event ``is not of sufficient magnitude to cause the MFF to violate''
a threshold).
---------------------------------------------------------------------------

b. Principal Volatility
    In addition to requiring funds to test their liquidity against, at
minimum, specified hypothetical events, we are requiring funds to test
their ability to minimize principal volatility.\1774\ Funds are
currently required to test their ability to maintain a stable NAV. In
the Proposing Release, we proposed replacing this requirement for
floating NAV funds with a requirement to test their ability to maintain
weekly liquid assets, and proposed requiring stable NAV funds to test
their ability to maintain both a certain level of liquidity and a
stable share price.\1775\ In the Proposing Release, however, we
recognized that there might be other metrics that could be used in
stress testing. Specifically, we requested comment on whether to
require floating NAV funds to test their ability to meet an investment
objective, avoid losses or minimize principal volatility.\1776\
---------------------------------------------------------------------------

    \1774\ See rule 2a-7(g)(8)(i).
    \1775\ See Proposing Release, supra note 25, at section III.L.
    \1776\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

    In response, several commenters argued that floating NAV funds
should continue to test their NAV stability.\1777\ These commenters
pointed out investors in floating NAV funds will continue to expect a
relatively stable NAV.\1778\ Additionally, commenters argued that the
stress testing requirements should not differ between floating NAV and
fixed NAV funds.\1779\ As we noted above, two commenters did not
believe that stress testing requirements should apply to floating NAV
funds.\1780\ One such commenter argued that testing for floating NAV
funds was not necessary because a floating NAV already provides optimal
price transparency.\1781\
---------------------------------------------------------------------------

    \1777\ See BlackRock II Comment Letter (noting that investors in
floating NAV funds expect a relatively stable NAV); Fidelity Comment
Letter (same); MSCI Comment Letter (noting that even with a floating
NAV, there will still be a valuation ``tipping point'').
    \1778\ Id.
    \1779\ See BlackRock II Comment Letter; Fidelity Comment Letter.
    \1780\ See Deutsche Comment Letter; Legg Mason & Western Asset
Comment Letter (commenting that no stress testing should be required
for Floating NAV funds, and arguing that having a floating NAV fund
test for liquidity would serve no useful purpose). The argument
raised in the Legg Mason & Western Asset Comment Letter is discussed
above in the discussion regarding the use of liquidity as a metric
in stress testing.
    \1781\ See Deutsche Comment Letter.

---------------------------------------------------------------------------

    We agree with commenters that believed floating NAV funds should
test their NAV stability. We believe that money market funds,
regardless of whether they have a floating NAV or maintain a stable
NAV, will continue to strive to minimize principal volatility to
maintain a stable share price. In times of market stress, funds could
face challenges in limiting principal volatility, and we believe that
funds and fund boards would benefit from stress testing to help them
understand the potential pressures on principal stability, as the
current requirements do today. We have therefore modified the proposed
rule to require a fund to test both its ability to maintain liquidity
and its ability to minimize principal volatility based on specified
hypothetical events. We have determined not to set specific limitations
or thresholds against which funds should test principal volatility.
Unlike stable NAV funds, which have a clear threshold, we do not
believe that there is single measure of what level of volatility
investors in floating NAV funds will tolerate. This measure might
differ among floating NAV funds, depending on, for example, investor
composition. Accordingly, we believe that funds and fund boards are
best suited to determining the amount of principal volatility that
investors in their floating NAV funds will likely tolerate and,
accordingly, what volatility threshold or thresholds should be used in
their stress testing.
    We have chosen to use the term ``minimize principal volatility''
rather than ``maintain a stable share price'' to clarify this
requirement applies regardless of whether the fund has a floating or a
stable NAV, and believe that this metric is consistent with the
comments submitted.\1782\ We believe, based on comments, that funds
would generally approach this requirement similar to how they today
test the ability to maintain a stable share price although, as
discussed above, funds will need to determine what volatility threshold
or thresholds they believe are appropriate to test against.\1783\ We
have chosen to use the metric of minimizing volatility, rather than
avoiding losses because certain investors in floating NAV funds might
demand overall price stability, and therefore some floating NAV funds
might determine that it is appropriate to consider both upward and
downward price pressures when developing stress tests.\1784\
---------------------------------------------------------------------------

    \1782\ See BlackRock II Comment Letter (noting that it believes
that investors in a floating NAV fund will expect the fund to have a
``relatively stable NAV''); MSCI Comment Letter (noting that it is
unlikely that investors in floating NAV funds will accept NAV
fluctuations outside of a very small band, and that there will be
some form of a ``valuation tipping point'').
    \1783\ See State Street Comment Letter (noting that it currently
offers stress testing to liquidity funds with a floating NAV,
including the ability for a floating NAV to avoid losses greater
than 25 or 50 basis points, and that these tests are ``relatively
simple'' modifications to the stable NAV tests).
    \1784\ Although we recognize that upward price pressures might
be a relevant metric to stress test for some funds, we also
recognize that funds will generally be more concerned with downward
price pressures. Accordingly, we do not interpret the requirement to
test the ability to minimize principal volatility to require funds,
as a matter of course, to test against upward price movements. This
is consistent with staff's clarification of the stress testing rules
adopted in 2010 that funds did not have to stress test against
``breaking the buck on the upside.'' See Staff Responses to
Questions about Money Market Fund Reform, August 7, 2012, available
at http://www.sec.gov/divisions/investment/guidance/mmfreform-imqa.htm.
---------------------------------------------------------------------------

    We have retained the requirement that stable NAV funds test their
ability to maintain a stable share price. Although we do not anticipate
that stable NAV funds would approach this additional requirement in a
way that differs much, if at all, from a test to minimize principal
volatility, it clarifies that stable NAV funds are required to test the
ability of the fund to avoid breaking the buck.
    The Commission believes that requiring funds to test against both
the level of weekly liquid assets and principal volatility is
appropriate. Several commenters similarly supported testing both
liquidity and principal stability.\1785\ Although we recognize that
requiring testing against both metrics could require more tests than
requiring testing against one metric, we believe that testing for both
metrics justifies the additional burden of more tests. As commenters
pointed out, principal stability and minimizing price volatility are
two primary objectives of money market funds.\1786\ Additionally, we
believe that principal stability and liquidity are interrelated. In
particular, we agree with a commenter that pointed out that, in times
of market stress, a fund could experience (i) less price stability,
resulting from a decline in liquidity or in an attempt to maintain
adequate liquidity, or (ii) less liquidity, resulting from a decline in
price stability or an attempt to maintain price stability.\1787\ We
therefore believe boards should understand the range of events that
could place stress on liquidity, principal stability or both, and that
stress testing both liquidity and volatility will increase such
understanding.
---------------------------------------------------------------------------

    \1785\ See BlackRock II Comment Letter; Fidelity Comment Letter;
MSCI Comment Letter.
    \1786\ Id.
    \1787\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

3. Hypothetical Events Used in Stress Testing
    The Commission is also adopting modifications to the hypothetical
events that funds use in stress testing. As discussed further below, we
have modified these events from the Proposing Release to address
commenter concerns about the potential complexity of testing for some
of the proposed hypothetical events, while still enhancing stress tests
to incorporate correlations between securities and combinations of
events. In response to commenters' concerns, we have modified the rule
text to clarify the number and extent of tests that the rule requires.
    As discussed above, we proposed improvements to stress testing in
the Proposing Release because we believed that certain enhancements and
clarifications to the hypothetical events currently used in stress
testing were necessary to improve the minimum quality of the stress
testing by some funds. The proposed enhancements included requiring the
funds to consider factors such as correlations among securities returns
and various combinations of events in their stress tests, an assessment
of how a fund would meet increasing shareholder redemptions (taking
into consideration assumptions regarding the liquidity and price of
portfolio securities), and both parallel and non-parallel shifts in the
yield curve.
    Some commenters generally supported the proposed
enhancements.\1788\ Several commenters opposed or expressed concerns
about the proposed enhancements.\1789\ Specifically, some commenters
argued that the enhancements would not allow funds to retain
flexibility to tailor stress tests to the fund.\1790\ Some commenters
expressed concerns that the proposed enhancements would increase the
burden, expense, and complexity of stress testing.\1791\ Some
commenters believed that the proposed

enhancements were too vague.\1792\ Commenters expressed concerns that
the proposed requirements to test for combinations of events and other
events made the rule unclear about what events must be tested and the
extent of testing necessary to comply with the proposed requirements,
with some commenters arguing that the proposed rule required
potentially endless numbers of tests.\1793\
---------------------------------------------------------------------------

    \1788\ See, e.g., MSCI Comment Letter; TIAA-CREF Comment Letter.
    \1789\ See, e.g., Dreyfus Comment Letter; ICI Comment Letter;
Federated VIII Comment Letter; Schwab Comment Letter; Invesco
Comment Letter.
    \1790\ See Legg Mason & Western Asset Comment Letter; Comment
Letter of Waddell & Reed Investment Management Company (Sept. 17,
2013) (``Waddell & Reed Comment Letter''); SIFMA Comment Letter.
    \1791\ See, e.g., Federated II Comment Letter; Dreyfus Comment
Letter; Invesco Comment Letter; SSGA Comment Letter.
    \1792\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Federated VIII Comment Letter; Dreyfus Comment Letter;
Schwab Comment Letter.
    \1793\ See Federated II Comment Letter (noting that the rule is
unclear about the type and number of tests required); ICI Comment
Letter (noting that the requirement to incorporate combinations of
events causes the number of test results to grow geometrically with
each permutation of stress events).
---------------------------------------------------------------------------

    In particular, some commenters believed that the proposed
enhancements would require funds to make unrealistic assessments about
the liquidity and price of securities that a fund might sell to meet
redemptions, and assessments about how an adverse event in one
portfolio security might affect other portfolio securities. Commenters
argued that these requirements might require significant assumptions
that would be difficult to make and that could render the results not
useful to boards.\1794\
---------------------------------------------------------------------------

    \1794\ See, e.g., Schwab Comment Letter; ICI Comment Letter;
Federated VIII Comment Letter; Dreyfus Comment Letter; Invesco
Comment Letter.
---------------------------------------------------------------------------

    The Commission disagrees with commenters who argued that
modifications to hypothetical events will reduce funds' flexibility in
developing stress tests.\1795\ First, the requirements we are adopting
today still leave the specific parameters of the hypothetical events to
the fund's discretion. Furthermore, the hypothetical events specified
in the rule are not a comprehensive list of the hypothetical events
that funds may stress test, but a minimum set. As discussed below, the
rule requires a fund adviser to include additional combinations of
events that the fund adviser deems relevant.
---------------------------------------------------------------------------

    \1795\ See Legg Mason & Western Asset Comment Letter; Waddell &
Reed Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    We are, however, persuaded by commenters that some of the proposed
enhancements might require funds to make complex behavioral assumptions
that might not be realistic and that might ultimately reduce the
utility of stress testing to fund boards. We also recognize that, as
proposed, some of the hypothetical events were vague and might be
difficult to implement. Finally, we also are sensitive to the potential
burdens that administering a large number of stress tests with complex
assumptions can place on funds and their boards, a point raised by
commenters. To address these concerns, and as discussed below, we have
modified the proposed enhancements to specify certain minimum
hypothetical events that funds are required to incorporate in their
testing. We believe that the proposed requirements reflected four
primary areas of risk that can place stress on funds. Those are (i) an
increase in the general level of short-term interest rates, (ii) a
downgrade or default of a portfolio security position, (iii) a
correlated increase in the credit spreads for certain portfolio
securities, and (iv) an increase in shareholder redemptions.\1796\ We
have therefore modified the hypothetical events that funds must use in
stress testing so that they focus on these risks and eliminated several
of the elements in the proposed rule within those areas of risk that
commenters argued would require the most complex and unrealistic
assumptions. As discussed further below, each fund is required to test
each of the first three events in combination with increasing
shareholder redemptions, which we believe will allow funds to focus on
the most important combination of events that will provide the most
meaningful results to boards, while reducing the number of combinations
of events that the rule requires as a minimum set for stress testing.
---------------------------------------------------------------------------

    \1796\ See ICI Comment Letter (noting that the rule should only
require tests for spreads in the yield curve; an increase in the
spread of non-Treasury securities over the yield curve, redemptions,
and a downgrade or default of a significant issuer and/or provider
of demand features and guarantees); Fidelity Comment Letter
(suggesting standardized scenarios with combinations of interest
rate increases, yield spread shocks across a sector of portfolio
securities, a credit event of an issuer of a portfolio securities,
and shareholder redemptions).
---------------------------------------------------------------------------

a. Interest Rate Increases
    Funds are currently required to stress test for a change in short-
term interest rates. We proposed modifying this requirement so that
funds would only need to test for increases in the general level of
short-term interest rates, making clear that funds did not have to test
for decreases in short-term interest rates. We received no comments on
this aspect of the proposal, and we are adopting the modifications as
proposed.\1797\
---------------------------------------------------------------------------

    \1797\ See rule 2a-7(g)(8)(i)(A).
---------------------------------------------------------------------------

    Second, we proposed to add a hypothetical event for funds to test,
namely ``[o]ther movements in interest rates that may affect fund
portfolio securities, such as parallel and non-parallel shifts in the
yield curve.'' Commenters expressed concerns with this requirement.
First, commenters noted that testing for non-parallel shifts in the
yield curve would be unlikely to yield results that are any more
informative than carefully chosen parallel shifts in the yield curve,
yet incorporating this factor into stress testing would require
significantly more effort. \1798\ Another commenter noted that this
requirement was vague and open-ended, as there are an infinite number
of non-parallel interest rate movements.\1799\
---------------------------------------------------------------------------

    \1798\ See ICI Comment Letter; Fidelity Comment Letter.
    \1799\ See ICI Comment Letter.
---------------------------------------------------------------------------

    We are not adopting the proposed requirement to test for ``[o]ther
movements in interest rates that may affect fund portfolio securities,
such as parallel and non-parallel shifts in the yield curve.'' We are
persuaded by commenters' concerns that incorporating non-parallel
shifts in the yield curve will require funds to expend effort
determining the types of shifts to test for, with little more benefit
than testing for parallel shifts in the yield curve, and that testing
for parallel shifts in the yield curve is encompassed by the
requirement to test for general increases in the level of short-term
interest rates.\1800\
---------------------------------------------------------------------------

    \1800\ See ICI Comment Letter (noting that a test for a parallel
increase in the Treasury yield curve corresponds to test for general
increases in short-term interest rates).
---------------------------------------------------------------------------

b. Credit Events
    Funds currently are required to test for a downgrade of or default
on portfolio securities.\1801\ We proposed to enhance this requirement
by requiring that funds test for a ``downgrade or default of portfolio
securities and the effects these events could have on other securities
held by the fund.'' As discussed in the Proposing Release, we had
proposed this requirement to ensure that funds consider portfolio
correlations when stress testing. Commenters expressed concerns about
the proposed enhancement, arguing that the requirement was vague and
qualitative in nature because the fund would have to make assumptions
about the event that led to the downgrade or default, resulting in
stress testing results that might not be meaningful to its board.\1802\
We were persuaded by commenters of the potentially

speculative nature of the proposed requirement and that, as a result,
the proposed requirement might not provide meaningful information to
boards about the correlation of portfolio securities, which was the
intent of the proposed requirement. We have therefore determined not to
require funds to incorporate in their testing the effect of a downgrade
or default of one security on the price of other securities in the
portfolio. We also believe that eliminating this proposed requirement
will reduce the burden of the stress testing requirements relative to
the proposed requirements.\1803\
---------------------------------------------------------------------------

    \1801\ See current rule 2a-7(c)(10)(v).
    \1802\ See, e.g., Dreyfus Comment Letter; see also ICI Comment
Letter (noting that a stress test can assume a downgrade or default
without making any assumptions about what caused it, but cannot
assess what other portfolio securities might be correlated to the
downgrade or default without some basis for assuming the adverse
event that led to the downgrade or default).
    \1803\ See ICI Comment Letter (noting the time and cost that
would need to be incurred in developing highly sophisticated stress
tests that the commenter believed would be required to incorporate
this requirement).
---------------------------------------------------------------------------

    After reviewing the comments, we have modified the requirement from
what was proposed. Specifically, we are requiring that funds test for
``a downgrade or default of particular portfolio security positions,
each representing various portions of the fund's portfolio (with
varying assumptions about the resulting loss in the value of the
security). . . .'' The current rule requires, and the proposed rule
would have continued to require, that funds stress test for the
downgrade or default on more than one portfolio security (i.e., they
are required to test for a downgrade or default of portfolio
securities). Commenters suggested that the rule could require funds to
stress test a particular portfolio security, such as the most
significant individual credit risk to the fund, measured by the size of
the holding, the likelihood of default or both,\1804\ or the ``median''
portfolio security.\1805\
---------------------------------------------------------------------------

    \1804\ Id.
    \1805\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Rather than have the rule define which securities in the portfolio
to test, we believe that it is appropriate for the adviser to make a
determination of which security positions, representing different
portions of the portfolio, would be most informative to the board to
test for a downgrade or default of an issuer. We believe the most
appropriate security to test for a hypothetical default will vary among
funds depending on several factors, including the composition of the
fund's portfolio and contemporaneous market events. The fund could
determine that it should test a security that represents the single
biggest credit risk in the portfolio and a security that represents a
``median'' exposure, like commenters suggested, or it could include
securities representing different levels of exposure.
    Although the rule we are adopting gives funds general discretion
when making the determination of which securities to test, we do
believe it is appropriate to require funds to select particular
security positions representing varying, i.e., different, portions of
the portfolio when making such determinations, so that the fund's
adviser and its board can better compare the differing results to the
fund depending on the security that is tested. Tests of the
hypothetical downgrade or default of a portfolio security representing
the largest credit risk to the fund and of a portfolio security
representing a median exposure, for example, allows a board to see how
the results from these stress tests differ, and therefore better
understand that a downgrade or default of different securities will
have different impacts on the fund.
    Finally, although we are not requiring funds to assume that any
particular event is causing the hypothetical downgrade or default,
funds may want to consider incorporating in this stress test, as
appropriate, a deterioration in the credit quality of a guarantor (or
provider of demand features) of portfolio securities, as suggested by
one commenter.\1806\ This type of scenario might be particularly
relevant for funds in which a single entity is a guarantor or provider
of a demand feature for a high concentration of portfolio securities.
---------------------------------------------------------------------------

    \1806\ See ICI Comment Letter (arguing that funds should be
required to stress test a ``downgrade or default of a significant
issuer and/or provider of demand feature and guarantees).
---------------------------------------------------------------------------

    After reviewing the comments, the Commission is also modifying the
rule to require that funds make varying assumptions about the resulting
loss in the value of the security when testing for a downgrade or
default of a portfolio security. The Commission notes that a downgrade
or default of a portfolio security does not always have a uniform
effect on the price of a security. In some cases, the downgrade or
default could cause almost a complete loss on that portfolio
security.\1807\ In other cases, the loss on the security might be less,
potentially even substantially less.\1808\
---------------------------------------------------------------------------

    \1807\ For example, according to filings submitted to us
pursuant to temporary rule 30b1-6T, money market funds' holdings of
securities issued by Lehman Brothers Holdings Inc. or its affiliates
were typically valued at approximately 17% of their amortized cost
value in 2009.
    \1808\ For example, according to filings submitted to us
pursuant to temporary rule 30b1-6T, money market funds' holdings of
securities issued by structured investment vehicle were typically
valued at approximately 50% of their amortized cost value in 2009.
---------------------------------------------------------------------------

    As with the size of the portfolio position of an issuer that has a
downgrade or default, the impact on a fund of a downgrade or default of
a portfolio security may vary substantially depending on the size of
the loss that the downgrade or default causes.\1809\ Accordingly, we
believe that it is appropriate to require stress testing to include
varying assumptions on the amount of loss on a security as a result of
a downgrade or default so that boards better understand how the amount
of loss of a portfolio security will affect the fund overall.\1810\ It
can also help boards understand when pricing pressures on certain
securities are unlikely to have a significant impact on the fund. For
example, during the debt ceiling impasse of 2013, staff observed
through discussions with fund advisers that although yields on certain
Treasury bills increased and some funds holding these Treasury bills
experienced some increase in redemptions, there was very little effect
on the shadow price of Treasury or government money market funds.
Stress testing can illustrate these effects.
---------------------------------------------------------------------------

    \1809\ A comparison of commenters' discussion of stress testing
a downgrade or default of a portfolio security illustrates that the
effect of a downgrade or default can differ substantially, and
thereby have substantially different effects on the fund. Compare
Dreyfus Comment Letter (``We also know that a single default of a 1%
position . . . in a MMF can break the buck.'') with Fidelity Comment
Letter (showing the results of stress testing the effect on a
hypothetical fund of a credit event resulting in a 10% loss on the
portfolio security, which does not cause the hypothetical fund's NAV
per share to drop below $0.9950).
    \1810\ As with the requirement that funds test for a downgrade
or default of particular portfolio security positions representing
various portions of the fund's portfolio, we believe it is efficient
for funds to make the determination of the appropriate magnitudes of
loss to incorporate in stress testing, as that decision will vary
depending on several factors, including, for example, historical
information on losses on similar securities following a downgrade or
default.
---------------------------------------------------------------------------

c. Credit Spread Increase in Portfolio Sectors
    We proposed requiring that funds test for the ``widening or
narrowing of spreads among the indexes to which interest rates of
portfolio securities are tied'' in order to require funds to test for
changes in spreads that may affect specific asset classes. One
commenter supported the proposed requirement, noting that testing for
asset class spreads can provide information about a fund's exposure to
investor flights that have occurred in the past, such as in asset-
backed commercial paper and European financials.\1811\ One commenter
suggested that funds be required to test for a change in spreads by
testing for a parallel increase in the spread of non-Treasury
securities over the Treasury

yield curve, assuming a perfect correlation in the price movement,
regardless of issuer or maturity, which would show the board the
``worst case scenario'' for yield spread changes.\1812\ Another
commenter suggested that a test for changes in yield spreads that would
require the fund to test for a yield spread shift in a ``typical
portfolio sector,'' which it described as a sector (i.e., a logically
related subset of holdings) representing the median exposure in the
portfolio among all defined sectors.\1813\ This commenter also noted
that its suggested approach would incorporate into stress testing a
test for correlated price movements among portfolio securities.
---------------------------------------------------------------------------

    \1811\ See MSCI Comment Letter.
    \1812\ See ICI Comment Letter.
    \1813\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    In response to these comments, we are modifying the proposed
requirement to require funds to test for ``a widening of spreads
compared to the indexes to which portfolio securities are tied in
various sectors of a fund portfolio (in which a `sector' is a logically
related subset of portfolio securities, such as securities of issuers
in similar or related industries or geographic region, or securities of
a similar security type).'' \1814\ As discussed above and in the
Proposing Release, the Commission believes that it is important for
funds to stress test for potential correlations in the price movements
of related securities. That is because an event that affects the price
of one security may also affect the prices of securities of similarly
situated issuers or asset classes. We believe, as one commenter
suggested, that testing for a correlated shift in the yield spread
among logically related securities (i.e., sectors) will illustrate the
impact on funds of a concurrent price shift among portfolio securities
representing, for example, a similar industry, similar geographic
region, or security type.\1815\ We understand that some money market
funds today use such assumed sectors in their stress testing.
---------------------------------------------------------------------------

    \1814\ See rule 2a-7(g)(8)(i)(C).
    \1815\ See Fidelity Comment Letter (suggesting that the stress
testing requirements include standardized yield shift spreads of a
logically related subset of holdings); MSCI Comment Letter
(supporting stress testing requirements that focus on, among other
things, stresses on spreads in asset classes, such as asset-backed
commercial paper or European financials).
---------------------------------------------------------------------------

    To implement this requirement, funds should generally group
securities into logically related categories, or sectors, such as
securities of a similar industry, similar geographic region or security
type (such as asset-backed commercial paper or variable rate demand
notes), and then test for the impact of yield spread changes on various
sectors. For example, a fund with concentrations of securities in a
particular geographic region, such as Europe, could test a correlated
spread shift among those securities, and perhaps even test a correlated
shift of securities from a single country or group of countries that
are experiencing or have experienced stress, such as during the 2011
Eurozone debt crisis. We also believe that it could be helpful to
boards to include in the required report, discussed below, a summary of
the sector composition and the concentration of that sector within the
portfolio as part of the assessment of stress testing.
    We are not further specifying how funds should define sectors or
which sectors funds should test for a yield spread change, such as
requiring funds to test a ``typical'' or ``median'' sector, as
suggested by one commenter.\1816\ We believe that such determinations
are appropriate to leave to the fund's discretion because such
determinations will vary among funds depending on several factors,
including the composition of the fund's portfolio and contemporaneous
market events. We are not adopting the suggestion of one commenter that
funds test for a perfect correlation of spreads in all non-Treasury
securities to show funds the ``worst case scenario'' of a spread
shift.\1817\ This suggested test would not provide information about
potential correlations among similarly situated securities. For
example, the suggested test would not provide any information about how
an adverse event in a particular industry in which the fund held
portfolio securities might affect the fund. We believe that testing a
spread of different sectors of a portfolio, will help the board better
understand the composition of the fund portfolio and potential
correlations among portfolio securities.
---------------------------------------------------------------------------

    \1816\ See Fidelity Comment Letter.
    \1817\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Additionally, in the Proposing Release, we proposed to require
funds to test for combinations of events that the adviser deemed
relevant, ``assuming a positive correlation of risk factors . . . and
taking into consideration the extent to which portfolio securities are
correlated such that adverse events affecting a given security are
likely to also affect one or more other securities (e.g., a
consideration of whether issuers in the same or related industries or
geographic regions would be affected by adverse events affecting
issuers in the same industry or geographic region).'' This proposed
requirement was intended to have stress testing include an evaluation
of the effect that hypothetical events on issuers that operate in a
similar industry, are based in a similar geographic region, or have
other related attributes. Commenters expressed concerns about this
proposed requirement, arguing that it would be difficult to implement
because it required complex or speculative assumptions about the
effects of adverse events.\1818\
---------------------------------------------------------------------------

    \1818\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

    We believe that the requirement that we are adopting of an assumed
correlated yield shift in specific sectors of portfolio securities
provides funds and boards information about the effect of correlated
price movements among similar securities in a simpler and less
burdensome way than the proposed requirement of taking into
consideration correlations among securities. Because the requirement
allows funds to assume a perfectly correlated change in spreads among
similarly situated securities, funds will not be required to make
assumptions about how adverse events affect prices of these securities.
Accordingly, although we are requiring some combinations of events, as
discussed below, we are not adopting the requirement that fund advisers
``assum[e] a positive correlation of risk factors . . . and ``tak[e]
into consideration the extent to which the fund's portfolio securities
are correlated. . . . '' when considering whether to test for
additional events.
d. Shareholder Redemptions
    The fourth hypothetical event identified by the Commission and
commenters that is important to include in stress testing is
shareholder redemption levels. As noted above, however, rather than
requiring funds to consider shareholder redemptions in isolation, as is
currently required and would have been required under the proposed
rule, we are requiring that funds test for various levels of
shareholder redemptions in combination with each of the three other
required hypothetical events, i.e., an increase in interest rates, a
downgrade or default of various portfolio securities, and a yield
spread change in various sectors of portfolio securities.
    As discussed in the Proposing Release, the Commission believes that
testing for combinations of events can help funds better understand
risks to the fund, and therefore included in the proposed rule a
requirement that the fund test for combinations of events that the
adviser deems relevant. Although

the Commission did not include in the proposed rule any specific
combinations of events, the Commission requested comment on whether
specific combinations of events should be required in the rule, noting
in particular the possibility of combining an increase in shareholder
redemptions with an increase in interest rates or a downgrade of a
portfolio security.\1819\
---------------------------------------------------------------------------

    \1819\ See Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

    Generally, redemptions, by themselves, are unlikely to create
stress on a fund as long as the market for the fund's portfolio
securities is liquid and interest rates remain unchanged.\1820\
Similarly, an increase in interest rates, if no shareholders redeem
from the fund until the securities affected by the interest rate shift
mature, should have no price impact on the fund.\1821\ It is the
combination of events--and particularly an interest rate or credit
event combined with redemptions--that most typically can create fund
stress.\1822\ We also believe combinations of events are more likely to
be realistic scenarios than market events or increases in redemptions
in isolation (e.g., it is reasonable to expect that a money market fund
that experiences a significant credit event may also experience a
subsequent increase in redemptions).\1823\ We are not including in the
rule the redemption levels that funds must include in stress
testing.\1824\ We believe that the appropriate level of redemptions to
test will vary among funds, and will depend, for example, on the
composition of funds' investor bases and shareholder redemption
preferences, as well as historical redemption activity in the fund.
---------------------------------------------------------------------------

    \1820\ Prices of fixed income securities typically remain stable
if interest rates do not change. Thus, shareholder redemptions that
require funds to sell securities should have no effect on funds'
NAVs as long as interest rates have not changed. We note that
redemptions from a stable value money market fund have no impact on
the fund's market-based NAV per share as long as the NAV per share
is $1.00.
    \1821\ Prices of fixed income securities typically fall when
interest rates rise. Thus funds that must sell fixed income
securities before maturity are likely to realize capital losses if
interest rates have risen. If instead funds hold securities to
maturity, they receive securities' par value and should realize no
losses. Thus, interest rates increases that are not accompanied by
securities sales to meet redemption requests should not cause funds
to incur capital losses.
    \1822\ See Fidelity Comment Letter (illustrating the effect on
liquidity and NAV on increasing shareholder redemptions in
combination with each of an (i) interest rate increase, (ii) a
credit event, and (iii) a spread shift).
    \1823\ See State Street Comment Letter (noting that stress
testing combinations of events is important because stress events do
not typically happen in isolation, and suggesting the Commission
consider the combination of shareholder redemptions in combination
with increases in interest rates, a downgrade or default, and credit
spreads).
    \1824\ See Fidelity Comment Letter (suggesting standard
scenarios including redemption levels of 0%, 25%, and 50%).
---------------------------------------------------------------------------

    We also proposed to require that funds incorporate in stress
testing an assessment of how a fund would meet redemptions, taking into
consideration factors such as the liquidity and pricing of the fund's
portfolio securities. One commenter supported this proposed
requirement, but noted that liquidity data regarding fund portfolio
securities transactions was scarce.\1825\ Other commenters expressed
concerns that this requirement was vague and qualitative, and would
require detailed and sophisticated assumptions.\1826\ We were persuaded
by commenters' concerns that the proposed requirement could require
complex assumptions to implement for which data might not be readily
available, particularly the requirement that the fund take into account
the liquidity and pricing of the fund's portfolio securities. We have
therefore not adopted this requirement to simplify, and thereby reduce
the potential burden of, the stress testing requirements relative to
the proposal.
---------------------------------------------------------------------------

    \1825\ See MSCI Comment Letter.
    \1826\ See, e.g., ICI Comment Letter (expressing concerns about
how to fulfill this requirement); Dreyfus Comment Letter (same).
---------------------------------------------------------------------------

    We note, however, that funds need to make some basic assumptions
about how a fund obtains cash for redemptions to satisfy the new stress
testing requirements relating to the fund's level of weekly liquid
assets. In doing so, a fund could use a variety of assumptions. For
example, some commenters suggested that funds assume that all
redemptions are satisfied first using weekly liquid assets.\1827\ This
assumption would provide conservative stress test results given that it
would have the most dramatic effect on a fund's level of weekly liquid
assets. On the other hand, some funds may prefer to assume in their
stress tests other methods of meeting shareholder redemptions (or may
prefer to show how the stress tests results would differ if this
assumption were varied). For example, a fund might assume that
redemptions are met with a combination of weekly liquid assets and
sales of portfolio securities.\1828\ The rule does not specify what
assumptions the fund must make, leaving that to the discretion of fund
advisers because we believe the determination of which assumptions are
most appropriate will vary among funds, depending on, for example, how
funds have satisfied redemptions historically, and the composition of
the fund's portfolio. The rule requires, however, that the fund's
adviser include a summary of the significant assumptions made when
performing the stress test. For example, such assumptions may include
how redemptions are satisfied and the size of any ``haircut'' that the
fund assumed in the sale of portfolio securities in order to meet
redemptions.
---------------------------------------------------------------------------

    \1827\ See ICI Comment Letter; Federated VIII Comment Letter.
    \1828\ See Fidelity Letter (illustrating a stress test that
includes the assumption that sales of non-liquid assets to meet
redemptions incur a cost); MSCI Comment Letter (noting that to the
extent that a redemption scenario would require the fund to sell
securities, then the fund should make some assumption regarding a
liquidity haircut, but that only simple assumptions can be
reasonably expected).
---------------------------------------------------------------------------

e. Other Combinations of Events
    The proposed rule would have required funds to test for
``combinations of these and any other events that the adviser deems
relevant . . .'' \1829\ We have made clarifying edits to the rule we
are adopting today in response to some commenters who expressed
concerns that the proposed rule was open-ended and could be read to
require that funds test for combinations of every event listed in the
rule.\1830\ Specifically, we are requiring funds to test for ``[a]ny
additional combinations of events that the adviser deems relevant.'' We
believe that the modified language clarifies that the fund is only
required to test for additional combinations as the fund adviser deems
relevant, not for combinations of every permutation of the events
listed in the rule.
---------------------------------------------------------------------------

    \1829\ See proposed rule 2a-7(g)(7)(i)(F) (Floating NAV
Alternative or Fees and Gates Alternative). The full proposed
requirement was ``Combinations of these and any other events the
adviser deems relevant, assuming a positive correlation of risk
factors (e.g., assuming that a security default likely will be
followed by increased redemptions) and taking into consideration the
extent to which the fund's portfolio securities are correlated such
that adverse events affecting a given security are likely to also
affect one or more other securities (e.g., a consideration of
whether issuers in the same or related industries or geographic
regions would be affected by adverse events affecting issuers in the
same industry or geographic region).'' We discuss above why we are
not adopting the proposed requirement that follows the clause
``Combinations of these any other events the adviser deems
relevant.''
    \1830\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

    The rule requires that fund advisers test for combinations of
events that they deem relevant. Although a fund adviser might determine
that the three combinations of events included in the rule are
sufficient, there might be circumstances when a fund adviser believes
it is necessary to incorporate additional scenarios. For example, a
fund adviser might believe that it would be relevant for the board to
understand

the effect of a yield spread increase in a sector, in combination with
a downgrade of a portfolio security in that sector, particularly if
that sector, or an issuer within that sector, has historically
experienced stress.
    One commenter also argued that the requirement could be interpreted
to mean that all special risk assessments take the form of stress
tests.\1831\ This is not a requirement of the rule. We agree with the
commenters that stress tests are not the only method to communicate
fund risks to the board and that not every risk can be incorporated
into a stress test.\1832\ The rule does not require the adviser to
develop a stress test for every risk the fund faces, but requires the
adviser to consider whether stress testing for combinations of events
not explicitly listed in the rule might be relevant to the fund's
board. We believe stress testing should be used to help the board
understand the principal risks of the particular fund and the risks
that reasonably foreseeable stress events may place on the fund.
---------------------------------------------------------------------------

    \1831\ See Federated VIII Comment Letter.
    \1832\ See ICI Comment Letter; Federated VIII Comment Letter.
---------------------------------------------------------------------------

4. Board Reporting Requirements
    Funds are currently required to provide the board with a report of
the results of stress testing, which must include the dates of testing,
the magnitude of each hypothetical event that would cause a fund to
``break the buck,'' and an assessment of the fund's ability to
withstand events that are reasonably likely to occur within the
following year. We proposed modifications to these reporting
requirements. First, we proposed adding a requirement that the fund
report to the board the magnitude of each hypothetical event that would
cause the fund to have invested less than 15% of its total assets in
weekly liquid assets. Second, we proposed requiring funds to include in
their assessment ``such information as may reasonably be necessary for
the board of directors to evaluate the stress testing . . . and the
results of the testing.''
    We are adopting modifications to the proposed reporting
requirements to boards regarding stress testing in response to comments
we received on the proposal. Specifically, we are adopting a
requirement that the board of directors be provided at its next annual
meeting, or sooner if appropriate, a report that includes the dates on
which the testing was performed and an assessment of the fund's ability
to maintain at least 10% in weekly liquid assets and to limit principal
volatility.\1833\ As discussed above, some commenters had concerns that
the proposed requirement that funds report to the board the magnitude
of each hypothetical event that would cause the fund to have invested
less than 15% in weekly liquid assets was not feasible.\1834\ We
believe that requiring funds to provide an assessment of the fund's
ability to maintain liquidity, rather than requiring the funds report a
specific value for each hypothetical event, addresses such concerns. We
have also added the requirement for an assessment of the fund's ability
to minimize principal volatility because, as discussed above, we have
added this metric to the stress testing requirements in response to
comments. We believe that requiring funds to provide an assessment of
their ability to maintain liquidity and minimize principal volatility
(and in the case of stable NAV funds, to maintain a stable share
price), rather than the more prescriptive requirements proposed and
that are in the rule currently, is also appropriate because we have
modified the rule so that each ``hypothetical event'' is a combination
of two events. We want to clarify that funds are not required to
separately test for interest rate increases, a downgrade or default, a
spread shift, or shareholder redemptions in isolation.\1835\
---------------------------------------------------------------------------

    \1833\ See rule 2a-7(g)(8)(ii).
    \1834\ See, e.g., ICI Comment Letter; Federated II Comment
Letter; Federated VIII Comment Letter.
    \1835\ See ICI Comment Letter (noting that the stress testing
requirements adopted in 2010, by requiring funds to report the
``magnitude of each hypothetical event'' that would cause a fund to
``break the buck,'' required funds to perform and report stress
tests of each event in isolation, and noting that changing this
requirement would make it easier for boards to include combinations
tests in the fund's procedures).
---------------------------------------------------------------------------

    We understand that under the current requirements, many funds, in
addition to reporting the magnitude of each event that would cause the
fund to ``break the buck,'' provide a table showing how the fund's
shadow NAV is affected by different combinations of events and
different values. Some funds include information regarding, for
example, the concentrations of several of the funds' largest portfolio
holdings, both by individual issuer and by sector, and of historical
redemptions rates, as points of reference. Several funds also include
narratives to help explain the results. In some instances, for example,
fund advisers used the narrative to compare results among funds or to
explain results that they considered to be unusual. Some narratives
also assessed the likelihood of the hypothetical events. We are not
including requirements for any of these specific items in the rule
because we recognize that there is no one set of factors that will be
relevant for all funds, but we believe these are examples of items that
we encourage fund advisers to consider when developing the required
report assessing stress test results.
    We are adopting as proposed the requirement that a fund's adviser
provide ``such information as may reasonably be necessary for the board
of directors to evaluate the stress testing conducted by the adviser
and the results of the testing.'' One commenter supported this
requirement, noting that it is a common practice to provide directors
with information that helps to place stress-testing results in
context.\1836\ Some commenters opposed this requirement, arguing that
the provision of additional information could be burdensome for boards
and would not provide useful information to fund boards.\1837\ We
disagree. As we noted in the Proposing Release, the staff's examination
of stress testing reports revealed disparities in the quality of
information regarding stress testing provided to fund boards. We
believe that this requirement will allow boards of directors to receive
information that is useful for understanding and interpreting stress
testing results. We note that this requirement does not require a fund
adviser to provide the details and supporting information for every
stress test that the fund administered. To the contrary, a thoughtful
summary of stress testing results with sufficient context for
understanding the results may be preferable to providing details of
every test. For example, information about historical redemption
activities, as mentioned above, and the fund's investor base could help
boards evaluate the potential for shareholder redemptions at the levels
that are being tested. Additionally, information regarding any
contemporaneous market stresses to particular portfolio sectors could
be helpful to a board's consideration of stress testing results.
---------------------------------------------------------------------------

    \1836\ See ICI Comment Letter.
    \1837\ See Dreyfus Comment Letter; SIFMA Comment Letter.
---------------------------------------------------------------------------

    Finally, after considering comments regarding the assumptions that
funds will need to make in administering stress tests,\1838\ the
Commission has

added a requirement that the adviser include in the report a summary of
the significant assumptions made when performing the stress tests. As
discussed above, we have, in response to comments, modified the
required hypothetical events from the proposal to reduce the number and
complexity of the assumptions funds are required to make. We recognize,
however, that funds will need to make some basic assumptions when
conducting the stress tests. These assumptions would include, for
example, how the fund would satisfy shareholder redemptions (e.g.,
through weekly liquid assets or by selling certain portfolio
securities, including any assumption of haircuts such securities can be
sold at) and the amount of loss in value of a downgraded or defaulted
portfolio security. We believe that having a summary of such
assumptions will help the board better understand the stress testing
results, and particularly the sensitivity of those results to given
assumptions. We believe this information will allow the board to better
understand money market fund risk exposures, and thus allow it to
provide more effective oversight of the fund and its adviser.
---------------------------------------------------------------------------

    \1838\ See, e.g., Fidelity Comment Letter (including in its
suggested stress testing an assumption regarding the size of the
loss on the sales of securities to meet redemption and the size of
the loss on a portfolio security when testing a hypothetical credit
event); ICI Comment Letter (suggesting funds use an assumption that
redemptions are satisfied using weekly liquid assets).
---------------------------------------------------------------------------

5. Dodd-Frank Mandated Stress Testing
    In the Proposing Release, we requested comment on certain aspects
of money market fund stress testing as it relates to our obligation
under section 165(i)(2) of the Dodd-Frank Act to specify certain stress
testing requirements for nonbank financial companies that have total
consolidated assets of more than $10 billion and are regulated by a
primary federal financial regulatory agency.\1839\ Under this section
of the Dodd-Frank Act, among other matters, we must establish
methodologies for the conduct of stress tests that shall provide for at
least three different sets of conditions, including baseline, adverse,
and severely adverse.\1840\ Two commenters responded, noting that they
did not believe that the scenarios currently published by the Federal
Reserve Board for stress testing under Dodd-Frank Act Section 165(i)
would be an effective means of stress testing for money market funds,
because the Federal Reserve's scenarios are focused on long-term
horizons, which do not have a direct causal link to foreseeable changes
in money market funds.\1841\ Another commenter, however, expressed some
support for incorporating macroeconomic factors in money market fund
stress tests.\1842\ One commenter made recommendations regarding the
stress testing scenarios required under section 165(i), including
scenarios involving the four hypothetical events in the stress testing
rule amendments we are adopting today, and stated that its
recommendations would be an effective means to evaluate risk in a money
market fund portfolio.\1843\
---------------------------------------------------------------------------

    \1839\ For a definition of ``nonbank financial companies'' for
these purposes, see Definition of ``Predominantly Engaged in
Financial Activities'' and ``Significant'' Nonbank Financial Company
and Bank Holding Company, Board of Governors of the Federal Reserve
System, [78 FR 20756 (April 5, 2013)].
    \1840\ Under this section of the Dodd-Frank Act, we also must
define the term ``stress test'' for purposes of that section,
establish the form and content of the report to the Federal Reserve
Board and the Commission regarding such stress testing, and require
companies subject to this requirement to publish a summary of the
results of the required stress tests. We note that under this
section of the Dodd-Frank Act, we must design stress testing not
just for certain money market funds, but also other types of funds
and investment advisers that we regulate and that meet the $10
billion total consolidated assets test.
    \1841\ See Fidelity Comment Letter (noting that the Federal
Reserve scenarios have at best an indirect causal link to changes in
a money market fund); MSCI Comment Letter (noting that the horizon
for the Federal Reserve's stress scenarios is between one and two
years, while the scenarios that are of concern to money market funds
are short-term, such as valuation shocks and rapid shareholder
redemptions).
    \1842\ See Santoro Comment Letter (noting that stress testing
should align with existing stress testing methodologies, and
specifically macro market stress scenarios).
    \1843\ Fidelity Comment Letter (noting that the standardized
scenario that it proposed could serve as the ``severely adverse''
conditions required by Section 165(i)(2)(C)(2) of the Dodd-Frank
Act).
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we intend to engage in a
separate rulemaking to implement the requirements of Section 165(i) of
the Dodd-Frank Act, including determining appropriate baseline,
adverse, and severely adverse scenarios for money market funds and
other funds and advisers with more than $10 billion in consolidated
assets.\1844\ In proposing such stress testing for money market funds
subject to these requirements, we expect to consider the efficiencies
that funds subject to these additional requirements will achieve if the
scenarios broadly are built off of the parameters set forth today.
---------------------------------------------------------------------------

    \1844\ Proposing Release, supra note 25, at section III.L.
---------------------------------------------------------------------------

6. Economic Analysis
    Our baseline for the economic analysis we discuss below is the
current stress testing requirements for money market funds. The costs
and benefits, and effects on competition, efficiency, and capital
formation are measured in increments over the current stress testing
requirement baseline. The benefits, as well as the costs, of the stress
test requirements will depend in part on the extent to which funds
already engage in stress tests that are similar to the requirements.
For example, although we are now requiring funds to test for increases
in the general level of short-term interest rates in combination with
various levels of an increase in shareholder redemptions, we understand
that many funds already tested for increases in interest rates in
combination with shareholder redemptions.
    The additional information generated from the amendments to the
stress testing requirements should provide several qualitative benefits
to funds. Specifically, they should help fund managers, advisers, and
boards monitor, evaluate, and manage fund risk, and thus better protect
the fund and its investors from the adverse consequences that may
result from falling below the 10% weekly liquid assets threshold or
failing to minimize principal volatility (or, in the case of stable NAV
funds, a stable share price). The magnitude of these qualitative
benefits are not easily quantified and will vary from fund to fund
based on the extent to which funds are already voluntarily conducting
stress testing that meet the new requirements, as well as the investor
base and portfolios of each fund. We received no comments regarding how
to quantify such benefits.
    In the Proposing Release, we stated that because funds are
currently required to meet a stress testing requirement, we did not
anticipate significant additional costs to funds under the proposed
rule. Several commenters responded that they expected to incur
increased costs as a result of the changes.\1845\ One commenter noted
that it believed a majority of funds will need to change their stress
testing procedures to some degree, specifically with respect to stress
testing liquidity levels.\1846\ One commenter provided a quantitative
estimate for some of the proposed changes, estimating that required
software changes to implement two of the proposed requirements, not
including costs to load data, run the tests, and analyze the results,
would

range from $250,000 to $750,000.\1847\ We note, however, that the
estimate was based on an evaluation of two of the hypothetical stress
tests that we proposed, one of which the Commission has determined not
to adopt and the other which the Commission has modified and simplified
substantially.
---------------------------------------------------------------------------

    \1845\ See, e.g., SSGA Comment Letter (generally supporting
stress testing by funds, but asking the Commission to consider the
benefits of the enhancements against the ``substantial increase in
costs'' associated with the proposed changes); State Street Comment
Letter (noting that there will be both a development cost and on-
going operational costs); Schwab Comment Letter (noting that the
proposal is costly); TIAA-CREF Comment Letter (supporting the
proposed requirement and acknowledging that they would require
operational changes that would require time and resources to
implement).
    \1846\ See State Street Comment Letter.
    \1847\ Federated VIII Comment Letter (noting that it contacted a
third-party service provider regarding the costs of implementing
proposed rule 2a-7(g)(7)(i)(E), concerning testing for parallel and
non-parallel shifts in the yield curve, and rule 2a-7(g)(7)(i)(F),
concerning testing for ``combinations of these and any other events
that the adviser deems relevant, assuming a positive correlation of
risk factors . . . and taking into consideration the extent to which
the fund's portfolio securities are correlated . . .'').
---------------------------------------------------------------------------

    We stated in the Proposing Release that we expected funds would use
similar hypothetical events when testing their ability to avoid falling
below a liquidity threshold to those events they use when stress
testing their ability to maintain a stable price. We also understand
many funds already test for their ability to avoid falling below a 15%
weekly liquid asset threshold as part of their current stress tests.
One commenter noted that it already tests against the 15% liquidity
threshold and other liquidity thresholds, and one commenter stated
generally that it already tests for liquidity maintenance, and neither
commenter discussed the costs of including liquidity metric in stress
testing.\1848\ Two commenters indicated that requiring funds to add
this liquidity metric to the stress testing requirements would impose
new costs, but did not provide quantitative estimates of the costs of
adding a liquidity metric to the stress testing requirements.\1849\ One
commenter, which provides stress testing services to funds, noted that
it currently provides liquidity-related stress tests, but it did not
currently provide a stress test that tests a fund's ability to avoid
falling below a 15% liquidity asset threshold.\1850\
---------------------------------------------------------------------------

    \1848\ See BlackRock Comment Letter; Dreyfus Comment Letter.
    \1849\ See Federated VIII Comment Letter; State Street Comment
Letter (noting that the new requirement would imposed both a
development cost and on-going operational costs).
    \1850\ See State Street Comment Letter. See also Federated VIII
Comment Letter (noting that it contacted a service provider of a
risk management system, who indicated that the provider's system
could not test for an ability to maintain weekly liquid assets at or
above 15% of its total assets).
---------------------------------------------------------------------------

    After reviewing the comments, we believe that the amendments to the
stress testing requirements will impose some development and ongoing
costs to funds, particularly the requirement to test against a
liquidity threshold. We believe that the costs will be lower for funds
that already include liquidity and combinations of events as part of
their stress testing, as some funds do. We understand from commenters,
however, that even funds that currently incorporate liquidity metric in
their stress testing might need to modify their procedures to test
against the 10% threshold.\1851\ We also recognize that funds, which
currently are required to test their ability to maintain a stable share
price, will now be required to test the ability to minimize principal
volatility. We believe, based on our review of comments, that the costs
of modifying stress testing from the metric of maintaining a stable
share price to the metric of minimizing principal volatility will not
be substantial.\1852\ We recognize, however, that funds might incur
some costs in analyzing and determining the appropriate level of
volatility against which to test.
---------------------------------------------------------------------------

    \1851\ See State Street Comment Letter (noting that it currently
provides a range of liquidity related stress tests).
    \1852\ See State Street Comment Letter (noting that it currently
provides stress testing services to floating NAV liquidity funds
that include testing a fund's ability to avoid losses of greater
than 25 or 50 basis points, and that this would entail ``relatively
simple modifications,'' with no associated development costs).
---------------------------------------------------------------------------

    Additionally, we believe there will be costs associated with stress
testing the effect of the hypothetical events that we are adopting. The
extent of those costs will depend upon the extent to which a fund
currently tests for the requirements or would need to modify their
stress testing procedures and systems to add such tests. We understand
that many funds already test for events such as interest rate increases
and credit events in combination with hypothetical increases in
shareholder redemptions. We also note that we have determined not to
adopt several of the hypothetical events that commenters indicated
would require the most estimation or modeling.\1853\ Finally, as the
rule requires that a fund test for ``any additional combinations of
events that the adviser deems relevant,'' a fund might incur periodic
costs for making such an assessment and, if necessary, incorporating
such additional tests in its stress testing.
---------------------------------------------------------------------------

    \1853\ See, e.g., Fidelity Comment Letter (noting that the
proposed requirement to test for non-parallel shifts in the yield
curve would require significantly more effort and analysis than
testing for non-parallel shifts with little benefit); ICI Comment
Letter (noting that the proposed requirement to include assumptions
as to how the fund would sell portfolio securities to meet
redemptions were sophisticated and complex assumptions).
---------------------------------------------------------------------------

    In the Paperwork Reduction Act analysis in section IV.A.5 below, we
identified certain initial and ongoing hour burdens and associated time
costs related to the collection of information requirements for our
stress testing amendments. As we discuss there in more detail, our
staff estimates that the amendments to stress testing associated with
the requirement that money market funds maintain a written copy of
their stress testing procedures, and any modifications thereto, and
preserve for a period of not less than six years following the
replacement of such procedures with new procedures, the first two years
in an easily accessible place, would involve 51,428 burden hours, at an
average one-time cost of $24.52 million for all money market funds. In
addition, our staff estimates that the amendments to stress testing
associated with the requirement that money market funds have written
procedures that provide for a report of the stress testing results to
be presented to the board of directors at its next regularly scheduled
meeting (or sooner, if appropriate in light of the results) would
create a total annual burden for all money market funds of an
additional 25,155 burden hours at a total time cost of approximately
$7.28 million.
    We believe the new costs for stress testing will be so small as
compared to the fund's overall operating expenses that any effect on
competition would be insignificant. Although some commenters believed
the proposed requirements would impose new costs, commenters did not
indicate that such costs would have competitive effects. The new stress
testing requirements may increase allocative efficiency if the
information it provides to the fund adviser, and board of directors
improves the fund adviser's ability to manage the fund's risk and the
board's oversight of fund risk management. Some money market fund
investors also may view the enhanced stress testing requirements
positively, which could marginally increase those investors' demand for
money market funds and correspondingly the level of the funds'
investment in the short-term financing markets. This in turn positively
affects capital formation. We do not have the information necessary to
provide a reasonable estimate of the effects the amendments might have
on capital formation, because we do not know to what extent these
changes would result in increases or decreases in investments in money
market funds or in money market funds' allocation of investments among
different types of short-term debt securities. No commenters provided
such information or discussed the potential effects of the proposed
stress testing rule on efficiency or capital formation.

K. Certain Macroeconomic Consequences of the New Amendments

    In this section, as well as in sections III.A and III.B above, we
analyze the macroeconomic consequences of the primary reform amendments
that require fees and gates for all non-government funds and an
additional floating NAV requirement for institutional prime funds. We
also examine, in conjunction with analyses in these preceding sections,
the effects that the amendments may have on efficiency, competition,
and capital formation and discuss the potential implications of the
changes for money market fund investors, funds, and the short-term
financing markets. We note that we presented extensive economic
analyses of the specific benefits and costs associated with the amended
rules in sections III.A.5 and III.B.8 above, as well as examined
commenters' specific evaluations of the proposed fees and gates and
floating NAV requirements. As such, we focus here on the specific
macroeconomic effects of the reforms on current money market funds and
the impact of the reforms on efficiency, competition, and capital
formation. It is important to note that although a large number of
commenters supported our proposed fees and gates requirement for non-
government funds,\1854\ and some commenters supported our floating NAV
requirement for institutional prime funds,\1855\ many commenters
opposed the combination of alternatives.\1856\ The baseline for these
analyses (and all of our economic analysis in this Release) is money
market fund investment and the short-term financing markets as they
exist today.
---------------------------------------------------------------------------

    \1854\ See, e.g., Form Letter Type A [1], Type C [2], and Type D
[2]; Page Comment Letter; Federated V Comment Letter; J.P. Morgan
Comment Letter; TIAA-CREF Comment Letter; ICI Comment Letter; Reich
& Tang Comment Letter; Northern Trust Comment Letter.
    \1855\ See, e.g., BlackRock II Comment Letter; Goldman Sachs
Comment Letter; Schwab Comment Letter; Vanguard Comment Letter; CFA
Institute Comment Letter; Comm. Cap. Mkt. Reg. Comment Letter.
    \1856\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; Federated X Comment Letter; Goldman Sachs Comment Letter;
Vanguard Comment Letter; American Benefits Council Comment Letter.
---------------------------------------------------------------------------

    In earlier sections we discussed the specific benefits and costs
associated with other reforms adopted today, including the amended
rules that increase portfolio and guarantor diversification, enhance
disclosure, and mandate stress testing. We discuss in these sections
the macroeconomic effects of the amendments, as well as their effects
on efficiency, competition, and capital formation. The specific
operational costs of implementing the reforms are discussed in each
respective section.
    We note that the reforms adopted today will affect the economy in a
number of ways, many of which are difficult, if not impossible to
quantify. The effect of the reforms will depend on investors' choices
among many investment alternatives, funds' and competitors' responses
to the reforms and to each other's strategies, and many other factors
in the larger economy. For these reasons, many of the macroeconomic
effects discussed here are unquantifiable. We provide, however, ranges
of possible outcomes where we can without being speculative and we
discuss effects qualitatively, as well. Much of the qualitative
analysis of the reforms remains similar to that presented in the
Proposing Release. We note, however, that the magnitude of the
macroeconomic effects, both positive and negative, may be greater for
funds that are subject to both a floating NAV and fees and gates than
the funds subject to just one type of reform. Many commenters noted
that the combination of reforms would have a greater impact than either
alternative alone.\1857\
---------------------------------------------------------------------------

    \1857\ See, e.g., Fidelity Comment Letter; Invesco Comment
Letter; Northern Trust Comment Letter; State Street Comment Letter;
SunGard Comment Letter; Wells Fargo Comment Letter; Government
Finance Officers Association, et al. (Sept. 17, 2013) (``GFOA II'').
---------------------------------------------------------------------------

    In the remaining portion of this section, we discuss in detail the
likely macroeconomic effects of our primary reforms and the effects
that these amendments may have on efficiency, competition, and capital
formation. We first examine the effect of our amendments on investors
in money market funds. We then analyze the effect on the money market
fund industry and the short-term financing markets.
1. Effect on Current Investors in Money Market Funds
    As of February 28, 2014, money market funds had approximately $3.0
trillion in assets under management. Of this $3.0 trillion, government
money market funds had approximately $959 billion in assets under
management.\1858\ Government money market funds will not be required to
comply with either fees and gates or floating NAV requirements. Because
the regulatory landscape for these funds will remain largely unchanged,
we anticipate current investors will likely remain invested in the
funds.
---------------------------------------------------------------------------

    \1858\ Based on Form N-MFP data as of February 28, 2014.
---------------------------------------------------------------------------

    Non-government funds, however, will be subject to fees and gates,
and some investors may shift their assets to government funds or other
investment alternatives. Non-government funds, which include prime and
tax-exempt funds, held approximately $2.1 trillion in assets as of
February 28, 2014. Of this approximately $2.1 trillion, we estimate
retail prime funds managed approximately 33% of prime fund assets (not
including tax-exempt funds) or $593 billion, whereas retail tax-exempt
funds managed 71% of tax-exempt fund assets or $197 billion of assets,
or $790 billion in total retail fund assets.\1859\ The remaining funds
are institutional prime funds, which will be subject to an additional
floating NAV requirement. We estimate that institutional prime funds,
other than tax-exempt funds, managed approximately 67% of prime fund
assets (not including tax-exempt fund assets) or $1.2 trillion in
assets and institutional tax-exempt funds managed 29% of tax-exempt
funds assets or $82 billion, for a total of $1.269 trillion.\1860\
Consistent with these estimates, commenters noted that approximately
30% of tax-exempt funds currently self-report as institutional
funds.\1861\
---------------------------------------------------------------------------

    \1859\ Based on data from Form N-MFP and iMoneyNet data as of
February 28, 2014. To estimate retail and institutional segments for
non-government funds, we used self-reported fund data from iMoneyNet
as of February 28, 2014 to estimate percentages for retail and
institutional segments for each fund type. We then multiplied the
percentages times the total market size segments, as provided by
Form N-MFP as of February 28, 2014. We note the retail designation
is self-reported and omnibus accounts in these funds may include
both individual and institutional beneficial owners. For these
reasons, our estimates may underestimate the number of funds with
retail investors.
    \1860\ Our staff's analysis, based on iMoneyNet data, shows that
the amount of municipal money market fund assets held by
institutional investors varied between 25% to 43% between 2001 to
2013.
    \1861\ See, e.g., BlackRock II Comment Letter; Federated VII
Comment Letter; J.P. Morgan Comment Letter; Dreyfus II Comment
Letter.
---------------------------------------------------------------------------

    As noted in the Proposing Release, the Commission recognizes that
imposing fees and gates on non-government money market funds and an
additional floating NAV requirement on institutional prime funds will
likely affect the willingness of investors to commit capital to certain
money market funds. On the one hand, the fees and gates requirements
will have little effect on funds and their investors except during
times of fund distress. During such exceptional times, investors,
especially investors who are unlikely to redeem shares, may view the
fees and gates requirements as protecting them from incurring costs
from heavy shareholder redemptions and improving their funds' ability
to manage and mitigate potential contagion from such

redemptions. Likewise, some, but not all, investors in institutional
prime funds may view the floating NAV requirement as reducing their
funds' susceptibility to heavy investor redemptions and minimizing
shareholder dilution. We believe the amendments more generally will
increase funds' resiliency and treat investors more equitably than the
rules do today. Further, one commenter pointed out that floating NAV
money market funds will likely offer higher returns than stable NAV
government money market funds, and thus will continue to attract
investment.\1862\ This commenter argued that institutional investors
are unlikely to reallocate assets from floating NAV institutional prime
funds because they will continue to be one of the most conservative and
flexible investment alternatives, even with a floating NAV.\1863\
Finally, this commenter contended that investor education may improve
investor confidence in floating NAV money market funds, which could
attract capital.\1864\
---------------------------------------------------------------------------

    \1862\ See Thrivent Comment Letter.
    \1863\ Id.
    \1864\ Id.
---------------------------------------------------------------------------

    On the other hand, we recognize many current investors in non-
government funds, especially institutions, may prefer products that
offer guaranteed liquidity and a stable NAV rather than non-government
funds that will be subject to fees and gates and a floating NAV
requirement after the reforms. As we noted in the Proposing Release and
in this Release, we anticipate these investors will consider the
tradeoffs involved with continuing to invest in the money market funds
that are subject to the new requirements. As discussed in section
III.A.1.c.iv above, several commenters noted and we concur that fees
and gates might force some investors to either abandon or severely
restrict investment in affected money market funds.\1865\ Likewise,
commenters expressed concern that investors would migrate away from
institutional prime funds because a floating NAV would eliminate the
stable value feature that currently makes money market funds attractive
to many shareholders.\1866\ As discussed in detail in section III.B.1
above, and noted by commenters,\1867\ unlike most investment products,
money market funds are generally used as cash management tools, and a
floating NAV may curtail the ability of some investors to use money
market funds for cash management purposes. Investors also may be
prohibited by board-approved guidelines, internal policies, or other
restrictions from investing in products that do not have a stable value
per share.\1868\ A floating NAV also could drive investors with a more
limited loss tolerance away from money market funds.\1869\
---------------------------------------------------------------------------

    \1865\ Ky. Inv. Comm'n Comment Letter; Boeing Comment Letter;
Schwab Comment Letter; American Bankers Ass'n Comment Letter; State
Street Comment Letter; GFOA II Comment Letter; 42 Members of U.S.
Congress Comment Letter.
    \1866\ Fidelity Comment Letter; Legg Mason & Western Asset
Comment Letter; SunGard Comment Letter; U.S. Bancorp Comment Letter;
Association for Financial Professionals, et al. (Sept. 17, 2013)
(``Ass'n Fin. Profs. II Comment Letter''); Defined Contribution
Institutional Investment Association (Sept. 17, 2013) (``Def.
Contrib. Inst. Inv. Ass'n Comment Letter''); GFOA II Comment Letter.
    \1867\ See, e.g., Form Letter Type E [1]; Federated IV Comment
Letter; Invesco Comment Letter; State Street Comment Letter; Chamber
II Comment Letter; GFOA II Comment Letter; National Association of
State Auditors, Comptrollers and Treasurers (Sept. 17, 2013).
    \1868\ Form Letter Type B [2], Type D [1-2], and Type F [1];
Federated IV Comment Letter; J.P. Morgan Comment Letter; American
Benefits Council Comment Letter; Ass'n Fin. Profs. II Comment
Letter; National Association of College and University Business
Officers (Sept. 17, 2013) (``Nat'l Ass'n of College & Univ. Bus.
Officers Comment Letter''); Chamber II Comment Letter; State
Treasurer, State of Utah (Aug. 26, 2013) (``Utah Treasurer Comment
Letter'').
    \1869\ BlackRock II Comment Letter; SunGard Comment Letter;
Treasury Strategies Comment Letter; American Bankers Ass'n Comment
Letter; ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    The Commission acknowledges, and many commenters concur,\1870\
that, as a result of our reforms, some investors may reallocate assets
to either government money market funds or other investment
alternatives. We do not anticipate our reforms will have a substantial
effect on the total amount of capital invested, although investors may
reallocate assets among investment alternatives, potentially affecting
issuers and the short-term financing markets, which we discuss below.
---------------------------------------------------------------------------

    \1870\ See Dreyfus DERA Comment Letter, Federated DERA I Comment
Letter, Fidelity DERA Comment Letter, Invesco DERA Comment Letter,
and Wells Fargo DERA Comment Letter.
---------------------------------------------------------------------------

    As noted earlier in this section, retail investors owned
approximately $790 billion of assets in non-government money market
funds as of February 28, 2014. Under the reforms, money market funds
that qualify as retail funds may continue to offer a stable value as
they do today--and facilitate their stable price by use of amortized
cost valuation and/or penny-rounding pricing of their portfolios. We
anticipate few investors in retail funds will reallocate assets to
other investment choices, given that retail funds will continue to
offer price stability, yield, and liquidity in all but exceptional
circumstances. We are defining a retail money market fund to mean a
money market fund that has policies and procedures reasonably designed
to limit all beneficial owners of the fund to natural persons.\1871\ We
expect, however, that at least some investors who are natural persons
that currently are invested in non-government funds that are not
designated retail may reallocate their assets to retail funds. We
anticipate these investors will likely move to retail funds that have
investment objectives that are similar to the objectives of their
current funds.
---------------------------------------------------------------------------

    \1871\ See rule 2a-7(a)(25). ``Beneficial ownership'' typically
means having voting and/or investment power. See supra note 679.
---------------------------------------------------------------------------

    Institutions invested approximately $1.27 trillion in non-
government money market funds as of February 28, 2014. Of this $1.27
trillion, institutional prime funds, other than tax-exempt funds,
managed approximately $1.19 trillion in assets and institutional tax-
exempt funds managed $82 billion. Under the reforms, these funds will
be subject not only to fees and gates, but also to an additional
floating NAV requirement. As such, we believe as much as $1.269
trillion in assets could be at risk for being reallocated to government
funds and other investment alternatives.
    But as discussed below, neither the Commission nor most commenters
believe that all institutional investors in non-government funds will
reallocate their assets. Institutional prime funds typically offer
higher yields than government funds, and certain investors receive tax
advantages from investing in tax-exempt funds. In addition, we have
been informed that, today, the Treasury Department and the IRS will
propose new regulations and issue a revenue procedure that we believe
should remove the most significant tax-related impediments associated
with our floating NAV reform.\1872\ Additionally, the Commission, which
has authority to set accounting standards, has clarified that an
investment in a floating NAV money market fund generally meets the
definition of a ``cash equivalent.'' \1873\ And according to one
commenter, more than half of survey respondents indicated the
likelihood of using a floating NAV money market fund would increase if
such a fund's shares are considered cash equivalents for accounting
purposes.\1874\ Thus, we believe these factors and actions taken by the
Commission and other regulatory agencies should help preserve the

attractiveness of institutional prime funds to investors, perhaps
reducing the assets reallocated to alternatives.
---------------------------------------------------------------------------

    \1872\ See supra section III.B.6.
    \1873\ As discussed in detail in section III.B.6.b, many
investors questioned whether an investment in a floating NAV money
market fund would meet the definition of a ``cash equivalent.''
    \1874\ See Deutsche Comment Letter.
---------------------------------------------------------------------------

    As noted by several commenters, it is difficult to estimate the
amount of assets that institutional investors might reallocate from
non-government funds to either government funds or other investment
alternatives.\1875\ One commenter estimated that 64% or $806 billion
could shift from prime funds to government funds,\1876\ whereas another
commenter estimated that 25% of assets in its institutional prime funds
would transfer permanently into government funds.\1877\ A third
commenter estimated a shift in assets of between $500 billion and $1
trillion.\1878\ In an earlier letter, this commenter cited a survey of
institutional investors that estimates investors may withdraw between
$660 and $750 billion from money market funds if the Commission adopts
a floating NAV requirement because they cannot tolerate principal
volatility.\1879\ As with much of the survey evidence provided by
commenters,\1880\ however, we note that this survey was administered
before the Proposing Release and before the tax and accounting relief
that we are discussing today was known. For example, the survey, which
was administered between February 13, 2012 and March 6, 2012, did not
consider that government funds might not be subject to the fees, gates,
and floating NAV requirements,\1881\ and retail money market funds
might continue to maintain a stable price. Similarly, the survey
designers did not present to survey participants the possibility that
the Treasury Department and IRS would propose new regulations and issue
a revenue procedure that we believe will remove the most significant
tax-related impediments associated with a floating NAV reform.\1882\
Moreover, survey designers were not able to anticipate that the
Commission, which has authority to set accounting standards, would
clarify that an investment in a floating NAV money market fund would
meet the definition of a ``cash equivalent.'' For these and other
reasons herein, we believe that the survey data submitted by commenters
reflecting that certain investors expect to reduce or eliminate their
money market fund investments under the floating NAV alternative may
overstate how investors are likely to actually behave under the final
amendments that we are adopting today.\1883\
---------------------------------------------------------------------------

    \1875\ See Federated DERA I Comment Letter; Invesco DERA Comment
Letter.
    \1876\ See Fidelity DERA Comment Letter.
    \1877\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter. The commenter did not provide a basis for the estimate in
this letter. We note, however, the commenter presented similar
estimates using survey data in a previous letter. See Federated X
Comment Letter.
    \1878\ See Federated DERA I Comment Letter.
    \1879\ See Federated X Comment Letter and Treasury Strategies,
Money Market Fund Regulations: The Voice of the Treasurer (Apr. 19,
2012) http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf,
which is cited in Federated X Comment Letter. Federated concludes,
``. . . at a minimum, $660 to $750 billion would be driven from
institutional prime funds . . .'' We note, however, the cited survey
queries institutional respondents about money market funds generally
and does not reflect that government funds are not be subject to the
floating NAV requirement. In addition, the survey did not address
fees and gates.
    \1880\ A number of commenters cited survey data indicating that
organizations would reduce their use of money market funds under
either our floating NAV or liquidity fees and gates reform. See,
e.g., ICI Comment Letter (citing the 2013 AFP Liquidity Survey,
Association of Financial Professionals, 2013 AFP Liquidity Survey:
Report of Survey Results (June 2013)); Wells Fargo Comment Letter;
Northern Trust Comment Letter; Invesco Comment Letter; BlackRock II
Comment Letter; Sungard Comment Letter.
    \1881\ See Treasury Strategies, Money Market Fund Regulations:
The Voice of the Treasurer (Apr. 19, 2012), available at http://www.ici.org/pdf/rpt_12_tsi_voice_treasurer.pdf.
    \1882\ See supra section III.B.6.a.
    \1883\ See, e.g., Better Markets FSOC Comment Letter, supra note
59 (in response to industry survey data reflecting intolerance for
the floating NAV, stating that ``it is difficult to predict the
level of contraction that would actually result from instituting a
floating NAV. [. . . .] The move to a floating NAV does not alter
the fundamental attributes of money market funds with respect to the
type, quality, and liquidity of the investments in the fund. [. . .
.] It is therefore unrealistic to think that money market funds . .
. will become extinct solely as a result of a move to a more
accurate and transparent valuation methodology.''); Comment Letter
of John M. Winters (Dec. 18, 2012) (available in File No. FSOC-2012-
0003) (``[T]he feared migration to unregulated funds has not been
quantified and is probably overstated.'').
---------------------------------------------------------------------------

    The Commission recognizes, however, that some assets will likely
flow out of non-government funds as a result of the reforms, and that
the greatest effect will likely be on institutional prime funds.
Commenters specifically noted that a combination of proposals would
force most money market fund sponsors to exit the prime space,\1884\
and would cause many investors to invest their cash assets in
government money market funds, direct investments, bank deposits, or
other investment alternatives.\1885\ As discussed in the DERA
Study,\1886\ the Proposing Release,\1887\ and below, there are a range
of investment alternatives that currently compete with money market
funds. Each of these choices involves different tradeoffs, and money
market fund investors that are unwilling or unable to invest in their
current option under the reforms would need to analyze the various
tradeoffs associated with each alternative. Specifically, investors
could choose from among at least the following alternatives: Direct
investments in money market instruments; money market funds that are
not subject to the reforms; bank deposit accounts; bank certificates of
deposit; bank collective trust funds; LGIPs; U.S. private funds;
offshore money market funds; short-term investment funds (``STIFs'');
separately managed accounts; ultra-short bond funds; and short-duration
exchange-traded funds (``ETFs'').\1888\ The following table, taken from
the DERA Study and Proposing Release, outlines the principal features
of various cash alternatives to money market funds that exist today.
---------------------------------------------------------------------------

    \1884\ See, e.g., Dreyfus Comment Letter; Invesco Comment
Letter; PFM Asset Mgmt. Comment Letter; ICI Comment Letter; SIFMA
Comment Letter.
    \1885\ See, e.g., Blackrock II Comment Letter; Dreyfus Comment
Letter; Legg Mason & Western Asset Comment Letter; Northern Trust
Comment Letter; PFM Asset Mgmt. Comment Letter; SunGard Comment
Letter.
    \1886\ See DERA Study, supra note 24, Table 6.
    \1887\ See Proposing Release, supra note 25, Table 2.
    \1888\ See, e.g., Comment Letter of Investment Company Institute
(Feb. 16, 2012) (available in File No 4-619.) (``ICI Feb 2012 PWG
Comment Letter''); Comment Letter of the Association for Financial
Professionals et al. (Apr. 4, 2012) (available in File No. 4-619)
(``AFP Comment Letter'').

                                                          Table 1--Cash Investment Alternatives
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Investment risks       Redemption                                                Restrictions on
             Product                   Valuation              \A\            restrictions          Yield \B\           Regulated         investor base
--------------------------------------------------------------------------------------------------------------------------------------------------------
Bank demand deposits............  Stable............  Below benchmark up  No................  Below benchmark...  Yes...............  No.
                                                       to depository
                                                       insurance
                                                       (``DI'') limit;
                                                       above benchmark
                                                       above DI limit
                                                       \C\.

Time deposits (CDs).............  Stable............  Bank counterparty   Yes \D\...........  Below benchmark...  Yes...............  No.
                                                       risk above DI
                                                       limit.
Offshore money funds (European    Stable or Floating  Comparable to       Some \F\..........  Comparable to       Yes...............  Yes.\G\
 short-term MMFs) \E\.             NAV.                benchmark.                              benchmark.
Offshore money funds (European    Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  Yes.
 MMFs) \H\.
Enhanced cash funds (private      Stable NAV          Above benchmark...  By contract.......  Above benchmark...  No \I\............  Yes.\J\
 funds).                           (generally).
Ultra-short bond funds..........  Floating NAV......  Above benchmark...  Some..............  Above benchmark...  Yes...............  No.
Collective investment funds \K\.  Not stable........  Above benchmark...  No................  Above benchmark...  Yes...............  Tax-exempt bank
                                                                                clients.\L\
Short-term investment funds       Stable............  Above benchmark...  No................  Above benchmark...  Yes \M\...........  Tax-exempt bank
 (``STIFs'').                                                                                clients.
Local government investment       Stable (generally)  Benchmark.........  No................  Benchmark.........  Yes...............  Local government
 pools (``LGIPs'').                \N\.                                                                                and public
                                                                                entities.
Short-duration ETFs.............  Floating NAV;       Above benchmark...  No................  Above benchmark...  Yes...............  No.
                                   Market price \O\.
Separately managed accounts       Not stable........  Above benchmark...  No................  Above benchmark...  No................  Investment
 (including wrap accounts).                                                                                minimum.\P\
Direct investment in MMF          Not stable........  Comparable to       No................  Comparable to       No................  Some.\R\
 instruments.                                          benchmark but may                       benchmark but may
                                                       vary depending on                       vary depending on
                                                       investment mix                          investment mix.
                                                       \Q\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\A\ For purposes of this table, investment risks include exposure to interest rate and credit risks. The column also indicates the general level of
  investment risk for the product compared with the baseline of prime money market funds and is generally a premium above the risk-free or Treasury
  rate.
\B\ The table entries reflect average yields in a normal interest rate environment. Certain cash management products, such as certificates of deposits
  (``CDs'') and demand deposits, may be able to offer rates above the baseline in a low interest rate environment.
\C\ The current DI limit is $250,000 per owner for interest-bearing accounts. See Deposit Insurance Summary, Federal Deposit Insurance Corporation
  (``FDIC''), available at http://www.fdic.gov/deposit/deposits/.
\D\ Time deposits, or CDs, are subject to minimum early withdrawal penalties if funds are withdrawn within six days of the date of deposit or within six
  days of the immediately preceding partial withdrawal. See 12 CFR 204.2(c)(1)(i). Many CDs are also subject to early withdrawal penalties if withdrawn
  before maturity, although market forces, rather than federal regulation, impose such penalties. CDs generally have specific fixed terms (e.g., one-,
  three-, or six-month terms), although some banks offer customized CDs (e.g., with terms of seven days).
\E\ The vast majority of money market fund assets are held in U.S. and European money market funds. See Consultation Report of the IOSCO Standing
  Committee 5 (Apr. 27, 2012) (``IOSCO SC5 Report''), at App. B, Sec.  Sec.   2.1-2.36 (in 2011, of the assets invested in money market funds in IOSCO
  countries, approximately 61% were invested in U.S. money market funds and 32% were invested in European money market funds). Consequently, dollar-
  denominated European money market funds may provide a limited offshore money market fund alternative to U.S. money market funds. Most European stable
  value money market funds are a member of the Institutional Money Market Funds Association (``IMMFA''). According to IMMFA, as of March 1, 2013, there
  were approximately $286 billion U.S. dollar-denominated IMMFA money market funds. See www.immfa.org (this figure excludes accumulating NAV U.S. dollar-
  denominated money market funds). Like U.S. money market funds, European short-term money market funds must have a dollar-weighted average maturity of
  no more than 60 days and a dollar-weighted average life maturity of no more than 120 days, and their portfolio securities must hold one of the two
  highest short-term credit ratings and have a maturity of no more than 397 days. However, unlike U.S. money market funds, European short-term money
  market funds may either have a floating or fixed NAV. Compare Common Definition of European Money Market Funds (Ref. CESR/10-049) with rule 2a-7.
\F\ Most European money market funds are subject to legislation governing Undertakings for Collective Investment in Transferable Securities (``UCITS''),
  which also covers other collective investments. See, e.g., UCITS IV Directive, Article 84 (permitting a UCITS to, in accordance with applicable
  national law and its instruments of incorporation, temporarily suspend redemption of its units); Articles L. 214-19 and L. 214-30 of the French
  Monetary and Financial Code (providing that under exceptional circumstances and if the interests of the UCITS units holders so demand, UCITs may
  temporarily suspend redemptions).
\G\ Section 7(d) of the Investment Company Act requires that any non-U.S. investment company that wishes to register as an investment company in order
  to publicly offer its securities in the U.S. must first obtain an order from the SEC. To issue such an order, the SEC must find that ``by reason of
  special circumstances or arrangements, it is both legally and practically feasible to enforce the provisions of [the Act against the non-U.S. fund,]
  and that the issuance of [the] order is otherwise consistent with the public interest and the protection of investors.'' No European money market fund
  has received such an order. European money market funds could be offered to U.S. investors privately on a very limited basis subject to certain
  exclusions from investment company regulation under the Investment Company Act and certain exemptions from registration under the Securities Act. U.S.
  investors purchasing non-U.S. funds in private offerings, however, may be subject to potentially significant adverse tax implications. See, e.g.,
  Internal Revenue Code of 1986 Sec.  Sec.   1291 through 1297. Moreover, as a practical matter, and in view of the severe consequences of violating the
  Securities Act registration and offering requirements, most European money market funds currently prohibit investment by U.S. Persons.
\H\ European money market funds may have a dollar-weighted average portfolio maturity of up to six months and a dollar-weighted average life maturity of
  up to 12 months that are significantly greater than are permitted for U.S. money market funds. Compare Common Definition of European Money Market
  Funds (Ref. CESR/10-049) with rule 2a-7.

\I\ Private funds generally rely on one of two exclusions from investment company regulation by the Commission. Section 3(c)(1) of the Investment
  Company Act, in general, excludes from the definition of ``investment company'' funds whose shares are beneficially owned by not more than 100 persons
  where the issuer does not make or propose to make a public offering. Section 3(c)(7) of the Act places no limit on the number of holders of
  securities, as long as each is a ``qualified purchaser'' (as that term is defined in section 2(a)(51) of the Act) when the securities are acquired and
  the issuer does not make or propose to make a public offering. Most retail investors would not fall within the definition of ``qualified purchaser.''
  Moreover, such private funds also generally rely on the private offering exemption in section 4(2) of the Securities Act or Securities Act rule 506 to
  avoid the registration and prospectus delivery requirements of Section 5 of the Securities Act. Rule 506 establishes ``safe harbor'' criteria to meet
  the private offering exemption. The provision most often relied upon by private funds under rule 506 exempts offerings made exclusively to
  ``accredited investors'' (as that term is defined in rule 501(a) under the Securities Act). Most retail investors would not fall within the definition
  of ``accredited investor.'' Offshore private funds also generally rely on one of the two non-exclusive safe harbors of Regulation S, an issuer safe
  harbor and an offshore resale safe harbor. If one of the two is satisfied, an offshore private fund will not have to register the offer and sale of
  its securities under the Securities Act. Specifically, rules 903(a) and 904(a) of Regulation S provide that offers and sales must be made in
  ``offshore transactions'' and rule 902(h) provides that an offer or sale is made in an ``offshore transaction'' if, among other conditions, the offer
  is not made to a person in the United States. Regulation S is not available to offers and sales of securities issued by investment companies required
  to be registered, but not registered, under the Investment Company Act. See Regulation S Preliminary Notes 3 and 4.
\J\ See id.
\K\ Collective investment funds include collective trust funds and common trust funds managed by banks or their trust departments, both of which are a
  subset of short-term investment funds. For purposes of this table, short-term investment funds are separately addressed.
\L\ Collective trust funds are generally limited to tax-qualified plans and government plans, while common trust funds are generally limited to tax-
  qualified personal trusts and estates and trusts established by institutions.
\M\ STIFs are generally regulated by 12 CFR 9.18. The Office of the Comptroller of the Currency recently reformed the rules governing STIFs subject to
  their jurisdiction to impose similar requirements to those governing money market funds. See Office of the Comptroller of Currency, Treasury, Short-
  Term Investment Funds [77 FR 61229 (Oct. 9, 2012)].
\N\ Regarding all items in this row of the table, LGIPs generally are structured to meet a particular investment objective. In most cases, they are
  designed to serve as short-term investments for funds that may be needed by participants on a day-to-day or near-term basis. These local government
  investment pools tend to emulate typical money market mutual funds in many respects, particularly by maintaining a stable net asset value of $1.00
  through investments in short-term securities. A few local government investment pools are designed to provide the potential for greater returns
  through investment in longer-term securities for participants' funds that may not be needed on a near-term basis. The value of shares in these local
  government investment pools fluctuates depending upon the value of the underlying investments. Local government investment pools limit the nature of
  underlying investments to those in which its participants are permitted to invest under applicable state law. See http://www.msrb.org/Municipal-Bond-Market/About-Municipal-Securities/Local-Government-Investment-Pools.aspx. Investors in local government investment pools may include counties, cities,
  public schools, and similar public entities. See, e.g., The South Carolina Local Government Investment Pool Participant Procedures Manual, available
  at http://www.treasurer.sc.gov/media/4755/The-South-Carolina-Local-Government-Investment-Pool-Participant-Procedures-Manual.pdf.
\O\ Although the performance of an ETF is measured by its NAV, the price of an ETF for most shareholders is not determined solely by its NAV, but by
  buyers and sellers on the open market, who may take into account the ETF's NAV as well as other factors.
\P\ Many separately managed accounts have investment minimums of $100,000 or more.
\Q\ Depending on the nature and scope of their investments, these investors may also face risks stemming from a lack of portfolio diversification.
\R\ Some money market fund instruments are only sold in large denominations or are only available to qualified institutional buyers. See generally rule
  144A under the Securities Act (17 CFR 230.144A(7)(a)(1)).

    These investment options offer different combinations of price
stability, risk exposure, return, investor protections, and disclosure.
For example, some current money market fund investors, in particular
bank trust departments and corporate trusts, may choose to manage their
cash themselves and, based on our understanding of institutional
investor cash management practices, many of these investors will invest
directly in securities similar to those held by money market funds
today. According to one commenter, however, this strategy may create
additional burdens and risks for these investors, including having to
acquire, retain, and monitor the maturity of short-term
investments.\1889\ Any desire to self-manage cash will likely be
tempered by the expertise required to invest in a diversified portfolio
of money market securities directly and the costs of investing in those
securities given the economies of scale that will be lost when each
investor has to conduct credit analysis itself for each investment (in
contrast to money market funds which are able to spread their credit
analysis costs for each security across their entire shareholder
base).\1890\ As such, we anticipate that direct investment in
securities similar to those held by money market funds today will be
limited to investors with large cash management requirements and active
Treasury functions.
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    \1889\ See, e.g., M&T Bank Comment Letter.
    \1890\ See, e.g., Comment Letter of U.S. Chamber (Jan. 23, 2013)
(available in File No. FSOC-2012-0003) (``U.S. Chamber FSOC Comment
Letter'') (``Quite simply, it is more efficient and economical to
pay the management fee for a money market funds than to hire the
internal staff to manage the investment of cash.'').
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    Alternatively, commenters suggested that some investors, especially
investors in institutional prime funds, will reallocate assets to
government funds.\1891\ Investors that shift their assets from
institutional prime funds to government money market funds will likely
sacrifice yield,\1892\ but they will retain the principal stability and
liquidity of their assets. To the extent that assets under management
in government funds increase, we anticipate investors will have more
government funds from which to choose than they do today. This expected
increase in the number government funds could be because complexes that
currently offer government funds will offer additional government funds
or because other complexes will offer new government funds. In either
case, competition among government funds should increase although the
impact on competition likely should, at the margin, be larger if new
complexes enter the government fund market.
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    \1891\ Federated IV Comment Letter; TRACS Financial Comment
Letter; Wells Fargo Comment Letter; Boeing Comment Letter; American
Bankers Ass'n Comment Letter; Def. Contrib. Inst. Inv. Ass'n Comment
Letter; ICI Comment Letter; see also supra section III.C.
    \1892\ See, e.g., Federated X Comment Letter; Angel Comment
Letter. Commenters noted that investors that shift assets from prime
funds to government funds will earn lower rates on their investments
because government funds are less risky and offer lower yields than
prime funds.
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    In addition, a reallocation of assets to government funds could
lower the yields received by both investors in government funds and
direct purchasers of government securities. If an increase in demand
for government funds, which must largely invest in eligible government
securities, subsequently increases the demand for these
securities,\1893\ the rates on eligible

government securities and hence yields on government funds might
fall.\1894\ Several commenters argued that absorbing assets from non-
government funds into government funds could reduce yields on eligible
government securities in what is already a low yield environment.\1895\
The extent to which asset reallocation affects yields on government
funds, however, will depend on the amount of capital that shifts into
government funds and on the supply of eligible government securities to
meet heightened demand for these securities by government funds. We
discuss these issues in further detail below.
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    \1893\ Government money market funds must invest at least 99.5
percent of their portfolio in cash, ``government securities'' as
defined in section 2(a)(16) of the Act, and repurchase agreements
collateralized with government securities. See rule 2a-7(a)(16).
Allowable securities include securities issued by government-
sponsored entities such as the Federal Home Loan Banks, government
repurchase agreements, and those issued by other
``instrumentalities'' of the U.S. government. It excludes, however,
securities issued by state and municipal governments, which do not
generally share the same credit and liquidity traits as U.S.
government securities.
    \1894\ See, e.g., Federated X Comment Letter.
    \1895\ See Dreyfus DERA Comment Letter; Federated DERA I Comment
Letter; Invesco DERA Comment Letter; Wells Fargo DERA Comment
Letter.
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    As noted above, commenters indicated that some investors that
currently invest in non-government funds may shift assets into demand
deposits or short-maturity certificates of deposit. FDIC insurance that
covers deposit accounts (which include checking and savings accounts,
money market deposit accounts, and certificates of deposit) guarantees
principal stability within the insurance limits and in certain
instances liquidity irrespective of market conditions.\1896\ We noted
in the Proposing Release that some institutions may be deterred from
moving their investments from money market funds to banks, because
their assets in many cases may be above the current depository
insurance limits; assets above the limits would be exposed to
counterparty and sector-specific risks that are different and less
attractive than the risk profiles of diversified non-government money
market funds today.\1897\ Nevertheless, these investors may gain full
insurance coverage if they are willing and able to break their cash
holdings into sufficiently small pieces and spread them across banks,
but doing so may impose an administrative burden on investors.\1898\
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    \1896\ FDIC insurance covers all deposit accounts, including
checking and savings accounts, money market deposit accounts and
certificates of deposit. FDIC insurance does not cover other
financial products and services that banks may offer, such as
stocks, bonds, mutual fund shares, life insurance policies,
annuities, or securities. The standard insurance amount is $250,000
per depositor, per insured bank, for each account ownership
category. See http://www.fdic.gov/deposit/deposits/.
    \1897\ See, e.g., Comment Letter of Crawford and Company (Jan.
14, 2013) (available in File No. FSOC-2012-0003) (``Bank demand
deposits . . . lack the diversification of money market funds and
carry inherent counterparty risk.''); Comment Letter of Investment
Company Institute (Jan. 10, 2011) (available in File No 4-619)
(``The Report suggests that requiring money market funds to float
their NAVs could encourage investors to shift their liquid balances
to bank deposits. We believe that this effect is overstated,
particularly for institutional investors. Corporate cash managers
and other institutional investors would not view an undiversified
holding in an uninsured (or underinsured) bank account as having the
same risk profile as an investment in a diversified short-term money
market fund. Such investors would continue to seek out diversified
investment pools, which may or may not include bank time
deposits.''). See also Federated X Comment Letter.
    \1898\ Certain third party service providers offer such
services. See, e.g., Nathaniel Popper and Jessica Silver-Greenberg,
Big Depositors Seek New Safety Net, N.Y. Times (Dec. 30, 2012).
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    It is important to note that investors will likely earn lower
yields on deposit accounts than what they currently receive on non-
government funds.\1899\ One commenter even suggested flows of capital
into banks may create additional downward pressure on the yields paid
to depositors, further lowering investor returns.\1900\ If the
additional capital that flows from non-government funds is more than
banks can profitably lend, then banks might reduce the interest rates
that they pay to depositors. If, however, banks have sufficient
opportunities to invest the additional capital, interest rates would
likely not fall.
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    \1899\ See, e.g., Federated X Comment Letter; Angel Comment
Letter.
    \1900\ See Angel Comment Letter.
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    In addition, as discussed above, investors in non-government funds
may not reallocate assets in a significant way, and if they do, may not
reallocate large amounts of capital to banks. Given that deposit
accounts held over $8 trillion as of February 28, 2014,\1901\ we do not
anticipate that additional flows from non-government funds will have a
sufficient impact to materially push down interest rates at banks. Even
if investors reallocate capital to demand deposits, recent history
indicates demand deposits can successfully absorb large flows of
capital from investors. As discussed in the DERA Study, individual and
business holdings in checking deposits and currency have significantly
increased in recent years relative to their holdings of money market
fund shares.\1902\ The 2012 AFP Liquidity Survey of corporate
treasurers indicates that bank deposits accounted for 51% of the
surveyed organizations' short-term investments in 2012, which is up
from 25% in 2008.\1903\ Money market funds accounted for 19% of these
organizations' short-term investments in 2012, down from 30% just a
year earlier, and down from almost 40% in 2008.\1904\
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    \1901\ From Board of Governors, Federal Reserve System, as of
February 28, 2014. Demand deposits at domestically chartered
commercial banks, U.S. branches, and agencies of foreign banks, and
Edge Act corporations (excluding those amounts held by depository
institutions, the U.S. government, and foreign banks and official
institutions) less cash items in the process of collection and
Federal Reserve float held $1.069 trillion. Savings deposits, which
include money market deposit accounts, totaled $7.221 trillion. See
http://www.federalreserve.gov/Releases/h6/current/default.htm.
    \1902\ See DERA Study, supra note 24, at figure 18.
    \1903\ See 2012 AFP Liquidity Survey, supra note 64.
    \1904\ See id., 2008 AFP Liquidity Survey, supra note 64.
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    We discussed in the Proposing Release and commenters who addressed
this issue agreed that one practical constraint for many money market
fund investors is that they may be precluded from investing in certain
alternatives outside of funds regulated under rule 2a-7, such as STIFs,
offshore money market funds, LGIPs, separately managed accounts, and
direct investments in money market instruments, due to significant
restrictions on participation.\1905\ For example, STIFs are only
available to accounts for personal trusts, estates, and employee
benefit plans that are exempt from taxation under the U.S. Internal
Revenue Code.\1906\ STIFs subject to regulation by the Office of the
Comptroller of the Currency also are subject to less stringent
regulatory restrictions than rule 2a-7 imposes, and STIFs under the
jurisdiction of other banking regulators may be subject to no
restrictions at all equivalent to rule 2a-7.\1907\ Similarly, European
money market funds can take on more risk than U.S. money market funds
because they are not currently subject to regulatory restrictions as
stringent as rule 2a-7 on their credit quality, liquidity, maturity,
and diversification.\1908\ If investment

alternatives are less stringently regulated than non-government funds,
then they could pose greater risk than money market funds and thus may
not be viable or attractive alternatives to investors that highly value
principal stability. Offshore money market funds, which are investment
pools domiciled and authorized outside the United States, generally
sell shares to U.S. investors only in private offerings, limiting their
availability to investors at large.\1909\ Further, few offshore money
market funds offer their shares to U.S. investors in part because doing
so could create adverse tax consequences.\1910\
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    \1905\ See, e.g., Form Letter Type B [2], Type D [1-2], and Type
F [1]; Federated IV Comment Letter; J.P. Morgan Comment Letter;
Treasury Strategies Comment Letter; American Benefits Council
Comment Letter; Ass'n Fin. Profs. II Comment Letter; Nat'l Ass'n of
College & Univ. Bus. Officers Comment Letter.
    \1906\ See, e.g., American Bankers Ass'n Comment Letter. See