For years, regulators have threatened to impose new reforms on money market funds (MMFs) in an attempt to reduce the risk of future runs and maintain financial stability. Today, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved final rules that will change the way MMFs operate. Since many businesses use MMFs to meet short term financing and investment needs, manufacturers should be aware that these new rules may impact how manufacturers manage cash.
The new rules, effective over a two year transition period, require that institutional prime funds adopt a floating net asset value (NAV) instead of using the current stable value, meaning that the share price will fluctuate. The rule also implements new discretionary liquidity gates and fees for all non-government MMFs.
After the reforms were proposed last year, the NAM, in a joint letter to the SEC, noted that the floating NAV may carry negative accounting, tax, and operational implications. The NAM also requested that the SEC hold a roundtable on the proposal to gain the perspective of key stakeholders before any changes are finalized – a request that was unfortunately ignored. The NAM has blogged before about the negative impact that the proposed MMF reforms could have on manufacturers and other business. For example, moving to a floating NAV could cost investors up to $2 billion initially and close to that amount in annual operating costs.
In her statement, SEC Chairman Mary Jo White said the Commission has worked to address at least one concern raised by the business community regarding the additional tax burden that the floating NAV would bring. To that end, the Department of Treasury and Internal Revenue Service will release guidance and proposed rulemaking today aimed at providing relief through a simplified aggregate tax accounting method and exempting investors from tracking individual transactions for tax reporting.
Republican Commissioner Daniel Gallagher voted in favor of the final rule, stating that his support had been contingent upon fixing the tax issue. On the other hand, Republican Commissioner Michael Piwowar told his fellow Commissioners that the public should have the opportunity to review and weigh in on proposed IRS tax rules before the SEC’s MMF rules are finalized, and opposed the rule for this and other reasons.
Now that the rules are final, manufacturers should consider the costs and administrative impacts that moving to a floating NAV, along with potentially paying fees or facing a gate when trying to redeem cash from a fund fees, will have on their cash management practices. Manufacturers should also review the proposed tax changes that the Treasury and IRS release today and consider if they adequately provide relief from additional tax reporting burdens.