Thursday, May 2, 2013

FSOC Punts on Money Market Funds, While SEC Hints at Floating NAV.

The Financial Stability Oversight Council's recently released 2013 Annual Report revealed that the FSOC will defer to the Securities and Exchange Commission on further reforms for money market mutual funds (MMFs), so long as the SEC moves forward with "meaningful structural reforms."

The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risk 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.

 You may recall that in November 2012, the FSOC issued its own set of proposed recommendations on money market fund reform after the SEC decided not move forward on former Chairman Mary Schapiro’s money fund proposal. Since that time, the SEC seems to have been making some progress on formlating new recommendations for MMF reform. One change in particular, a move away from a fixed $1 net asset value (NAV) to a floating NAV, seems to be high on the SEC's radar. Rumors have been circulating that the SEC will release just such a proposal soon.  It has been reported that the SEC's staff met with their counterparts at the IRS to discuss how adopting a floating net asset value (NAV) for money market funds would potentially be treated for tax purposes. In particular, their discussions centered around the tax treatment of small gains and losses for investors in MMFs. The outcome of that meeting is not promising for a floating NAV, however. It seems that the IRS is not willing to provide much flexibility in interpreting the current tax law and regulations should MMFs move to floating NAVs. Consequently, under a floating NAV regime, both retail and institutional investors potentially would have to treat every money market fund transaction as a taxable event. This inflexibility in tax treatment could complicate, or even doom a floating NAV proposal for MMFs from the SEC.  The SEC reportedly has discussed with the IRS more options than merely the floating NAV, though details of those discussions have yet to emerge.