysis nor 

certification by the Council is required. However, 

in any case, these proposed recommendations 

would not have a significant economic impact on 

Continued 

and practices of MMFs discussed in 

Section IV. 

Description of fees or gates. Standby 

liquidity fees or gates could provide 

targeted redemption restrictions that 

would only be implemented once a predetermined threshold, intended to 

indicate stress in the fund, has been 

breached. While a variety of features 

have been proposed, the below 

discussion outlines several possible 

design considerations. 

Trigger. Standby liquidity fees or 

gates could be imposed automatically 

based on specific measures indicating 

stress on an MMF’s condition, such as 

a decline in the fund’s NAV or in the 

fund’s holdings of daily or weekly 

liquid assets below a certain level. For 

example, some have suggested imposing 

fees or gates if an MMF’s shadow NAV 

fell below $0.9975 per share or if its 

level of weekly liquid assets fell below 

7.5 percent.114 Alternatively, the trigger 

could be at the discretion of an MMFs’ 

board. 

Duration. The fee or gate could apply 

to any redemption until the health of 

the MMF has improved and the trigger 

measure, such as the fund’s NAV or 

liquid assets, returns to levels required 

under rule 2a–7. The length of the 

temporary fee or gate could be limited 

to a prescribed period, such as 30 days, 

after which the MMF would allow 

redemptions or liquidate. 

Fee level. The level of a fee could be 

based on the level of stress in the fund. 

As the level of the stress grows, so 

would the size of the fee. For example, 

the fee size could be based on the size 

of the decline in the fund’s NAV or its 

liquid assets. Alternatively, the fee 

could be structured as a fixed 

percentage of the amount sought to be 

redeemed. In either case, the fee would 

be intended to shift the cost of liquidity 

to redeeming shareholders and help 

relieve potential strains on the fund.115

Gate operation. While rule 22e–3 

allows a fund’s board to suspend 

redemptions if the fund has broken the 

buck or is in danger of breaking the 

buck, the board must first irrevocably 

approve the liquidation of the fund and 

notify the SEC of its decision to 

liquidate and suspend redemptions. The 

gates discussed here, in contrast, would 

be temporary and could provide the 

MMF a short period of time to increase 

its liquidity levels to meet redemption 

requests and could allow the fund to 

remain in operation after the gates are 

lifted. 

Sequencing. If paired together, 

standby liquidity fees and temporary 

gates could be structured such that the 

fees are triggered before or after gates. If 

standby liquidity fees are triggered first, 

this may reduce the likelihood that gates 

are needed. If standby liquidity fees are 

imposed after gates are triggered, this 

may allow funds to permit redemptions 

if they determine that the liquidity fee 

would reduce the risk these 

redemptions pose to the fund. 

Enhanced Transparency. MMFs could 

be required to disclose information on 

their financial condition more 

frequently so investors could monitor if 

an MMF was approaching its triggers. 

Questions on liquidity fees and gates. 

Would investors’ concerns about the 

potential triggering of a standby 

liquidity fee or gate increase the 

likelihood of preemptive runs? Would 

one fund imposing fees or gates lead to 

runs at other funds? Would a fee, as 

some have suggested, serve as a 

sufficient deterrent to investor 

redemptions such that MMFs’ liquidity 

buffers would prove able to absorb 

shareholder redemptions in times of 

stress? 

Should the trigger be based on a 

fund’s NAV, levels of daily and weekly 

liquid assets, or both? At what levels 

and why? Are there other triggers that 

would be more effective? 

What would be the appropriate size of 

a standby liquidity fee? Should the fee’s 

size be based on the magnitude of losses 

or liquidity costs, or should it be a fixed 

percentage of the investor’s redemption? 

How would they affect the composition 

of funds’ portfolios and funds’ risktaking? Would a flat fee based on the 

size of the investor’s redemptions fairly 

allocate liquidity costs? 

Should standby liquidity fees or gates 

be applied automatically based on predetermined thresholds or instead at the 

discretion of the fund’s board of 

directors (or its independent directors)? 

Would a fund’s board fail to impose a 

fee or gate even when it would benefit 

the fund and its shareholders? How 

could such discretion be structured to 

make it more likely that it would be 

imposed when appropriate? 

Would a gate be more effective 

combined with a liquidity fee? If so, 

how should the combination be 

structured? For example, should a fund 

impose a liquidity fee first, allowing 

investors to continue to redeem, but 

impose a gate if the fund is unable to 

sufficiently recover and reaches a higher 

level of stress? How would investors 

view gates? 

Should there be exemptions to a fee 

or a gate based on the type of fund or 

investor? For example, should retail 

accounts or funds be exempt? If so, 

should such an exemption be based on 

account size? How could such 

exemptions work with omnibus 

accounts? Should there be exemptions 

for very small withdrawals? If so, what 

size? Should there be exemptions for 

Treasury or government MMFs? 

The Council also requests comment 

on how a standby liquidity fee or gate 

would alter investors’ view of MMFs.116

How might it impact the size of the 

MMF industry? How would the impact 

be different if the fee were mandatory or 

discretionary? 

VI. Consideration of the Economic 

Impact of Proposed Reform 

Recommendations on Long-Term 

Economic Growth 

Under Section 120 of the Dodd-Frank 

Act, the Council is required to ‘‘take 

costs to long-term economic growth into 

account’’ when recommending new or 

heightened standards and safeguards for 

a financial activity. If the SEC accepts 

the Council’s recommendation, it is 

expected that the SEC would implement 

the recommendation through a 

rulemaking, subject to public comment, 

that would consider the economic 

consequences of the implementing rule 

as informed by the SEC staff’s own 

economic study and analysis.117


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a substantial number of small entities because the 

proposed recommendations would directly impact 

only the SEC, and any rulemakings by the SEC 

imposing the recommended standards would be 

expected to apply only to MMFs, of which few, if 

any, are believed to be small entities. 

118 In the consideration herein, long-term 

economic growth refers to the average rate of 

change of overall economic activity, as measured by 

the rate of change in real GDP (that is, GDP 

measured in constant dollars) over an extended 

period. Specifically, we consider expected costs 

and benefits over a horizon sufficient to include a 

transition period and the potential costs and 

benefits with respect to long-term capital formation 

and a diminished probability and severity of future 

financial crises. As such, these costs and benefits 

are likely to accrue over a period of a decade or 

substantially longer. The potential benefits of the 

proposed recommendations, in terms of long-term 

economic growth, arise from the higher level of 

economic activity expected to prevail from a 

reduction in the likelihood or severity of a financial 

crisis and the consequent adverse effects on 

investment and overall spending; similarly, the 

potential costs in terms of long-term economic 

growth stem from the reduced level of spending 

that may accompany higher costs of financing 

investment and other outlays. Such positive or 

negative effects on the level of real GDP would raise 

or lower the growth rate of economic activity in 

future years relative to the levels expected to 

prevail absent adoption of the recommendations. 

119Policymakers with responsibility for 

mitigating systemic risks may face an economic 

tradeoff between accepting higher costs in normal 

times in order to significantly reduce the costs of 

financial crises. Systemic risks are an externality 

that individual firms would not, on their own, seek 

to mitigate efficiently, because they would bear the 

full costs of doing so while the benefits would 

accrue to the broader financial system and the 

economy. 

The financial crisis demonstrated that 

MMFs’ activities and practices make 

them susceptible to runs that can have 

destabilizing implications for financial 

markets and the broader economy. If 

investors perceive a risk of even small 

losses, MMFs’ lack of explicit lossabsorption capacity, the first-mover 

advantage enjoyed by redeeming 

investors, investor uncertainty regarding 

sponsor support, and the similarity of 

MMFs’ portfolios can incite widespread 

runs on MMFs. Due to the significant 

role MMFs play in the short-term credit 

markets, an industry-wide run on MMFs 

can reduce the availability of credit to 

borrowers. During the financial crisis, 

despite government intervention, the 

run on the MMF industry led to rapid 

disinvestment by MMFs of short-term 

instruments which severely exacerbated 

stress in already strained financial 

markets. 

The Council expects that the 

proposed recommendations would 

significantly reduce the risk of runs on 

MMFs and, accordingly, lower the risk 

of a significant long-term cost to 

economic growth.118 Specifically, the 

proposed recommendations could 

bolster the resilience and stability of 

MMFs during periods of financial stress, 

and reduce the severity of financial 

crises. Given the large adverse effects of 

financial crises on real GDP, such 

reductions imply important expected 

benefits. At the same time, the proposed 

recommendations described in Section 

V could lead to an increase in the cost 

of lending that MMFs provide, which 

could reduce economic growth in 

normal periods.119 However, even 

assumptions that would tend to 

overstate these potential costs suggest a 

very small increase in the weightedaverage cost of credit for U.S. 

businesses, households, and state and 

local governments, with 

commensurately small potential costs to 

long-term economic growth. 

The Council’s consideration of the 

cost to long-term economic growth is 

based on the potential effects of the 

proposed recommendations on the rates 

at which MMFs would lend to 

borrowers and the consequent effects of 

such higher borrowing costs on 

investment and other spending by U.S. 

businesses, households, and 

governments. The consideration 

assesses the cost of financing an NAV 

buffer for MMFs and how this could 

increase the lending rates of MMFs. For 

example, Alternatives Two and Three 

contemplate MMFs raising NAV buffers 

that would replace some short-term 

claims with longer-term, subordinated 

claims to absorb fluctuations in the 

value of the fund’s assets. The longerterm, subordinated claims may raise 

costs because providers of the NAV 

buffer will require a higher return for 

their greater term, credit, and liquidity 

risk. This assumes a required return for 

NAV buffers based on historical 

experience in the United States for 

claims subject to similar risks and 

duration. This assumed return is used to 

estimate an implied increase in the rates 

at which MMF would lend if they were 

to raise an NAV buffer. Although the 

NAV buffer would diminish the risks 

associated with MMF shares it is 

assumed that the required returns on 

those claims (net yields paid to 

shareholders) would not decline. 

In addition, for the purposes of this 

consideration, the Council has assumed 

that borrowers will not shift borrowing 

away from MMFs and as a result will be 

forced to fully absorb this higher cost. 

If substitution toward other sources of 

credit were considered, the estimated 

cost to economic growth likely would be 

smaller. In particular, if MMFs are not 

able to pass through their higher costs, 

and instead were forced to absorb some 

of the costs in the form of reduced 

profits for sponsors or lower yields for 

MMF shareholders, the costs to 

economic growth through the 

borrowing-cost channel would be lower. 

There may be economic impacts 

associated with lower profits for MMF 

sponsors if they are unable to pass 

through initial transition costs or higher 

operating costs, but the impact of such 

costs on long-term economic growth are 

likely to be less direct and smaller than 

the costs that affect borrowing rates. 

There are substantial uncertainties 

around estimates of both the benefits 

and the costs to long-term economic 

growth. Moreover, both the benefits and 

costs to economic growth would vary 

for the different alternatives set forth in 

section V. 

Estimated costs to long-term 

economic growth. The cost of a 3 

percent NAV buffer in Alternative Three 

is the component of the proposed 

recommendations that may have the 

most direct and largest effect on lending 

costs. The cost of financing a 3 percent 

NAV buffer would depend on providers’ 

required return for absorbing first losses 

from any fluctuations in the value of 

MMF portfolios, particularly the 

declines in value that might result from 

credit losses. To put this required return 

in context, a range of riskier investment 

returns are considered. The yield on a 

ten-year BBB-rated corporate bond has 

averaged 6.5 percent since 1997, while 

prime MMF gross yields have averaged 

3.2 percent over the same period, 

indicating an estimate of a spread for 

longer-term claims of 3.3 percentage 

points over the past 15 years. Another 

estimate of the additional required 

return is based on the long-run required 

return to equity, which is estimated to 

be about 9.0 percent since 1997, 

suggesting a spread to prime MMF gross 

yields of 5.8 percentage points. These 

calculations suggest reasonable 

assumptions for the additional required 

return can range from 3.3 percentage 

points to 5.8 percentage points. Hence, 

the remainder of this discussion of 

lending costs assumes a 5 percentage 

point additional required return. 

Under the assumption that MMFs 

would fully pass on this additional cost 

to borrowers, the rate at which MMFs 

would lend would increase by 0.05 

percentage points for each percentage 

point of short-term claims replaced by 

subordinated, longer-term claims. To 

the extent that higher costs result in 

lower net yields for MMF shareholders, 

and as a result are not passed on fully 

to borrowers, the estimated impact on 

costs to long-term economic growth 

through borrowing costs would be 

smaller. 

This increased lending rate would 

impact economic growth through its 

effect on the weighted-average 

borrowing costs of U.S. businesses, 


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120Based on data reported to the SEC on Form N– 

MFP. This total includes all ABCP held by MMFs, 

not just paper issued by ABCP programs with U.S. 

sponsors, since foreign-sponsored ABCP conduits 

purchase the obligations of U.S. businesses and 

households. 

121This total includes all such repo held by 

MMFs, not just repo conducted with U.S. 

counterparties, since repo with foreign 

counterparties may be used to finance the 

obligations of U.S. businesses and households. 

122Based on the Flow of Funds Accounts of the 

United States. A similar analysis focusing only on 

business debt indicates that financing provided by 

MMFs represented less than 3 percent of all 

nonfinancial business debt at the end of June 2012. 

Indeed, relatively few firms rely heavily on shortterm financing through the types of instruments 

held by MMFs. See Paolo Colla, Filippo Ippolito, 

and Kai Li, ‘‘Debt specialization,’’ Working Paper, 

University of British Columbia (2011) (showing 

that, among a sample of roughly 3,000 publicly 

traded firms, 0.1 percent of firms obtained more 

than 90 percent of their total debt financing from 

CP, but 26 percent of firms obtained more than 90 

percent of their debt financing from senior bonds 

and notes). 

123This figure reflects the assumption that MMF 

lending rates would increase 0.15 percentage points 

in total and the fact that MMF lending could 

represent as much as 5 percent of overall borrowing 

for these entities. 

124There is considerable uncertainty around 

these estimates. Nonetheless, the overall effects 

remain modest across the range of assumptions 

considered in this study. For a discussion of this 

range, see Macroeconomic Assessment Group, 

‘‘Interim Report: Assessing the macroeconomic 

impact of the transition to stronger capital and 

liquidity requirements,’’ Bank for International 

Settlements (Aug. 2010), at 18. 

households, and state and local 

governments that obtain financing, 

directly or indirectly, from MMFs. 

However, while MMFs provide such 

financing through a variety of channels 

and play a significant role in a number 

of credit markets (as discussed in 

Section IV), the total credit that they 

supply is relatively small compared to 

aggregate nonfederal, nonfinancial debt 

outstanding. 

As of June 30, 2012, the financing 

provided by MMFs included their 

holdings of $35 billion in domestic 

nonfinancial unsecured CP and $341 

billion in municipal securities. MMFs 

also held $117 billion in ABCP, which 

is often backed by loans to businesses 

and households (for example, credit 

card and other receivables),120 and $60 

billion in other notes and instruments 

issued by U.S. firms. In addition, MMFs 

purchase the debt of financial 

institutions and government agencies 

that themselves provide credit to 

businesses, households, and state and 

local governments, including $56 billion 

in securities issued by U.S. financial 

institutions, $396 billion of securities 

issued by U.S. government agencies and 

government-sponsored enterprises 

(‘‘GSEs’’), and $323 billion in repo 

backed by such securities. MMFs also 

held $71 billion in repo backed by 

securities other than U.S. government 

securities, which may include 

nonfinancial business debt and assetbacked securities.121

Under the assumption that MMF 

financing for financial institutions, 

government agencies, and GSEs is 

ultimately used to provide credit to 

businesses, households, and state and 

local governments, this data suggests 

that MMFs provided direct and indirect 

credit of as much as $1,400 billion to 

businesses, households, and state and 

local governments. While significant, 

this amount represented only 5 percent 

of the total debt outstanding of U.S. 

businesses, households, and state and 

local governments, which was $27,874 

billion as of June 30, 2012.122

Based on this share of total debt 

outstanding and the estimated 0.05 

percentage point increase in MMF 

lending rates per percentage point of 

capital, this implies that the weightedaverage cost of credit for businesses, 

households, and state and local 

governments would increase 0.0075 

percentage points if the required NAV 

buffer were 3 percent.123 As already 

noted, this estimate assumes that the 

costs of the buffer are passed on entirely 

to businesses, households, and state and 

local governments that ultimately obtain 

credit directly or indirectly from MMFs, 

rather than absorbed by MMF 

shareholders, asset management firms, 

or other financial intermediaries. This 

assumption leads to a larger estimated 

increase in borrowing costs for the 

nonfinancial sector than would occur if 

MMF shareholders or others absorbed 

some of the cost. The estimate also 

assumes that other providers of shortterm funding do not increase their 

lending rates. 

The small estimated increment to 

borrowing costs implies that the 

potential costs to long-term economic 

growth also would be small. An 

illustration of the magnitude of such 

effects can be derived using recent 

analyses that model the effects of higher 

interest spreads on economic activity. 

For example, the Macroeconomic 

Assessment Group (established by the 

Financial Stability Board and the Basel 

Committee on Banking Supervision) 

examined the impact of higher 

borrowing costs on aggregate output. 

Based on that group’s standard 

approach, an increase in borrowing 

spreads of 15 basis points was 

associated with median expected 

reductions in GDP for 32 quarters ahead 

(the longest horizon considered in the 

report) of 0.10 percent.124 Importantly, 

these estimates incorporated reduced 

loan volumes as well as higher lending 

spreads. Scaling these estimates, the 

0.0075 percentage point increment in 

borrowing costs for U.S. businesses, 

households, and state and local 

governments translates into an 0.005 

percent reduction in output 32 quarters 

after the capital requirement is imposed. 

In terms of per-year economic growth, 

this level effect is very small. 

Estimated benefits for long-term 

economic growth. As noted in Section 

IV, several activities and practices of 

MMFs combine to make them 

vulnerable to runs. Because of MMFs’ 

lack of loss-absorption capacity, the 

first-mover advantage enjoyed by 

redeeming investors, and investor 

uncertainty regarding sponsor support, a 

run on a single MMF can spread quickly 

to other funds, as MMF investors seek 

to minimize losses in funds with 

potentially correlated portfolio 

holdings. Due to the fact that MMFs are 

large and highly interconnected with 

the rest of the financial system and can 

act as a channel for transmission of risks 

and contagion, a run on MMFs can 

create or increase the risk of significant 

liquidity, credit, or other problems 

spreading among bank holding 

companies, nonbank financial 

companies, and U.S. financial markets. 

By reducing the likelihood of runs on 

MMFs, the proposed recommendations 

would be expected to diminish the 

severity of financial crises. The Council 

acknowledges the inherent difficulty in 

assigning a probability to runs on MMFs 

and how such runs could contribute to 

a financial crisis. Nonetheless, the very 

high degree of interconnectedness of 

MMFs and other parts of the financial 

system indicates that runs on MMFs and 

subsequent disruptions to financing are 

likely to occur at the same time when 

other parts of the financial system also 

are under stress, so runs on MMFs 

would be expected to increase the 

severity of a crisis. Indeed, the run in 

September 2008 exacerbated already 

severe strains in financial markets and 

contributed to a broader curtailment in 

the availability of credit. In addition, as 

described in section IV, some evidence 

suggests that institutional investors have 

become more attuned to MMF risks in 

the aftermath of the financial crisis, 

which may make them more prone to 

runs. 

Reducing the likelihood of financial 

crises or the damage that they cause 

would have large salutary effects on 

long-term economic growth. A recent 

review of multiple studies documents 

extensive evidence that financial crises 

have large adverse effects on economic 

activity over an extended period. 

Estimated costs of financial crises 

ranged from about 20 percent to more 


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125See Basel Committee on Banking Supervision, 

‘‘An assessment of the long-term economic impact 

of stronger capital and liquidity requirements,’’ 

Bank for International Settlements (Aug. 2010), at 

12–13. 

126 In the extreme, each investor subject to an 

MBR that desired to maintain full liquidity might 

maintain an extra balance of approximately 3 

percent to main that liquidity, so MMF 

shareholders themselves effectively would provide 

a buffer equal to the size of the MBR. 

127Such investor sorting may indeed be 

beneficial, since the most risk-averse, run-prone 

investors would likely invest in Treasury funds or 

MMFs with substantial NAV buffers or other 

protections. 

128Based on the Flow of Funds Accounts of the 

United States. 

than 150 percent of real GDP, depending 

on whether the effects of the crisis are 

transitory or permanent, with a central 

tendency of about 60 percent of real 

GDP.125 Given these large costs, reforms 

that even modestly reduce the 

probability or severity of a financial 

crisis would have considerable benefits 

in terms of greater expected economic 

activity and, therefore, higher expected 

economic growth. 

Effects of other alternatives. This 

consideration of the impact on longterm economic growth of the proposed 

recommendations in Section V focuses 

on the significant NAV buffer in 

Alternative Three because, among the 

different alternatives set forth in section 

V, that component would have the most 

direct potential effect on borrowing 

costs. Alternative Two would require a 

smaller NAV buffer than Alternative 

Three, so the direct effect on MMF 

lending rates under Alternative Two 

would be smaller. However, the 3 

percent MBR in Alternative Two would 

reduce the liquidity of investments in 

MMFs for large investors. While the 

effects of such a reduction in investors’ 

liquidity on borrowing costs are less 

clear, they are not likely to exceed those 

associated with financing a larger NAV 

buffer.126 Because the Council views 

both Alternatives Two and Three as 

means of reducing the structural 

vulnerabilities of MMFs, Alternative 

Two’s smaller NAV buffer and 3 percent 

MBR could be expected to have similar 

benefits for long-term economic growth 

as Alternative Three. 

Alternative One, which would 

mandate that MMFs adopt a floating 

NAV, would not require that MMFs 

have an NAV buffer or other protections 

that would be required of MMFs under 

Alternatives Two or Three. When 

evaluated using the methodology 

described above, Alternative One likely 

would have a smaller direct impact on 

borrowing costs and hence smaller costs 

to long-term economic growth than the 

other alternatives. However, the 

adoption of Alternative One in isolation, 

and hence a requirement that all MMFs 

adopt a floating NAV, could prompt 

shifts by MMF shareholders away from 

MMFs to alternative cash-management 

or investment products that maintain 

stable NAVs. Such a shift could reduce 

the expected benefits if the alternative 

products were vulnerable to runs. 

The scope of the reform package that 

is adopted will affect investors’ demand 

for MMFs and the costs to long-term 

economic growth. A package of reforms 

that allows asset managers to offer 

different types of MMFs would allow 

investors to choose the MMF that best 

suits their preferences. For example, if 

the range of options includes both 

floating NAV and stable NAV funds 

(with additional protection provided by 

an NAV buffer, an MBR, or a portfolio 

that is limited to Treasury securities or 

Treasury repo), investors who are 

willing to sacrifice some principal 

stability might choose the floating NAV 

funds, those willing to sacrifice some 

yield might choose a Treasury-only 

MMF or a fund with a significant NAV 

buffer, and those willing to sacrifice 

some liquidity might prefer a fund with 

an MBR.127 Hence, a broad range of 

options could reduce the likely impact 

of the recommended reforms on demand 

for all MMFs while preserving the net 

benefits to long-term economic growth 

that would result from the reduced 

vulnerability of MMFs to destabilizing 

runs. 

Uncertainty regarding estimates of 

costs and benefits for long-term 

economic growth. There are substantial 

uncertainties around the estimates of 

costs to long-term economic growth. 

Several assumptions noted above, 

including a full pass-through of higher 

costs to borrowers, attempt to produce 

a conservative estimate of the costs to 

long-term economic growth. To the 

extent that borrowers substitute away 

from the short-term financing provided 

by MMFs, for example, and sell shortterm instruments directly to investors or 

to other types of cash-management 

vehicles, costs to long-term economic 

growth could be smaller. As noted 

above, however, such substitution 

would reduce expected benefits for 

long-term economic growth if investors 

move money to products that are 

vulnerable to runs. 

Of course, some factors could lead to 

larger estimated costs to economic 

growth. For example, the estimated 

effects on the weighted-average cost of 

credit could be larger if short-term 

funding markets were to become less 

liquid, raising the costs of short-term 

funding provided by other lenders. But 

the overall effect of a broader increase 

in short-term rates on the weightedaverage cost of capital would still be 

minimal, given the small share of 

business, household, and state and local 

government debt that is short-term. For 

example, commercial paper outstanding 

accounted for just 1.1 percent of 

domestic nonfinancial business debt on 

June 30, 2012.128 There could be costs 

that are associated with lower profits or 

shrinkage for MMF sponsors if they are 

not able to fully pass on higher costs or 

are capital constrained and cannot 

quickly and economically build an NAV 

buffer. However, lower profits and 

transition costs associated with building 

the buffer are not likely to have a 

significant direct effect on long-term 

economic growth. In addition, the 

estimates from the macroeconomic 

studies cited above suggest some 

uncertainty about the drag on economic 

activity from higher borrowing costs. 

Expected benefits could be 

diminished if investors switched to 

alternative cash-management vehicles 

because MMFs become less attractive. If 

those cash-management vehicles are 

themselves vulnerable to runs and are 

also interconnected with other parts of 

the financial system, the benefits to 

long-term economic growth that result 

from mitigating the probability and 

severity of financial crises could be 

reduced. Nonetheless, the expected 

reductions in the probability or severity 

of crises associated with MMF reform 

would imply a sizable net benefit in 

terms of higher expected economic 

growth, given the very large costs of 

financial crises on economic output. 

Moreover, the Council and its members 

intend to use their authorities, where 

appropriate and within their 

jurisdictions, to reduce or eliminate 

regulatory gaps to address any risks to 

financial stability that may arise from 

dissimilar standards for other cashmanagement products with risks similar 

to MMFs. 

Questions 

How can the assumptions used to 

estimate costs to long-term economic 

growth be further refined? 

For each of the alternative reform 

proposals, what do you estimate would 

be the effect on the total AUM in 

MMFs? For each of your estimates, what 

are your underlying assumptions? Given 

these estimates, what would be the 

effect on long-term economic growth of 

such change in the total AUM of MMFs? 

Which features, if any, of the 

alternatives would potentially make 

MMFs less attractive to investors? If 

MMFs became less attractive to 

potential shareholders, where would 


pmangrum on DSK3VPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 223 / Monday, November 19, 2012 / Notices 69483 

they invest their funds? Would 

institutional customers or retail 

investors be more likely to withdraw 

funds? What alternative cashmanagement vehicles would investors 

likely move to? Would this affect the 

expected benefits of MMF reform? What 

impact would this have upon the credit 

markets in which MMFs invest? How 

should the role of other financial 

intermediaries be considered? What 

risks could that pose for financial 

stability? 

If MMFs became less attractive to 

potential borrowers, how might they 

change their financing methods? Would 

this affect the expected costs or benefits 

of MMF reform for long-term economic 

growth? 

Would yields on redeemable MMF 

shares decline, in light of reductions in 

risk? Would there be additional costs to 

long-term economic growth from 

reduced yields to MMF shareholders? If 

yes, what would they be? 

Would a reduction in profits for 

MMFs sponsors absorb some of the 

increase in costs? How would their 

reduced profits affect long-term 

economic growth? 

Are there factors other than borrowing 

costs, reduced yields to shareholders, 

and reduced profits for MMF sponsors 

that may be expected to impact longterm economic growth? 

Would higher short-term borrowing 

rates from MMFs affect other short-term 

borrowing rates? Are BBB corporate 

rates and the equity risk premium 

appropriate proxies for the returns 

likely to be demanded by providers of 

the NAV buffer? How should reductions 

in the structural vulnerability of MMFs 

impact the potential probability of a 

financial crisis? The severity of such a 

crisis? What additional benefits to longterm economic growth might result from 

reductions in the structural 

vulnerability of MMFs? 

Dated: November 13, 2012. 

Rebecca H. Ewing, 

Executive Secretary, Department of the 

Treasury. 

[FR Doc. 2012–28041 Filed 11–16–12; 8:45 am] 

BILLING CODE P 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

[OMB Control No. 9000–0007; Docket 2012– 

0076; Sequence 59] 

Federal Acquisition Regulation; 

Information Collection; Summary 

Subcontract Report 

AGENCY: Department of Defense (DOD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Notice of request for comments 

regarding an extension to an existing 

OMB clearance. 

SUMMARY: Under the provisions of the 

Paperwork Reduction Act, the 

Regulatory Secretariat will be 

submitting to the Office of Management 

and Budget (OMB) a request to review 

and approve an extension of a 

previously approved information 

collection requirement concerning 

summary subcontract report. 

Public comments are particularly 

invited on: Whether this collection of 

information is necessary for the proper 

performance of functions of the Federal 

Acquisition Regulations (FAR), and 

whether it will have practical utility; 

whether our estimate of the public 

burden of this collection of information 

is accurate, and based on valid 

assumptions and methodology; ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

ways in which we can minimize the 

burden of the collection of information 

on those who are to respond, through 

the use of appropriate technological 

collection techniques or other forms of 

information technology. 

DATES: Submit comments on or before 

January 18, 2013. 

ADDRESSES: Submit comments 

identified by Information Collection 

9000–0007, Summary Subcontract 

Report, by any of the following 

methods: 

• Regulations.gov: http:// 

www.regulations.gov. Submit comments 

via the Federal eRulemaking portal by 

searching the OMB control number. 

Select the link ‘‘Submit a Comment’’ 

that corresponds with ‘‘Information 

Collection 9000–0007, Summary 

Subcontract Report’’. Follow the 

instructions provided at the ‘‘Submit a 

Comment’’ screen. Please include your 

name, company name (if any), and 

‘‘Information Collection 9000–0007, 

Summary Subcontract Report’’, on your 

attached document. 

• Fax: 202–501–4067. 

• Mail: General Services 

Administration, Regulatory Secretariat 

(MVCB), 1275 First Street NE., 

Washington, DC 20417. ATTN: Hada 

Flowers/IC 9000–0007, Summary 

Subcontract Report. 

Instructions: Please submit comments 

only and cite Information Collection 

9000–0007, Summary Subcontract 

Report, in all correspondence related to 

this collection. All comments received 

will be posted without change to 

http://www.regulations.gov, including 

any personal and/or business 

confidential information provided. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Karlos Morgan, Procurement Analyst, 

Office of Governmentwide Acquisition 

Policy, GSA, (202) 501–2364 or via 

email at karlos.morgan@gsa.gov. 

SUPPLEMENTARY INFORMATION: 

I. Purpose 

In accordance with Federal 

Acquisition Regulation 19.702, any 

contractor receiving a contract for more 

than the simplified acquisition 

threshold must agree in the contract that 

small business, small disadvantaged 

business, historically underutilized 

business zone (HUBZone) small 

business, veteran-owned small business, 

service-disabled veteran-owned small 

business, and women-owned small 

business concerns will have the 

maximum practicable opportunity to 

participate in contract performance 

consistent with its efficient 

performance. Further, contractors 

receiving a contract or a modification to 

a contract expected to exceed $650,000 

($1,500,000 for construction) must 

submit a subcontracting plan that 

provides maximum practicable 

opportunities for the above named 

concerns. Specific elements required to 

be included in the plan are specified in 

section 8(d) of the Small Business Act 

and are implemented in FAR Subpart 

19.7. 

In conjunction with the 

subcontracting plan requirements, 

contractors must submit an annual 

summary (semi-annual for DOD and 

NASA) of subcontracts awarded by 

prime and subcontractors for a specific 

Federal Government agency that 

required an Individual Subcontracting 

plan for the previous fiscal year. This is 

accomplished through the use of the 

Standard Form 295, Summary 

Subcontract Report, or the Summary 

Subcontract Report (SSR), the electronic 

equivalent of the of the Standard Form 

295, submitted through the Electronic 


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